Digimarc CORP (Form: 10-Q, Received: 10/30/2020 17:28:14)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-34108

DIGIMARC CORPORATION

(Exact name of registrant as specified in its charter)

Oregon

26-2828185

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

9405 SW Gemini Drive, Beaverton, Oregon 97008

(Address of principal executive offices) (Zip Code)

(503) 469-4800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Trading Symbol		Name of Each Exchange on Which Registered
Common Stock, $0.001 Par Value Per Share		DMRC		The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☒

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 23, 2020, there were 15,315,663 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

Table of Contents

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):	3
	Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019	4
	Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2020 and 2019	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 4.	Controls and Procedures	33

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	36
SIGNATURES		37

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

DIGIMARC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(UNAUDITED)

	September 30,			December 31,
	2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	45,461		$	11,213
Marketable securities		17,194			25,604
Trade accounts receivable, net		3,022			4,021
Other current assets		2,396			2,456
Total current assets		68,073			43,294
Property and equipment, net		3,361			3,650
Intangibles, net		6,604			6,670
Goodwill		1,114			1,114
Other assets		2,353			2,660
Total assets	$	81,505		$	57,388
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$	2,469		$	2,272
Note payable, current		3,096			—
Deferred revenue		2,098			3,172
Total current liabilities		7,663			5,444
Lease liability and other long-term liabilities		2,712			2,494
Note payable, long-term		1,957			—
Total liabilities		12,332			7,938
Commitments and contingencies (Note 14)
Shareholders’ equity:
Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares issued and outstanding at September 30, 2020 and December 31, 2019)		50			50
Common stock (par value $0.001 per share, 50,000 authorized, 15,316 and 12,446 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively)		15			12
Additional paid-in capital		232,544			188,103
Accumulated deficit		(163,436	)		(138,715	)
Total shareholders’ equity		69,173			49,450
Total liabilities and shareholders’ equity	$	81,505		$	57,388

The accompanying notes are an integral part of these consolidated financial statements

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(UNAUDITED)

	Three			Three			Nine			Nine
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2020			2019			2020			2019
Revenue:
Service	$	3,352		$	3,160		$	10,982		$	10,549
Subscription		2,399			2,668			7,455			7,119
Total revenue		5,751			5,828			18,437			17,668
Cost of revenue:
Service		1,406			1,409			4,691			4,730
Subscription		522			509			1,548			1,507
Total cost of revenue		1,928			1,918			6,239			6,237
Gross profit		3,823			3,910			12,198			11,431
Operating expenses:
Sales and marketing		4,538			4,839			14,417			14,876
Research, development and engineering		4,662			4,105			13,303			12,124
General and administrative		3,009			2,998			9,457			9,287
Total operating expenses		12,209			11,942			37,177			36,287
Operating loss		(8,386	)		(8,032	)		(24,979	)		(24,856	)
Other income, net		36			259			257			727
Loss before income taxes		(8,350	)		(7,773	)		(24,722	)		(24,129	)
Benefit (provision) for income taxes		(2	)		12			1			(28	)
Net loss	$	(8,352	)	$	(7,761	)	$	(24,721	)	$	(24,157	)
Earnings (loss) per common share:
Loss per common share — basic	$	(0.68	)	$	(0.65	)	$	(2.04	)	$	(2.07	)
Loss per common share — diluted	$	(0.68	)	$	(0.65	)	$	(2.04	)	$	(2.07	)
Weighted average common shares outstanding — basic		12,241			11,924			12,129			11,693
Weighted average common shares outstanding — diluted		12,241			11,924			12,129			11,693

The accompanying notes are an integral part of these consolidated financial statements

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(UNAUDITED)


										Additional						Total
	Preferred Stock				Common Stock					Paid-in			Accumulated			Shareholders'
	Shares		Amount		Shares			Amount		Capital			Deficit			Equity
Three months ended September 30, 2020:
BALANCE AT JUNE 30, 2020		10	$	50		12,659		$	13	$	192,298		$	(155,084	)	$	37,277
Issuance of common stock, net of issuance costs		—		—		2,676			2		38,027			—			38,029
Issuance of restricted common stock		—		—		13			—		—			—			—
Forfeiture of restricted common stock		—		—		(3	)		—		—			—			—
Purchase and retirement of common stock		—		—		(29	)		—		(448	)		—			(448	)
Stock-based compensation		—		—		—			—		2,667			—			2,667
Net loss		—		—		—			—		—			(8,352	)		(8,352	)
BALANCE AT SEPTEMBER 30, 2020		10	$	50		15,316		$	15	$	232,544		$	(163,436	)	$	69,173

Three months ended September 30, 2019:
BALANCE AT JUNE 30, 2019		10	$	50		12,433		$	12	$	184,611		$	(122,271	)	$	62,402
Issuance of restricted common stock		—		—		19			—		—			—			—
Forfeiture of restricted common stock		—		—		(1	)		—		—			—			—
Purchase and retirement of common stock		—		—		(22	)		—		(885	)		—			(885	)
Stock-based compensation		—		—		—			—		2,085			—			2,085
Net loss		—		—		—			—		—			(7,761	)		(7,761	)
BALANCE AT SEPTEMBER 30, 2019		10	$	50		12,429		$	12	$	185,811		$	(130,032	)	$	55,841

Nine months ended September 30, 2020:
BALANCE AT DECEMBER 31, 2019		10	$	50		12,446		$	12	$	188,103		$	(138,715	)	$	49,450
Issuance of common stock, net of issuance costs		—		—		2,704			3		38,600			—			38,603
Exercise of stock options		—		—		8			—		135			—			135
Issuance of restricted common stock		—		—		242			—		—			—			—
Forfeiture of restricted common stock		—		—		(7	)		—		—			—			—
Purchase and retirement of common stock		—		—		(77	)		—		(1,568	)		—			(1,568	)
Stock-based compensation		—		—		—			—		7,274			—			7,274
Net loss		—		—		—			—		—			(24,721	)		(24,721	)
BALANCE AT SEPTEMBER 30, 2020		10	$	50		15,316		$	15	$	232,544		$	(163,436	)	$	69,173

Nine months ended September 30, 2019:
BALANCE AT DECEMBER 31, 2018		10	$	50		11,891		$	12	$	162,428		$	(105,875	)	$	56,615
Issuance of common stock, net of issuance costs		—		—		336			—		19,615			—			19,615
Exercise of stock options		—		—		23			—		293			—			293
Issuance of restricted common stock		—		—		292			—		—			—			—
Forfeiture of restricted common stock		—		—		(47	)		—		—			—			—
Purchase and retirement of common stock		—		—		(66	)		—		(2,753	)		—			(2,753	)
Stock-based compensation		—		—		—			—		6,228			—			6,228
Net loss		—		—		—			—		—			(24,157	)		(24,157	)
BALANCE AT SEPTEMBER 30, 2019		10	$	50		12,429		$	12	$	185,811		$	(130,032	)	$	55,841

The accompanying notes are an integral part of these consolidated financial statements

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)

	Nine			Nine
	Months			Months
	Ended			Ended
	September 30,			September 30,
	2020			2019
Cash flows from operating activities:
Net loss	$	(24,721	)	$	(24,157	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and write-off of property and equipment		1,112			1,098
Amortization and write-off of intangibles		612			533
Stock-based compensation		7,149			6,094
Changes in operating assets and liabilities:
Trade accounts receivable		999			318
Other current assets		60			(782	)
Other assets		307			263
Accounts payable and other accrued liabilities		146			1,086
Deferred revenue		(1,092	)		(735	)
Lease liability and other long-term liabilities		236			(481	)
Net cash used in operating activities		(15,192	)		(16,763	)
Cash flows from investing activities:
Purchase of property and equipment		(694	)		(692	)
Capitalized patent costs		(478	)		(524	)
Maturity of marketable securities		30,598			27,997
Purchase of marketable securities		(22,188	)		(38,037	)
Net cash provided by (used in) investing activities		7,238			(11,256	)
Cash flows from financing activities:
Issuance of common stock, net of issuance costs		38,603			19,615
Proceeds from note payable		5,032			—
Exercise of stock options		135			293
Purchase of common stock		(1,568	)		(2,753	)
Net cash provided by financing activities		42,202			17,155
Net increase (decrease) in cash and cash equivalents		34,248			(10,864	)
Cash and cash equivalents at beginning of period		11,213			27,278
Cash and cash equivalents at end of period	$	45,461		$	16,414
Supplemental disclosure of cash flow information:
Cash received for income taxes, net	$	12		$	89
Supplemental schedule of non-cash activities:
Property and equipment and patent costs in accounts payable	$	72		$	(6	)
Common stock issuance costs in accounts payable	$	241		$	—
Stock-based compensation capitalized to software and patent costs	$	125		$	134
Right of use assets obtained in exchange for lease obligations	$	—		$	2,709

The accompanying notes are an integral part of these consolidated financial statements

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(UNAUDITED)

1. Description of Business and Significant Accounting Policies

Description of Business

Digimarc Corporation (“Digimarc” or the “Company”), an Oregon corporation, is the inventor of a platform that enables a more efficient, reliable and economical means of automatic identification. The Digimarc Platform can apply a unique identifier to virtually all media objects—including product packaging, commercial print, audio and video—that can be automatically identified by an enabled ecosystem of industrial scanners, smartphones and other interfaces. These capabilities allow Digimarc and its partners to supply a wide range of solutions for retail and supply chain operations, consumer engagement, media management and security.

The Digimarc Platform features three core capabilities for the identification, discovery and quality management of media. Digimarc Barcode integrates the identification function, which is a novel data carrier encoded into media in ways that are generally imperceptible to people, permitting the carrier to be repeated many times over the surface of the enhanced media. Digimarc Discover represents the discovery function, which is software for computing devices and network interfaces that recognize and decode indicia of the identity of media. These include, but are not limited to, Digimarc Barcodes, Quick Response Codes, Universal Product Codes, certain other GS1 approved one-dimensional codes and relevant contextual data. Digimarc Verify incorporates the quality management function, a suite of software tools used to inspect and verify that the identification and discovery of media are both accurate and effective. Together, these core capabilities enable organizations, application developers, and other solution providers to build new and improve existing automatic identification solutions.

Interim Consolidated Financial Statements

Our significant accounting policies are detailed in “Note 1: Description of Business and Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2019.

The accompanying interim consolidated financial statements have been prepared from the Company’s records without audit and, in management’s opinion, include all adjustments (consisting of only normal recurring adjustments) necessary to fairly reflect the financial condition and the results of operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 27, 2020. The results of operations for the interim periods presented in these consolidated financial statements are not necessarily indicative of the results for the full year.

Reclassifications

Certain prior period amounts in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to current period presentation, including the reclassification of revenue and expense accounts to better align with the presentation provided by our peers in the software industry. These reclassifications had no material effect on the results of operations or financial position for any period presented.

Accounting Pronouncements Issued But Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based upon expected losses rather than incurred losses. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company does not expect the impact of the adoption of this standard to have a material impact on its financial condition, results of operations and disclosures.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (ASC 740) Simplifying the Accounting for Income Taxes,” that removes certain exceptions to the general principles and also improves consistent application of and simplifies U.S. GAAP. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company does not expect the impact of the adoption of this standard to have a material impact on its financial condition, results of operations and disclosures.

2. Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable and other accrued liabilities, approximate their carrying values due to the short-term nature of these instruments. The Company’s marketable securities are classified as held-to-maturity and are reported at amortized cost, which approximates fair value.

The Company’s fair value hierarchy for its cash equivalents and marketable securities was as follows:

September 30, 2020	Level 1		Level 2		Level 3		Total
Money market securities	$	7,731	$	—	$	—	$	7,731
Commercial paper		—		9,197		—		9,197
Pre-refunded municipals		—		6,383		—		6,383
Federal agency notes		—		3,300		—		3,300
Corporate notes		—		1,514		—		1,514
Total	$	7,731	$	20,394	$	—	$	28,125

December 31, 2019	Level 1		Level 2		Level 3		Total
Money market securities	$	746	$	—	$	—	$	746
Commercial paper		—		25,481		—		25,481
Corporate notes		—		5,773		—		5,773
U.S. treasuries		—		4,040		—		4,040
Total	$	746	$	35,294	$	—	$	36,040

The fair value maturities of the Company’s cash equivalents and marketable securities as of September 30, 2020, are as follows:

Maturities by Period

Total

Less than

1 year

1-5

years

5 - 10

years

More than

10 years

Cash equivalents and marketable securities

28,125

—

The Company considers all highly liquid marketable securities with original maturities of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents include money market funds and commercial paper totaling $10,931 and $10,436 at September 30, 2020, and December 31, 2019, respectively. Cash equivalents are carried at either cost or amortized cost, depending on the type of security, which approximates fair value.

3. Revenue Recognition

The Company derives its revenue primarily from software development services and software subscriptions. Applicable revenue recognition criteria are considered separately for each performance obligation as follows:

•

Service revenue consists primarily of revenue earned from the performance of software development services. The majority of service contracts are structured as time and materials agreements. Revenue for services is generally recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided.

•

Subscription revenue consists primarily of revenue earned from the sale of software products and to a lesser extent the licensing of intellectual property. The majority of subscription contracts are recurring, paid in advance and recognized over the term of the subscription, which is typically one to three years.

Customer arrangements may contain multiple performance obligations such as software development services, software products, and maintenance and support fees. The Company accounts for individual products and services separately if they are

distinct. To determine the transaction price, the Company considers the terms of the contract and the Company’s customary business practices. Some contracts may contain variable consideration. In those cases, the Company estimates the amount of variable consideration based on the sum of probability-weighted amounts in a range of possible consideration amounts. As part of this assessment, the Company will evaluate whether any of the variable consideration is constrained and if it is the Company will not include it in the transaction price. The consideration is allocated between distinct products and services based on their stand-alone selling prices. For items that are not sold separately, the Company estimates the standalone selling price based on reasonably available information, including market conditions, specific factors affecting the Company, and information about the customer. For distinct products and services, the Company typically recognizes the revenue associated with these performance obligations as they are delivered to the customer. Products and services that are not capable of being distinct are combined with other products or services until a distinct performance obligation is identified.

All revenue recognized in the Consolidated Statements of Operations is considered to be revenue from contracts with customers.

The following table provides information about disaggregated revenue by major market category in the Company’s single reporting segment:

	Three		Three		Nine		Nine
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2020		2019		2020		2019
Government
Service	$	3,170	$	3,003	$	10,535	$	10,167
Subscription		355		372		1,107		1,143
Total Government		3,525		3,375		11,642		11,310
Retail
Service	$	182	$	157	$	447	$	382
Subscription		1,172		1,440		3,741		3,384
Total Retail		1,354		1,597		4,188		3,766
Media
Service	$	—	$	—	$	—	$	—
Subscription		872		856		2,607		2,592
Total Media		872		856		2,607		2,592

Total	$	5,751	$	5,828	$	18,437	$	17,668

The Company has contract assets from contracts with customers that are classified as “trade accounts receivable.” Financial information about trade accounts receivable is included in Note 8.

The Company has contract liabilities from contracts with customers that are classified as “deferred revenue.” Deferred revenue consists of billings in advance for services and subscriptions for which the performance obligation has not been satisfied.

The following table provides information about contract liabilities from contracts with customers:

	September 30,		December 31,
	2020		2019
Deferred revenue, current	$	2,098	$	3,172
Deferred revenue, long-term		41		59
Total	$	2,139	$	3,231

The Company recognized $2,561 of revenue during the nine months ended September 30, 2020, that was included in the contract liability balance as of December 31, 2019.

The aggregate amount of transaction prices from contractual obligations that are unsatisfied or partially unsatisfied was $15,605 and $17,759 as of September 30, 2020, and December 31, 2019, respectively.

4. Segment Information

Geographic Information

The Company derives its revenue from a single reporting segment: automatic identification solutions. Revenue is generated in this segment primarily through software development services and software subscriptions. The Company markets its products in the U.S. and in non-U.S. countries through its sales personnel and partners.

Revenue by geographic area, based upon the “bill-to” location, was as follows:

	Three		Three		Nine		Nine
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2020		2019		2020		2019
Domestic	$	1,836	$	2,136	$	5,451	$	5,225
International (1)		3,915		3,692		12,986		12,443
Total	$	5,751	$	5,828	$	18,437	$	17,668

(1)	Revenue from the Central Banks, consisting of a consortium of central banks around the world, is classified as international revenue. Reporting revenue by country for this customer is not practicable.

Major Customers

The following customers accounted for 10% or more of revenue:

	Three			Three			Nine			Nine
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2020			2019			2020			2019
Central Banks		60	%		57	%		62	%		62	%
Walmart Inc.		14	%		14	%		13	%	*

* Less than 10%

Long-Lived Assets by Geographical Area

The Company’s long-lived assets are all domiciled in the U.S.

5. Stock-Based Compensation

Stock-based compensation includes expense charges for all stock-based awards to employees and directors. These awards include stock option grants, restricted stock awards and restricted stock unit awards.

Stock-based compensation expense related to internal labor is capitalized to software and patent costs based on direct labor hours charged to capitalized software and patent costs.

Determining Fair Value

Stock Options

The Company estimates the fair value of stock options on the date of grant (measurement date) using the Black-Scholes option valuation model. The Company recognizes the fair value of stock option awards on a straight-line basis over the vesting period of the award.

The following inputs are used in the Black-Scholes option valuation model to estimate the fair value of stock options:

Stock Price. The stock price represents the fair market value of the Company’s common stock on the date of the grant.

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms and vesting schedules of the awards. Stock options granted generally vest over a service period of three years and have contractual terms of ten years.

Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock based on historical prices over the most recent period commensurate with the expected life of the award.

Risk-Free Interest Rate. The Company determines the risk-free interest rate using current U.S. treasury yields for bonds with a maturity commensurate with the expected life of the award.

Expected Dividend Yield. The expected dividend yield is derived by the Company’s expected annual dividend rate over the expected term divided by the fair value of the Company’s common stock at the grant date.

Black Scholes option valuation inputs:

	Three			Three			Nine			Nine
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2020			2019			2020			2019
Stock price	$	15.36		$	39.54		$	15.36		$	39.54
Expected life (years)		3.25			3.20			3.25			3.20
Expected volatility		70.91	%		58.68	%		70.91	%		58.68	%
Risk-free interest rate		0.25	%		1.51	%		0.25	%		1.51	%
Expected dividend yield		0	%		0	%		0	%		0	%

Restricted Stock

The fair value of restricted stock awards is based on the fair market value of the Company’s common stock on the date of the grant (measurement date) and is recognized on a straight-line basis over the vesting period of the award. Restricted stock awards granted generally vest over a service period of three to four years for employee grants and one to three years for director grants.

Restricted Stock Units

The fair value of restricted stock unit (“RSU”) awards, which vest upon meeting a service condition, is based on the fair market value of the Company’s common stock on the date of the grant (measurement date) and is recognized on a straight-line basis over the service period of the award, which is generally 3 years.

Performance Restricted Stock Units

The fair value of performance restricted stock unit (“PRSU”) awards, which vest upon meeting a market condition, such as exceeding a target stock price in the future, and a service condition, is determined on the date of grant (measurement date) using the Monte Carlo valuation model. Under the Monte Carlo valuation model, the stock price is assumed to follow the Geometric Brownian Motion with a drift term equal to the risk-free rate. The Company recognizes the fair value of the award on a straight-line basis over the service period of the award, which is generally 3 years.

The following inputs are used in the Monte Carlo valuation model to estimate the fair value of PRSUs:

Stock Price. The stock price represents the fair market value of the Company’s common stock on the date of the grant.

Risk-Free Interest Rate. The Company determines the risk-free interest rate using current U.S. treasury yields for bonds with a maturity commensurate with the term of the award.

Monte Carlo valuation inputs:

	Three			Three		Nine			Nine
	Months			Months		Months			Months
	Ended			Ended		Ended			Ended
	September 30,			September 30,		September 30,			September 30,
	2020			2019		2020			2019
Stock price	$	16.49		$	—	$	16.49		$	—
Expected volatility		72.50	%		—		72.50	%		—
Risk-free interest rate		0.14	%		—		0.14	%		—

Stock-Based Compensation

	Three		Three		Nine		Nine
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2020		2019		2020		2019
Stock-based compensation:
Cost of revenue	$	216	$	163	$	602	$	524
Sales and marketing		591		459		1,674		1,467
Research, development and engineering		694		366		1,495		1,077
General and administrative		1,126		1,053		3,378		3,026
Stock-based compensation expense		2,627		2,041		7,149		6,094
Capitalized to software and patent costs		40		44		125		134
Total stock-based compensation	$	2,667	$	2,085	$	7,274	$	6,228

The following table sets forth total unrecognized compensation costs related to non-vested stock-based awards granted under the Company’s equity compensation plan:

	As of		As of
	September 30,		December 31,
	2020		2019
Total unrecognized compensation costs	$	16,139	$	13,535

Total unrecognized compensation costs will be adjusted for any future forfeitures if and when they occur.

The Company expects to recognize the total unrecognized compensation costs as of September 30, 2020, for stock option, restricted stock and restricted stock unit awards over weighted average periods through September 30, 2024, as follows:

	Stock	Restricted
	Options	Stock	RSUs	PRSUs
Weighted average period	1.49 years	1.43 years	2.00 years	2.25 years

As of September 30, 2020, under the Company’s stock-based compensation plan, equity awards to purchase an additional 803 shares were authorized for future grants under the plan. The Company issues new shares upon exercises of stock options, grants of restricted stock awards and vesting of restricted stock unit awards.

Stock Option Activity

The following table reconciles the outstanding balance of stock option awards:

			Weighted		Weighted
			Average		Average		Aggregate
	Number of		Exercise		Grant Date		Intrinsic
Three months ended September 30, 2020:	Options		Price		Fair Value		Value
Outstanding at June 30, 2020		550	$	31.40	$	14.10
Granted		105		15.36		7.36
Exercised		—		—		—
Forfeited or expired		—		—		—
Outstanding at September 30, 2020		655	$	28.83	$	13.02	$	732

				Weighted		Weighted
				Average		Average		Aggregate
	Number of			Exercise		Grant Date		Intrinsic
Nine months ended September 30, 2020:	Options			Price		Fair Value		Value
Outstanding at December 31, 2019		558		$	31.22	$	14.03
Granted		105			15.36		7.36
Exercised		(8	)		18.01		8.85
Forfeited or expired		—			—		—
Outstanding at September 30, 2020		655		$	28.83	$	13.02	$	732
Exercisable at September 30, 2020		450		$	30.33			$	—
Unvested at September 30, 2020		205		$	25.53			$	732

The aggregate intrinsic value is based on the closing price of $22.33 per share of Digimarc common stock on September 30, 2020, which would have been received by the optionees had all of the options with exercise prices less than $22.33 per share been exercised on that date.

Restricted Stock Activity

The following table reconciles the unvested balance of restricted stock awards:

				Weighted
				Average
	Number of			Grant Date
Three months ended September 30, 2020:	Shares			Fair Value
Unvested balance, June 30, 2020		526		$	28.34
Granted		13		$	15.15
Vested		(76	)	$	28.43
Forfeited		(3	)	$	28.72
Unvested balance, September 30, 2020		460		$	27.95

				Weighted
				Average
	Number of			Grant Date
Nine months ended September 30, 2020:	Shares			Fair Value
Unvested balance, December 31, 2019		435		$	27.05
Granted		242		$	29.90
Vested		(210	)	$	28.31
Forfeited		(7	)	$	28.94
Unvested balance, September 30, 2020		460		$	27.95

The following table indicates the fair value of all restricted stock awards that vested:

	Three		Three		Nine		Nine
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2020		2019		2020		2019
Fair value of restricted stock awards vested	$	1,168	$	2,195	$	4,239	$	7,427

Restricted Stock Units Activity

The following table reconciles the unvested balance of restricted stock unit awards:

			Weighted
			Average
	Number of		Grant Date
For the three and nine months ended September 30, 2020:	Units		Fair Value
Unvested balance, June 30, 2020 and December 31, 2019		—	$	—
Granted		45	$	15.36
Vested		—	$	—
Forfeited		—	$	—
Unvested balance, September 30, 2020		45	$	15.36

Performance Restricted Stock Units Activity

The following table reconciles the unvested balance of performance restricted stock unit awards:

			Weighted
			Average
	Number of		Grant Date
For the three and nine months ended September 30, 2020:	Units		Fair Value
Unvested balance, June 30, 2020 and December 31, 2019		—	$	—
Granted		124	$	11.08
Vested		—	$	—
Forfeited		—	$	—
Unvested balance, September 30, 2020		124	$	11.08

6. Shareholders’ Equity

Common Stock

On September 29, 2020, the Company entered into a Subscription Agreement with TCM Strategic Partners L.P. to issue and sell 2,542 shares of its common stock in a private placement at a price of $14.37 per share. The closing of the sale of common stock occurred the same day. The offering was made without an underwriter or placement agent. The Company received $36,530 of cash proceeds and paid $190 in stock issuance costs. The Company also issued and sold 17 shares of its Series B Convertible Preferred Stock, par value $0.001 per share (“Series B Convertible Preferred Stock”), for $16,970 of cash proceeds under the same Subscription Agreement and paid $84 in stock issuance costs. The closing of the sale and issuance of the Series B Convertible Preferred Stock occurred on October 1, 2020. Subject to shareholder approval, the Series B Convertible Preferred Stock will automatically convert into fully paid and non-assessable shares of common stock at a conversion price equal to $14.37 per share. See Note 15 for additional information.

In May 2019, the Company entered into an Equity Distribution Agreement, whereby the Company may sell from time to time through Wells Fargo Securities, LLC, as its sales agent, the Company’s common stock having an aggregate offering price of up to $30,000.

For the nine months ended September 30, 2020, the Company sold 162 shares at an average price of $16.80 under this Equity Distribution Agreement totaling $2,718 of cash proceeds, less $61 of commissions and $394 of stock issuance costs.

For the nine months ended September 30, 2019, the Company sold 336 shares at an average price of $60.61 under this Equity Distribution Agreement totaling $20,349 of cash proceeds, less $483 of commissions and $251 of stock issuance costs.

As of September 30, 2020, the Company sold 498 shares at an average price of $46.36 under this Equity Distribution Agreement totaling $23,068 of cash proceeds, less $544 of commissions and $646 of stock issuance costs.

7. Earnings Per Common Share

The Company calculates basic and diluted earnings per common share in accordance with ASC 260 “Earnings Per Share,” using the two-class method because the Company’s unvested restricted stock is a participating security since these awards contain non-forfeitable rights to receive dividends. Under the two-class method, earnings are allocated to each class of common stock and participating security as if all of the earnings for the period had been distributed.

Basic earnings per common share excludes dilution and is calculated by dividing earnings to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing earnings to common shares by the weighted-average number of common shares, as adjusted for the potentially dilutive effect of stock options. The dilutive effect of stock options is determined using the treasury stock method.

The following table reconciles earnings (loss) per common share:

	Three			Three			Nine			Nine
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2020			2019			2020			2019
Basic Earnings (Loss) per Common Share:
Loss to common shares — basic	$	(8,352	)	$	(7,761	)	$	(24,721	)	$	(24,157	)
Weighted average common shares outstanding — basic		12,241			11,924			12,129			11,693
Basic earnings (loss) per common share	$	(0.68	)	$	(0.65	)	$	(2.04	)	$	(2.07	)

Diluted Earnings (Loss) per Common Share:
Loss to common shares — diluted	$	(8,352	)	$	(7,761	)	$	(24,721	)	$	(24,157	)
Weighted average common shares outstanding — diluted		12,241			11,924			12,129			11,693
Diluted earnings (loss) per common share	$	(0.68	)	$	(0.65	)	$	(2.04	)	$	(2.07	)

The following table indicates the common stock equivalents related to stock options that were anti-dilutive and excluded from diluted earnings per common share calculations:

Three

Nine

Months

Ended

September 30,

2020

2019

2020

2019

Anti-dilutive shares due to:

Exercise prices higher than the average market price

550

—

550

100

Net loss

—

8. Trade Accounts Receivable

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount.

	September 30,			December 31,
	2020			2019
Trade accounts receivable	$	3,047		$	4,036
Allowance for doubtful accounts		(25	)		(15	)
Trade accounts receivable, net	$	3,022		$	4,021
Unpaid deferred revenue included in trade accounts receivable	$	484		$	2,015

Allowance for Doubtful Accounts

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing trade accounts receivable. The Company determines the allowance based on historical write-off experience and current information. The Company reviews its allowance for doubtful accounts each reporting period. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Unpaid Deferred Revenue

The unpaid deferred revenue that is included in trade accounts receivable is billed in accordance with the provisions of the contracts with the Company’s customers.

Major Customers

The following customers accounted for 10% or more of trade accounts receivable, net:

	September 30,			December 31,
	2020			2019
Central Banks		70	%		69	%

9. Property and Equipment

Property and equipment are stated at cost. Repairs and maintenance are charged to expense when incurred.

Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, generally two to ten years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the lease term.

	September 30,			December 31,
	2020			2019
Office furniture and fixtures	$	1,650		$	1,650
Software		4,882			4,379
Equipment		5,340			5,041
Leasehold improvements		1,658			1,721
Gross property and equipment		13,530			12,791
Less accumulated depreciation and amortization		(10,169	)		(9,141	)
Property and equipment, net	$	3,361		$	3,650

10. Intangibles

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment charges were recorded for the nine months ended September 30, 2020 and 2019.

Patent costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at the award date, which varies depending on the pendency period of the application, generally approximating 17 years.

Amortization of intangible assets acquired is calculated using the straight-line method over the estimated useful lives of the assets.

	Estimated Life	September 30,			December 31,
	(years)	2020			2019
Capitalized patent costs	17-20	$	9,570		$	9,245
Intangible assets acquired:
Purchased patents and intellectual property	3-10		250			250
Existing technology	5		1,560			1,560
Customer relationships	7		290			290
Backlog	2		760			760
Tradenames	3		290			290
Non-solicitation agreements	1		120			120
Gross intangible assets			12,840			12,515
Accumulated amortization			(6,236	)		(5,845	)
Intangibles, net		$	6,604		$	6,670

11. Leases

The Company adopted ASC 842, “Leases,” as amended, as of January 1, 2019, using the retrospective approach. The retrospective approach provides a method for recording existing leases at adoption and recording the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the historical

lease classification, its assessment of whether a contract was or contains a lease, and its initial direct costs for any leases that existed prior to January 1, 2019. In addition, the Company elected the short-term lease exception as a practical expedient and elected to combine lease and non-lease components.

The Company leases its corporate office in Beaverton, Oregon. In July 2015, the Company entered into an amendment with the landlord of its corporate office to extend the lease term through March 2024, with remaining rent payments as of September 30, 2020, totaling $2,902, payable in monthly installments. The Company had leased office space in San Mateo, California, until March 31, 2020, when the lease expired.

All of the Company’s leases are operating leases. The following table provides additional details of leases presented in the Consolidated Balance Sheets:

	September 30,			December 31,
	2020			2019
Right of use assets	$	1,911		$	2,263
Lease liabilities, current	$	646		$	663
Lease liabilities, long-term	$	1,947		$	2,435

Weighted-average remaining life	3.5 years			4.1 years
Weighted-average discount rate		8.20	%		8.20	%

The carrying value of the right of use assets is included in “Other assets” and the current and long-term lease liabilities are included in “Accounts payable and other accrued liabilities” and “Lease liability and other long-term liabilities,” respectively, in the Consolidated Balance Sheets.

Operating lease expense is included in cost of revenue and operating expenses in the Consolidated Statements of Operations and in cash flows from operating activities in the Consolidated Statements of Cash Flows. The operating leases include variable lease payments which are not material and are included in operating lease expense. Additional details of the Company’s operating leases are presented in the following table:

	Three		Three		Nine		Nine
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2020		2019		2020		2019
Operating lease expense	$	270	$	251	$	786	$	772
Cash paid for operating leases	$	296	$	322	$	919	$	1,014

The table below reconciles the cash payment obligations for the first five years and total of the remaining years for the operating lease liability recorded in the Consolidated Balance Sheet as of September 30, 2020:

	Cash
	Payment
Year ending December 31:	Obligations
Remaining in 2020	$	210
2021		838
2022		862
2023		867
2024		218
Thereafter		—
Total lease payments		2,995
Imputed interest		(402	)
Total minimum lease payments	$	2,593

12. Note Payable

Promissory Note under the Paycheck Protection Program

On April 16, 2020, the Company entered into a Promissory Note with Stearns Bank, N.A. in an aggregate principal amount of $5,032 (the “Note”), pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

The Note matures two years from the disbursement date and bears interest at a rate of 1.000% per annum, with the first six months of interest deferred. Principal and interest are payable monthly commencing six months after the disbursement date and may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. The Note is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the PPP. The Company believes that it used all of the proceeds from the Note for Qualifying Expenses. However, no assurance is provided that the Company will obtain forgiveness of the Note in whole or in part.

On June 29, 2020, the Company was notified by Stearns Bank, N.A. that the Note was transferred to The Loan Source, Inc., (the “Lender”) who will be responsible for servicing the Note going forward, including administering loan forgiveness.

On September 15, 2020, the Company filed its application for 100% forgiveness of the Note. The Lender has up to 60 days to review the application and the Small Business Administration (the “SBA”) has up to 90 days thereafter to approve the application.

The Note provides that the Company must obtain lender consent in the event of a “change of ownership.” On October 2, 2020, the SBA released a procedural notice that defined “change of ownership” as used in PPP loans to mean the transfer, whether in one or more transactions, of at least 20% of the common stock or other ownership interest of a PPP borrower. Based on the SBA’s newly issued notice, the Company has sought, but not yet received, the consent of the lender under the Note to the conversion of the Series B Convertible Preferred Stock issued on October 1, 2020, under the Subscription Agreement with TCM Strategic Partners L.P (see Note 15). Although we expect to receive such consent, the failure to do so could result in a default under the terms of the Note and an obligation to repay the PPP loan.

The following table provides information about the Note:

	September 30,
	2020
Note payable	$	5,032
Accrued interest		21
Total	$	5,053

Note payable, current	$	3,096
Note payable, long-term		1,957
Total	$	5,053

13. Income Taxes

The provision for income taxes for the nine months ended September 30, 2020 and 2019 reflects current taxes, deferred taxes, and withholding taxes. The effective tax rate for each of the nine months ended September 30, 2020 and 2019 was 0%. The valuation allowance against net deferred tax assets as of September 30, 2020, was $53,635, an increase of $5,826 from $47,809 as of December 31, 2019.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an ownership change will occur if there is a cumulative change in ownership by 5% shareholders that exceeds 50 percentage points over a rolling three-year period. As a result of the issuance of common stock and preferred stock to TCM Strategic Partners LP, as referenced in Note 6, the Company completed a study to determine whether an ownership change had occurred under Sections 382 or 383 of the Code. The Company determined that a change in ownership has not occurred as a result of the transaction.

Excess tax deficiencies of $1,011 and $1,759 were recognized in the provision for income taxes for the three and nine months ended September 30, 2020, respectively, which were offset by $1,011 and $1,759 of valuation allowance, respectively. Excess tax benefits of $707 and $2,751 were recognized in the provision for income taxes for the three and nine months ended September 30, 2019, respectively, which were offset by $707 and $2,751 of valuation allowance, respectively.

14. Commitments and Contingencies

Certain of the Company’s contracts include an indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with ASC 450 “Contingencies.” To date, there have been no claims made under such indemnification provisions.

The Company is subject from time to time to other legal proceedings and claims arising in the ordinary course of business. At this time, the Company does not believe that the resolution of any such matters will have a material adverse effect on its financial position, results of operations or cash flows.

15. Subsequent Event

On September 29, 2020, the Company entered into a Subscription Agreement with TCM Strategic Partners L.P. to, among other things, issue and sell 17 shares of its Series B Convertible Preferred Stock, par value $0.001 per share (“Series B Convertible Preferred Stock”), for $16,970 in a private placement and paid issuance costs of $84. The closing of the sale and issuance of the Series B Convertible Preferred Stock occurred on October 1, 2020. Subject to shareholder approval, the Series B Convertible Preferred Stock will automatically convert into fully paid and non-assessable shares of common stock at a conversion price equal to $14.37 per share.

The Series B Convertible Preferred Stock ranks senior to the Company’s common stock, the Series A Redeemable Nonvoting Preferred Stock and the Series R Participating Cumulative Preferred Stock with respect to dividends and distributions on liquidation, winding-up and dissolution. Upon liquidation, dissolution or winding up of the Company, each share of Series B Convertible Preferred Stock will be entitled to receive an amount per share equal to the greater of (i) $1,000 per share, plus all accumulated dividends (the “Liquidation Preference”), plus accrued and unpaid dividends and (ii) the amount that the holder of Series B Convertible Preferred Stock (each, a “Holder” and collectively, the “Holders”) would have been entitled to receive at such time if the Series B Convertible Preferred Stock were converted into common.

Dividend rights

The Holders are entitled to dividends on the Liquidation Preference at the rate of 7.5% per annum, payable in cash or, at the option of the Company, accumulated and added to the Liquidation Preference. The Holders are also entitled to participate in dividends declared or paid on the common stock and in offers to repurchase or exchange the common stock, in each case, on an as-converted basis.

Voting rights

The Holders generally will be entitled to vote with the holders of the shares of common stock on all matters submitted to a vote of holders of shares of common stock (voting together with the holders of shares of common stock as one class) on an as-converted basis, applying a voting conversion price of $17.01 (subject to customary anti-dilution adjustments in the event of any stock split, stock dividend or distribution, or stock combination); provided that, until the shareholder approval has been obtained, no Holder shall be entitled to cast a number of votes with respect to the Holder’s shares of Series B Convertible Preferred Stock and any shares of common stock beneficially owned by such Holder in excess of 19.9% of the outstanding shares of capital stock then entitled to vote. Additionally, certain matters will require the approval of the majority of the outstanding Series B Convertible Preferred Stock, voting as a separate class, including (i) amendments, alterations or repeal of any provision of the Company’s Articles of Incorporation or Bylaws that would adversely affect the rights, preferences or voting powers of the Series B Convertible Preferred Stock, (ii) any action that would authorize or create, or increase the number of authorized or issued shares of, or any securities convertible into shares of, or reclassify any security into, or issue, any class or series of capital stock of the Company ranking senior to, or on a parity basis with, the Series B Convertible Preferred Stock as to certain rights, (iii) certain transactions with affiliates, and (iv) certain business combinations and binding or statutory share exchanges or reclassification involving the Series B Convertible Preferred Stock, unless such events do not adversely affect the rights, preferences or voting powers of the Series B Convertible Preferred Stock.

Change of Control

If the Company undergoes a Change of Control, the Company will redeem all of its then-outstanding shares of Series B Convertible Preferred Stock for cash consideration equal to the greater of (i) the Liquidation Preference plus accrued and unpaid dividends and (ii) the amount that such Holder would have been entitled to receive at such time if the Series B Convertible Preferred Stock were converted into common stock immediately prior to such change of control.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of Digimarc that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. See the discussion regarding forward-looking statements included in this Quarterly Report on Form 10-Q under the caption “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.”

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Readers are also urged to carefully review and consider the disclosures made in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and in the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed on February 27, 2020 (our “2019 Annual Report”), and other reports and filings we have made with the U.S. Securities and Exchange Commission (“SEC”).

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to “Company,” “Digimarc,” “we,” “our” and “us” refer to Digimarc Corporation.

All dollar amounts are in thousands except per share amounts or unless otherwise noted. The percentages within the tables may not sum to 100% due to rounding.

Digimarc, Digimarc Barcode and Digimarc Discover are registered trademarks of Digimarc Corporation.

Overview

Digimarc Corporation, an Oregon corporation incorporated in 2008, is the inventor of a platform that enables a more efficient, reliable and economical means of automatic identification. The Digimarc Platform can apply a unique identifier to virtually all media objects—including product packaging, commercial print, audio and video—that can be automatically identified by an enabled ecosystem of industrial scanners, smartphones and other interfaces. These capabilities allow Digimarc and its partners to supply a wide range of solutions for retail and supply chain operations, consumer engagement, media management and security.

The Digimarc Platform features three core capabilities for the identification, discovery and quality management of media. Digimarc Barcode integrates the identification function, which is a novel data carrier encoded into media in ways that are generally imperceptible to people, permitting the carrier to be repeated many times over the surface of the enhanced media. Digimarc Discover represents the discovery function, which is software for computing devices and network interfaces that recognize and decode indicia of the identity of media. These include, but are not limited to, Digimarc Barcodes, Quick Response Codes, Universal Product Codes, certain other Global Standards One (“GS1”) approved one-dimensional codes and relevant contextual data. Digimarc Verify incorporates the quality management function, a suite of software tools used to inspect and verify that the identification and discovery of media are both accurate and effective. Together, these core capabilities enable organizations, application developers, and other solution providers to build new and improve existing automatic identification solutions.

The Digimarc Platform enables customers to create digital identities for media objects and provides many benefits for connected objects, including:

•

Security: An imperceptible and indestructible data carrier encoded in the object provides a unique identification, whether in a digital image, video or audio file, on paper or cardboard or etched within material substrates such as plastic and other materials. Among other things, this identification supports strong authentication.

•

Brand Protection: A unique identifier (“ID”) enables fraud deterrence across many use cases, from preventing “barcode swapping” and counterfeiting of currency, media and goods to copyright detection of digital images and e-publications.

•

Traceability: The ID can carry serial numbers for easier tracking of individual items or entire lots. This has many uses, from ensuring product legitimacy to preventing product pirating to quickly identifying products for recall based on source provenance and sales destination.

•

Sustainability: The ID can contain information specific to packaging content as an aid to broader and more efficient recycling. For example, a microscopic pattern embossed in plastic packaging can identify the materials used and their composition to aid sorting and recapture. Similarly, enhanced labels for fresh foods can be used to adjust pricing and thus reduce food waste proactively.

•

Engagement: Consumers can directly interact with enhanced objects by merely scanning the item with their enabled smartphones. Brands can share additional product information online, including recipes, instructions, information about ingredients and sources, how-to videos, coupons and more.

•

Efficiency: Connected items, reliably scanned by machines and mobile devices, can enhance supply chain efficiencies, from parts matching in manufacturing to faster and more accurate inventory scanning and quicker and easier front-of-store checkout experiences.

Our inventions allow our business partners and customers to provide persistent digital identities for virtually any media content that is digitally processed at some point during its lifecycle. Our technology can be applied to images, video, and audio to supply a wide range of consumer engagement, media management and security solutions across multiple consumer and government industry sectors. Over the years, our enabling software and business processes, and associated intellectual property portfolio, have grown to encompass many related technologies.

We provide our offerings directly and through our business partners. Our inventions provide a powerful document security element, giving rise to a long-term relationship with a consortium of central banks (the “Central Banks”) and many leading companies in the information technology industry. Our business partners and we have successfully propagated the use of our technology in music, movies, television broadcasts, digital images, e-publications and printed materials. Digimarc Barcode has been used in these applications to improve media rights and asset management, reduce piracy and counterfeiting losses, improve marketing programs, permit more efficient and effective distribution of valuable media content and enhance consumer entertainment and commercial experiences.

Digimarc Barcode can be used to enhance all forms of media and is generally imperceptible to human senses, but quickly detected by computers, networks or other digital devices like smartphones and tablets. Unlike traditional barcodes and tags, our solution does not require content owners to give up valuable visual space on their media content, nor does it affect their media content’s overall layout or aesthetics. Digimarc Barcode is generally imperceptible in regular use and does all that visible barcodes do, but performs better. Our Digimarc Discover software delivers a range of rich media experiences to its readers on their smartphones or tablets across multiple media formats, including print, audio and video. Unique to Digimarc Discover is its seamless multi-modal use of various content identification technologies as needed, including Digimarc Barcode, when present.

Banknote counterfeit deterrence was the first commercially successful large-scale use of our technologies. Innovations based on our existing technology and experience have been leveraged to create new products to deter counterfeiting and tampering of driver licenses and other government-issued secure credentials. In parallel, our business partners, under patent or technology licenses from us, are delivering solutions to track and monitor the distribution of music, images, television and movies to consumers.

Our intellectual property contains many innovations in digital watermarking, content recognition (sometimes referred to as “fingerprinting”), digital rights management and related fields. To protect our inventions, we have implemented an extensive intellectual property protection program that relies on a combination of patent, copyright, trademark and trade secret laws, and nondisclosure agreements and other contracts. As a result, we believe we have one of the world’s most extensive patent portfolios in digital watermarking and related fields, with approximately 1,100 U.S. and foreign patents granted and applications pending as of September 30, 2020. We continue to develop and broaden our portfolio in automatic identification and management technology and related applications and systems. We devote significant resources to developing and protecting our inventions and continuously seek to identify and evaluate potential licensees for our patents. The patents in our portfolio each have a life of approximately 20 years from the patent’s effective filing date, and up to 17 years after the patent has been granted.

The market for patent licensing has become more challenging in recent years. As a result, we have shifted our focus from direct monetization through enforcement and licensing to facilitating progress toward the realization of our vision to enrich everyday living via pervasive, intuitive computing by:

•

encouraging large scale adoption of our technologies by industry leaders;

•

increasing the scale and rate of growth of our products and services business; and

•

laying a foundation for continuous innovation.

For a discussion of activities and costs related to our research and development, see “Results of Operations – Summary – Research, development and engineering.”

COVID-19 Pandemic

The coronavirus disease 2019 (“COVID-19”) pandemic posed significant risks to our business. The ongoing public health actions attempting to reduce the spread of COVID-19 created and may continue to create significant disruptions to consumer demand, customer and supplier relationships, sales and support processes, and general economic conditions. Accordingly, our management continuously evaluates our business operations, communicates with and monitors the actions of our customers and partners, and reviews our near-term financial performance as we manage the Company through the uncertainty related to the COVID-19 pandemic. Some of our projects with retail customers and partners have been delayed as a result of the COVID-19 pandemic. Delays in these projects have affected the timing of closing new business. To help ensure adequate liquidity during this period and in light of uncertainties posed by the COVID-19 pandemic, we received a loan on April 16, 2020 under the U.S. government Paycheck Protection Program. On September 15, 2020, we filed our application for 100% forgiveness of the loan. The lender has up to 60 days to review the application and the Small Business Administration has up to 90 days thereafter to approve the application.

Critical Accounting Policies and Estimates

Detailed information about our critical accounting policies and estimates is set forth in Part III, Item 15 of our 2019 Annual Report (“Exhibits and Financial Statement Schedules”), in “Note 1: Description of Business and Summary of Significant Accounting Policies,” which is incorporated by reference into this Quarterly Report on Form 10-Q.

Results of Operations

The following table presents statements of operations data for the periods indicated as a percentage of total revenue. Unless stated otherwise, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to the three and nine month periods ended September 30, 2020, and all changes discussed with respect to such periods reflect changes compared to the three and nine month periods ended September 30, 2019.

	Three			Three			Nine			Nine
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2020			2019			2020			2019
Percentages are percent of total revenue
Revenue:
Service		58	%		54	%		60	%		60	%
Subscription		42			46			40			40
Total revenue		100			100			100			100
Cost of revenue:
Service		24			24			25			27
Subscription		9			9			8			9
Total cost of revenue		34			33			34			35
Gross profit		66			67			66			65
Operating expenses:
Sales and marketing		79			83			78			84
Research, development and engineering		81			70			72			69
General and administrative		52			51			51			53
Total operating expenses		212			205			202			205
Operating loss		(146	)		(138	)		(135	)		(141	)
Other income, net		1			4			1			4
Loss before income taxes		(145	)		(133	)		(134	)		(137	)
Benefit (provision) for income taxes		(0	)		0			0			(0	)
Net loss		(145	%)		(133	%)		(134	%)		(137	%)

Summary

Total revenue for the three month period ended September 30, 2020, decreased 1% to $5.8 million, compared to the corresponding three month period ended September 30, 2019, primarily as a result of lower subscription revenue from Retail customers, partially offset by growth in service revenue from Government customers.

Total revenue for the nine month period ended September 30, 2020, increased 4% to $18.4 million, compared to the corresponding nine month period ended September 30, 2019, primarily as a result of growth in service revenue from Government customers and subscription revenue from Retail customers.

Total operating expenses for the three and nine month periods ended September 30, 2020, increased 2%, compared to the corresponding three and nine month periods ended September 30, 2019, primarily as a result of cash and stock-based severance costs related to our restructuring plan implemented in July 2020 and routine annual compensation adjustments for our employees, partially offset by lower travel, consulting and marketing costs.

Revenue

	Three			Three									Nine			Nine
	Months			Months									Months			Months
	Ended			Ended			Dollar			Percent			Ended			Ended			Dollar		Percent
	September 30,			September 30,			Increase			Increase			September 30,			September 30,			Increase		Increase
	2020			2019			(Decrease)			(Decrease)			2020			2019			(Decrease)		(Decrease)
Revenue:
Service	$	3,352		$	3,160		$	192			6	%	$	10,982		$	10,549		$	433		4	%
Subscription		2,399			2,668			(269	)		(10	)%		7,455			7,119			336		5	%
Total	$	5,751		$	5,828		$	(77	)		(1	)%	$	18,437		$	17,668		$	769		4	%
Revenue (as % of total revenue):
Service		58	%		54	%								60	%		60	%
Subscription		42	%		46	%								40	%		40	%
Total		100	%		100	%								100	%		100	%

Service. Service revenue consists primarily of revenue earned from the performance of software development services. The majority of service contracts are structured as time and materials agreements. Revenue for services is generally recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided. Service contracts can range from days to several years in length. Our contract with the Central Banks, which accounts for the majority of service revenue, has a contract term through December 31, 2024 with the option to extend the term for an additional five years by mutual agreement. The contract is subject to work plans that are reviewed and agreed upon quarterly. The contract provides for predetermined billing rates, which are adjusted annually to account for cost of living variables, and provides for the reimbursement of third party costs incurred to support the work plans.

The increases in service revenue for the three and nine month periods ended September 30, 2020, compared to the corresponding three and nine month periods ended September 30, 2019, were primarily due to growth in service revenue from Government customers.

Subscription. Subscription revenue consists primarily of revenue earned from the sale of software products and, to a lesser extent, the licensing of intellectual property. The majority of subscription contracts are recurring, paid in advance and recognized over the term of the subscription, which is typically one to three years.

The decrease in subscription revenue for the three month period ended September 30, 2020, compared to the corresponding three month period ended September 30, 2019, was primarily due to the revenue impact of a renegotiated contract with a Retail supplier partner in the first quarter of 2020.

The increase in subscription revenue for the nine month period ended September 30, 2020, compared to the corresponding nine month period ended September 30, 2019, was primarily due to growth in software subscriptions to Retail customers, partially offset by the revenue impact of a renegotiated contract with a Retail supplier partner in the first quarter of 2020

Revenue by Geography

	Three			Three									Nine			Nine
	Months			Months									Months			Months
	Ended			Ended			Dollar			Percent			Ended			Ended			Dollar		Percent
	September 30,			September 30,			Increase			Increase			September 30,			September 30,			Increase		Increase
	2020			2019			(Decrease)			(Decrease)			2020			2019			(Decrease)		(Decrease)
Revenue by geography:
Domestic	$	1,836		$	2,136		$	(300	)		(14	)%	$	5,451		$	5,225		$	226		4	%
International		3,915			3,692			223			6	%		12,986			12,443			543		4	%
Total	$	5,751		$	5,828		$	(77	)		(1	)%	$	18,437		$	17,668		$	769		4	%
Revenue (as % of total revenue):
Domestic		32	%		37	%								30	%		30	%
International		68	%		63	%								70	%		70	%
Total		100	%		100	%								100	%		100	%

The changes in domestic revenue for the three and nine month periods ended September 30, 2020, compared to the corresponding three and nine month periods ended September 30, 2019, were primarily due to changes in subscription revenue from our domestic Retail customers.

The increases in international revenue for the three and nine month periods ended September 30, 2020, compared to the corresponding three and nine month periods ended September 30, 2019, were primarily due to growth in service revenue from our international Government customers.

Cost of Revenue

Service. Cost of service revenue primarily includes:

•

compensation, benefits, incentive compensation in the form of stock-based compensation and related costs of our software developers, quality assurance personnel, design professionals, product managers, business development managers and other personnel where we bill our customers for time and materials costs;

•

payments to outside contractors that are billed to customers;

•

charges for equipment directly used by customers;

•

depreciation for machinery, equipment and software directly used by customers; and

•

travel costs that are billed to customers.

Subscription. Cost of subscription revenue primarily includes:

•

cost of outside contractors that provide operational support for our subscription products;

•

Internet service provider connectivity charges and image search data fees to support our subscription products; and

•

amortization of capitalized patent costs and patent maintenance fees.

Gross Profit

	Three			Three									Nine			Nine
	Months			Months									Months			Months
	Ended			Ended			Dollar			Percent			Ended			Ended			Dollar		Percent
	September 30,			September 30,			Increase			Increase			September 30,			September 30,			Increase		Increase
	2020			2019			(Decrease)			(Decrease)			2020			2019			(Decrease)		(Decrease)
Gross Profit:
Service	$	1,946		$	1,751		$	195			11	%	$	6,291		$	5,819		$	472		8	%
Subscription		1,877			2,159			(282	)		(13	)%		5,907			5,612			295		5	%
Total	$	3,823		$	3,910		$	(87	)		(2	)%	$	12,198		$	11,431		$	767		7	%
Gross Profit (as % of related revenue components):
Service		58	%		55	%								57	%		55	%
Subscription		78	%		81	%								79	%		79	%
Total		66	%		67	%								66	%		65	%

The decrease in total gross profit for the three month period ended September 30, 2020, compared to the corresponding three month period ended September 30, 2019, was primarily due to lower subscription revenue, partially offset by higher service revenue.

The increase in total gross profit for the nine month period ended September 30, 2020, compared to the corresponding nine month period ended September 30, 2019, was primarily due to higher service and subscription revenue.

The increases in service gross profit as a percentage of service revenue for the three and nine month periods ended September 30, 2020, compared to the corresponding three and nine month periods ended September 30, 2019, were primarily due to a favorable mix of billable expenses, with higher labor and lower non-labor expenses.

The decrease in subscription gross profit as a percentage of subscription revenue for the three month period ended September 30, 2020, compared to the corresponding three month period ended September 30, 2019, was primarily due to lower subscription revenue.

There was no change in subscription gross profit as a percentage of subscription revenue for the nine month period ended September 30, 2020, compared to the corresponding nine month period ended September 30, 2019.

Operating Expenses

Sales and marketing

	Three			Three									Nine			Nine
	Months			Months									Months			Months
	Ended			Ended			Dollar			Percent			Ended			Ended			Dollar			Percent
	September 30,			September 30,			Increase			Increase			September 30,			September 30,			Increase			Increase
	2020			2019			(Decrease)			(Decrease)			2020			2019			(Decrease)			(Decrease)
Sales and marketing	$	4,538		$	4,839		$	(301	)		(6	)%	$	14,417		$	14,876		$	(459	)		(3	)%
Sales and marketing (as % of total revenue)		79	%		83	%								78	%		84	%

Sales and marketing expenses consist primarily of:

•

compensation, benefits, incentive compensation in the form of stock-based compensation and related costs of sales and marketing employees and product managers;

•

travel and market research costs, and costs associated with marketing programs, such as trade shows, public relations and new product launches;

•

professional services and outside contractor costs for product and marketing initiatives; and

•

charges for infrastructure and centralized costs of facilities and information technology.

The decrease in sales and marketing expenses for the three month period ended September 30, 2020, compared to the corresponding three month period ended September 30, 2019, was primarily due to:

•

decreased travel costs of $0.3 million due to travel restrictions related to the COVID-19 pandemic; and

•

decreased marketing and consulting costs of $0.1 million; partially offset by

•

non-recurring severance costs related to our July 2020 restructuring plan of $0.2 million.

The decrease in sales and marketing expenses for the nine month period ended September 30, 2020, compared to the corresponding nine month period ended September 30, 2019, was primarily due to:

•

decreased travel costs of $0.6 million due to travel restrictions related to the COVID-19 pandemic; and

•

decreased consulting and marketing costs of $0.3 million; partially offset by

•

increased compensation costs of $0.4 million; and

•

non-recurring severance costs related to our July 2020 restructuring plan of $0.2 million.

Research, development and engineering

	Three			Three								Nine			Nine
	Months			Months								Months			Months
	Ended			Ended			Dollar		Percent			Ended			Ended			Dollar		Percent
	September 30,			September 30,			Increase		Increase			September 30,			September 30,			Increase		Increase
	2020			2019			(Decrease)		(Decrease)			2020			2019			(Decrease)		(Decrease)
Research, development and engineering	$	4,662		$	4,105		$	557		14	%	$	13,303		$	12,124		$	1,179		10	%
Research, development and engineering (as % of total revenue)		81	%		70	%							72	%		69	%

Research, development and engineering expenses consist primarily of:

•

compensation, benefits, incentive compensation in the form of stock-based compensation and related costs of software and hardware developers and quality assurance personnel;

•

payments to outside contractors;

•

the purchase of materials and services for product development; and

•

charges for infrastructure and centralized costs of facilities and information technology.

The increase in research, development and engineering expenses for the three month period ended September 30, 2020, compared to the corresponding three month period ended September 30, 2019, was primarily due to:

•

non-recurring severance costs related to our July 2020 restructuring plan of $0.6 million;

•

increased compensation costs of $0.1 million; partially offset by

•

lower recruiting, travel and other expenses of $0.1 million.

The increase in research, development and engineering expenses for the nine month period ended September 30, 2020, compared to the corresponding nine month period ended September 30, 2019, was primarily due to:

•

increased compensation costs of $0.7 million; and

•

non-recurring severance costs related to our July 2020 restructuring plan of $0.6 million; partially offset by

•

decreased travel costs of $0.1 million due to travel restrictions related to the COVID-19 pandemic.

General and administrative

	Three			Three								Nine			Nine
	Months			Months								Months			Months
	Ended			Ended			Dollar		Percent			Ended			Ended			Dollar		Percent
	September 30,			September 30,			Increase		Increase			September 30,			September 30,			Increase		Increase
	2020			2019			(Decrease)		(Decrease)			2020			2019			(Decrease)		(Decrease)
General and administrative	$	3,009		$	2,998		$	11		0	%	$	9,457		$	9,287		$	170		2	%
General and administrative (as % of total revenue)		52	%		51	%							51	%		53	%

We incur general and administrative costs in the functional areas of finance, legal, human resources, intellectual property, executive and board of directors. Costs for facilities and information technology are also managed as part of the general and administrative processes and are allocated to this area as well as each of the areas in cost of revenue, sales and marketing and research, development and engineering.

General and administrative expenses consist primarily of:

•

compensation, benefits and incentive compensation in the form of stock-based compensation and related costs of general and administrative personnel;

•

third party and professional fees associated with legal, accounting and human resources functions;

•

costs associated with being a public company;

•

third party costs, including filing and governmental regulatory fees and fees for outside legal counsel and translation costs, related to the filing and maintenance of our intellectual property;

•

charges to write off previously capitalized patent costs for patent assets we abandon; and

•

charges for infrastructure and centralized costs of facilities and information technology.

The increase in general and administrative expenses for the three month period ended September 30, 2020, compared to the corresponding three month period ended September 30, 2019, was primarily due to:

•

increased compensation costs of $0.2 million; partially offset by

•

decreased accounting and consulting costs of $0.1 million; and

•

decreased travel costs of $0.1 million due to travel restrictions related to the COVID-19 pandemic.

The increase in general and administrative expenses for the nine month period ended September 30, 2020, compared to the corresponding nine month period ended September 30, 2019, was primarily due to:

•

increased compensation costs of $0.6 million; partially offset by

•

decreased travel costs of $0.2 million due to travel restrictions related to the COVID-19 pandemic;

•

decreased consulting and accounting costs of $0.1 million; and

•

decreased employee training costs of $0.1 million.

Stock-based compensation

	Three		Three							Nine		Nine
	Months		Months							Months		Months
	Ended		Ended		Dollar		Percent			Ended		Ended		Dollar		Percent
	September 30,		September 30,		Increase		Increase			September 30,		September 30,		Increase		Increase
	2020		2019		(Decrease)		(Decrease)			2020		2019		(Decrease)		(Decrease)
Cost of revenue	$	216	$	163	$	53		33	%	$	602	$	524	$	78		15	%
Sales and marketing		591		459		132		29	%		1,674		1,467		207		14	%
Research, development and engineering		694		366		328		90	%		1,495		1,077		418		39	%
General and administrative		1,126		1,053		73		7	%		3,378		3,026		352		12	%
Total	$	2,627	$	2,041	$	586		29	%	$	7,149	$	6,094	$	1,055		17	%

The increases in stock-based compensation expense for the three and nine month periods ended September 30, 2020, compared to the corresponding three and nine month periods ended September 30, 2019, were primarily due to stock-based severance costs of $450 related to our restructuring plan implemented in July 2020 and more stock awards granted in the current year than prior years.

We anticipate incurring an additional $16,139 in stock-based compensation expense through September 30, 2024, for awards outstanding as of September 30, 2020.

Other income, net

	Three			Three									Nine			Nine
	Months			Months									Months			Months
	Ended			Ended			Dollar			Percent			Ended			Ended			Dollar			Percent
	September 30,			September 30,			Increase			Increase			September 30,			September 30,			Increase			Increase
	2020			2019			(Decrease)			(Decrease)			2020			2019			(Decrease)			(Decrease)
Other income, net	$	36		$	259		$	(223	)		(86	)%	$	257		$	727		$	(470	)		(65	)%
Other income, net (as % of total revenue)		1	%		4	%								1	%		4	%

The decreases in other income, net for the three and nine month periods ended September 30, 2020, compared to the corresponding three and nine month periods ended September 30, 2019, were primarily due to lower interest income as a result of lower interest rates and lower investment balances.

Income Taxes

The provision for income taxes reflects current taxes, deferred taxes, and withholding taxes. The effective tax rate for each of the nine month periods ended September 30, 2020 and 2019 was 0% because we have a full valuation allowance recorded against our deferred tax assets.

The valuation allowance against deferred tax assets as of September 30, 2020, was $53,635, an increase of $5,826 from $47,809 as of December 31, 2019.

We continually assess the applicability of a valuation allowance against our deferred tax assets. Based upon the positive and negative evidence available as of September 30, 2020, and largely due to the cumulative loss incurred by us over the last several years, which is considered a significant piece of negative evidence when assessing the realizability of deferred tax assets, a full valuation allowance is recorded against our deferred tax assets. We will not record tax benefits on any future losses until it is determined that those tax benefits will be realized. All future reversals of the valuation allowance would result in a tax benefit in the period recognized.

Liquidity and Capital Resources

	September 30,		December 31,
	2020		2019
Working capital	$	60,410	$	37,850
Current ratio (1)	8.9:1		8.0:1
Cash, cash equivalents and short-term marketable securities	$	62,655	$	36,817
Long-term marketable securities	$	—	$	—
Total cash, cash equivalents and marketable securities	$	62,655	$	36,817

(1)	The current (liquidity) ratio is calculated by dividing total current assets by total current liabilities.

The $25,838 increase in cash, cash equivalents and marketable securities at September 30, 2020, from December 31, 2019, resulted primarily from:

•

net proceeds from the issuance of common stock;

•

proceeds from the note payable issued under the Paycheck Protection Program; and

•

proceeds from stock option exercises; partially offset by

•

cash used in operations;

•

purchases of common stock related to tax withholding in connection with the vesting of restricted stock; and

•

purchases of property and equipment and capitalized patent costs.

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and trade accounts receivable. We place our cash and cash equivalents with major banks and financial institutions and at times deposits may exceed insured limits. Marketable securities primarily include commercial paper, pre-refunded

municipals, federal agency notes and corporate notes. Our investment policy requires our portfolio to be invested to ensure that the greater of $3,000 or 7% of the invested funds will be available within 30 days’ notice.

Other than cash used for operating needs, which may include short-term marketable securities, our investment policy limits our credit exposure to any one financial institution or type of financial instrument by limiting the maximum of 5% of our cash and cash equivalents and marketable securities or $1,000, whichever is greater, to be invested in any one issuer except for the U.S. government, U.S. federal agencies and U.S. backed securities, which have no limits, at the time of purchase. Our investment policy also limits our credit exposure by limiting to a maximum of 40% of our cash and cash equivalents and marketable securities, or $15,000, whichever is greater, to be invested in any one industry category (e.g., financial or energy industries) at the time of purchase. As a result, we believe our credit risk associated with cash and investments to be minimal. A decline in the market value of any security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. To determine whether an impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and evidence indicating that the cost of the investment is recoverable outweighs evidence to the contrary. There have been no other-than-temporary impairments identified or recorded by us in the nine month periods ended September 30, 2020 and 2019.

Operating Cash Flow

The components of operating cash flows were:

	Nine			Nine
	Months			Months
	Ended			Ended			Dollar			Percent
	September 30,			September 30,			Increase			Increase
	2020			2019			(Decrease)			(Decrease)
Net loss	$	(24,721	)	$	(24,157	)	$	(564	)		(2	)%
Non-cash items		8,873			7,725			1,148			15	%
Changes in operating assets and liabilities		656			(331	)		987			298	%
Net cash used in operating activities	$	(15,192	)	$	(16,763	)	$	1,571			9	%

Cash flows used in operating activities for the nine month period ended September 30, 2020, decreased by $1,571, compared to the corresponding nine month period ended September 30, 2019, primarily as a result of higher non-cash items and favorable changes in operating assets and liabilities. The increase in non-cash items was primarily due to higher stock-based compensation. The changes in operating assets and liabilities was largely due to timing of receipts from customers and payments to vendors.

Cash flows from investing activities for the nine month period ended September 30, 2020, compared to the corresponding nine month period ended September 30, 2019, increased by $18,494 from $11,256 used to $7,238 provided, primarily as a result of higher net maturities of marketable securities.

Cash flows provided by financing activities for the nine month period ended September 30, 2020, compared to the corresponding nine month period ended September 30, 2019, increased by $25,047 from $17,155 to $42,202, primarily as a result of higher net proceeds from the issuance of common stock and proceeds from the note payable issued under the Paycheck Protection Program.

Future Cash Expectations

We believe that our current cash, cash equivalents, and short-term marketable securities balances will satisfy our projected working capital and capital expenditure requirements for at least the next 12 months. We continuously review our liquidity and anticipated capital requirements in light of the uncertainty created by the COVID-19 pandemic.

On September 29, 2020, we entered into a Subscription Agreement with TCM Strategic Partners L.P. in a private placement to issue and sell (i) 2,542 shares of our common stock (“Common Shares”), par value $0.001 per share, and (ii) 17 shares of our newly designated Series B Convertible Preferred Stock (“Series B Shares”), par value $0.001 per share, for an aggregate purchase price of $53,500. The purchase and sale of the Common Shares for $36,530 closed on September 29, 2020, and the purchase and sale of the Series B Shares for $16,970 closed on October 1, 2020. Subject to shareholder approval, the Series B Shares will automatically convert into fully paid and non-assessable shares of common stock at a conversion price equal to $14.37 per share. The offering was made without an underwriter or placement agent. We paid a total of $274 in stock issuance costs.

On July 27, 2020, we announced a plan to restructure certain areas of operations to improve productivity, communication, time to market, and support. The changes reduced the number of employees within the organization by 7%. As a result, we incurred severance costs of $840 during the quarter ended September 30, 2020, consisting of $390 of cash-based severance and $450 of stock-

based severance. The annualized cost savings from the restructuring are estimated to be $2,300, consisting of $2,100 of cash-based compensation and $200 of stock-based compensation.

On June 5, 2020, we filed a new shelf registration statement on Form S-3, that included $49,265 of unsold securities from our prior shelf registration statement filed on May 26, 2017 that recently expired. Under the new shelf registration statement, we may sell securities in one or more offerings up to $100,000. As of September 30, 2020, there was $97,892 available under the shelf registration. The new shelf registration statement will expire in July 2023.

On April 16, 2020, we entered into a Promissory Note with an aggregate principal amount of $5,032 (the “Note”) with Steans Bank, N.A. pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The proceeds gave us more time to observe financial market trends and assess the effects of the COVID-19 pandemic on the Company to determine the best course of action concerning financing the business. Subject to the terms and limitations of the PPP, the Note may be forgiven in whole or in part. On June 29, 2020, we were notified by Stearns Bank, N.A. that the Note was transferred to The Loan Source, Inc. (the “Lender”), who will be responsible for servicing the Note going forward, including administering loan forgiveness. We believe that we have used the entire amount of the Note to fund expenses eligible for forgiveness under the PPP, and on September 15, 2020, we filed our application for 100% forgiveness of the Note. The Lender has up to 60 days to review the application and the SBA has up to 90 days thereafter to approve the application.

The Note provides that we must obtain the Lender’s consent in the event of a “change of ownership.” On October 2, 2020, the Small Business Administration (the “SBA”) released a procedural notice that defined “change of ownership” as used in PPP loans to mean the transfer, whether in one or more transactions, of at least 20% of the common stock or other ownership interest of a PPP borrower. Based on the SBA’s newly issued notice, we have sought, but not yet received, the consent of the lender under the Note to the conversion of the Series B Convertible Preferred Stock issued on October 1, 2020, under the Subscription Agreement with TCM Strategic Partners L.P. Although we expect to receive such consent, the failure to do so could result in a default under the terms of the Note and an obligation to repay the PPP loan.

On May 16, 2019, we entered into an Equity Distribution Agreement, whereby we may sell from time to time through Wells Fargo Securities, LLC, as our sales agent, our common stock having an aggregate offering price of up to $30,000. Wells Fargo Securities, LLC will receive from us a commission equal to 2.50% of the gross sales price per share of common stock for shares having an aggregate offering price of up to $10,000, and a commission of 2.25% of the gross sales price per share of common stock thereafter, for shares sold under the Equity Distribution Agreement. As of September 30, 2020, we had sold 498 shares at an average price of $46.36 under this Equity Distribution Agreement, totaling $23,068 of cash proceeds, less $544 of commissions and $646 of stock issuance costs.

We may sell shares under the shelf registration and/or use similar or other financing means to raise working capital in the future, if necessary, to support continued investment in our growth initiatives. We may also raise capital in the future to fund acquisitions and/or investments in complementary businesses, technologies or product lines. If it becomes necessary to obtain additional financing, we may not be able to do so, or if these funds are available, they may not be available on satisfactory terms. The COVID-19 pandemic has created substantial uncertainty and volatility in the stock market, particularly in the small cap sector in which our stock is traded, and has negatively impacted our share price. These factors may inhibit our near-term ability to obtain financing.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

We are party to an operating lease for our corporate office in Beaverton, Oregon. In July 2015, we entered into an amendment with the landlord of our corporate office in Beaverton, Oregon, to extend the lease term through March 2024, with remaining rent payments as of September 30, 2020 totaling $2,902, payable in monthly installments.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933. Words such as “may,” “might,” “plan,” “should,” “could,” “expect,” “anticipate,” “intend,” “believe,” “project,” “forecast,” “estimate,” “continue,” and variations of such terms or similar expressions are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us, and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements, and investors are cautioned not to place undue reliance on such statements. We believe that the following factors, among others (including those described in Item 1A. “Risk

Factors” of our 2019 Annual Report), could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us. Forward-looking statements include but are not limited to statements relating to:

•

our beliefs regarding the possible effects of the COVID-19 pandemic on general economic conditions, public health, and consumer demand, and the Company’s results of operations, liquidity, capital resources, and general performance in the future;

•

the possible impact of COVID-19 on our ability to obtain financing through our Equity Distribution Agreement and the availability of any alternative sources of financing;

•

the potential for forgiveness of the Note under the terms of the PPP, the likelihood of obtaining consent to a change of control under the terms of the Note, and the possible impact of any audit related to the Note;

•

the likelihood of shareholder approval of the conversion of the Series B Convertible Preferred Stock to common stock under the terms of the Subscription Agreement with TCM Strategic Partners

•

the potential impact of COVID-19 on projects with our retail customers and partners;

•

concentration of revenue with few customers comprising a large majority of the revenue;

•

revenue trends and expectations;

•

anticipated successful advocacy of our technology by our partners;

•

our belief regarding the global deployment of our products;

•

our future level of investment in our business, including investment in research, development and engineering of products and technology, development of our intellectual property, sales growth initiatives and development of new market opportunities;

•

anticipated expenses, costs, margins, provision for income taxes and investment activities in the foreseeable future;

•

our assumptions and expectations related to stock awards;

•

our belief that we have one of the world’s most extensive patent portfolios in digital watermarking and related fields;

•

our beliefs regarding our critical accounting policies;

•

our expectations regarding the impact of accounting pronouncements issued but not yet adopted;

•

anticipated revenue to be generated from current contracts, renewals, and as a result of new programs;

•

our estimates, judgements and assumptions related to impairment testing;

•

variability of contracted arrangements;

•

business opportunities that could require that we seek additional financing and our ability to do so;

•

the size and growth of our markets and our assumptions and beliefs related to those markets;

•

the existence of international growth opportunities and our future investment in such opportunities;

•

the sources of our future revenue;

•

our expected short-term and long-term liquidity positions;

•

our capital expenditure and working capital requirements and our ability to fund our capital expenditure and working capital needs through cash flow from operations or financing;

•

the effect of computerized trading on our stock price;

•

capital market conditions, our expectations regarding credit risk exposure, interest rate volatility and other limitations on the availability of capital, which could have an impact on our cost of capital and our ability to access the capital markets;

•

our use of cash, cash equivalents and marketable securities in upcoming quarters and the possibility that our deposits of cash and cash equivalents with major banks and financial institutions may exceed insured limits;

•

the adoption of our technology and success of our products;

•

our ability to innovate and enhance our competitive differentiation;

•

our beliefs related to our existing facilities;

•

protection, development and monetization of our intellectual property portfolio;

•

our beliefs related to our relationship with our employees;

•

our beliefs regarding cybersecurity incidents;

•

our beliefs related to certain provisions in our bylaws and articles of incorporation; and

•

our beliefs related to legal proceedings and claims arising in the ordinary course of business.

We believe that the risk factors specified above and the risk factors contained in Part I, Item 1A. “Risk Factors” of our 2019 Annual Report, among others, could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf. Investors should understand that it is not possible to predict or identify all risk factors and that there may be other factors that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements made by us or by persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of the filing of this Quarterly Report on Form 10-Q.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. These disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective.

Changes in Controls

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three month period ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION.

Item 1.

Legal Proceedings.

We are subject from time to time to legal proceedings and claims arising in the ordinary course of business. At this time, we do not believe that the resolution of any such matters will have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A.

Risk Factors

Our business, financial condition, results of operations and cash flows may be affected by a number of factors. Detailed information about risk factors that may affect Digimarc’s actual results are set forth in Part I, Item 1A: “Risk Factors” of our 2019 Annual Report. The risks and uncertainties described in our 2019 Annual Report are those risks of which we are aware and that we consider to be material to our business. If any of those risks and uncertainties develop into actual events, our business, financial condition, results of operations or cash flows could be materially adversely affected. In that case, the trading price of our common stock could decline. Except as set forth below, there have been no material changes to the risk factors previously disclosed in our 2019 Annual Report.

Paycheck Protection Program Note

On April 16, 2020, we entered into a Promissory Note with Stearns Bank, N.A. in an aggregate principal amount of $5.0 million (the “Note”) pursuant to the Paycheck Protection Program (“PPP”), under the CARES Act. On April 23, 2020, the Small Business Administration (“SBA”) issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP. Subsequently, on April 28, 2020 the Secretary of the Treasury and Small Business Administrator announced that the government will review all PPP loans of more than $2 million for which the borrower applies for forgiveness. Should we be audited or reviewed by the U.S. Department of the Treasury or SBA as a result of filing an application for forgiveness or otherwise, such audit or review could result in the diversion of management’s time and attention and legal and reputational costs. If we were to be audited and receive an adverse finding in such audit, we could be required to return the full amount of the PPP Note, which could reduce our liquidity, and potentially subject us to fines and penalties.

On June 29, 2020, we were notified by Stearns Bank, N.A. that the Note was transferred to The Loan Source, Inc., (the “Lender”) who will be responsible for servicing the Note going forward, including administering loan forgiveness. On September 15, 2020, we filed our application for 100% forgiveness of the Note. The Lender has up to 60 days to review the application and the SBA has up to 90 days thereafter to approve the application.

On October 2, 2020, the SBA released a procedural notice that defined “change of ownership” as used in PPP loans to mean the transfer, whether in one or more transactions, of at least 20% of the common stock or other ownership interest of a PPP borrower. Based on the SBA’s newly issued notice, we have sought, but not yet received, the consent of the Lender to the conversion of the Series B Convertible Preferred Stock issued on October 1, 2020 under the Subscription Agreement with TCM Strategic Partners L.P. Although we expect to receive such consent, the failure to do so could result in a default under the terms of the Note and an obligation to repay the PPP loan.

COVID-19 Pandemic

The emergence of the COVID-19 pandemic around the world, and particularly in the United States, presents significant risks to the Company, not all of which we are able to fully evaluate or foresee. Some of the effects that could directly or indirectly result from the COVID-19 pandemic include, without limitation, possible impacts on the health of the Company’s management and employees, impairment of the Company’s administrative, research, and development operations, disruption in supplier and customer relationships, changes in demand for our services and subscriptions, and the collectability of accounts receivables. Some of our projects with retail customers and partners have been delayed as a result of the COVID-19 pandemic, thereby potentially affecting our ability to fund our business through near-term revenue growth. The scope and nature of these impacts, most of which are beyond our control, continue to evolve and the outcomes remain uncertain.

These short-term effects may change over the long term depending on the duration and severity of the COVID-19 pandemic, the length of time before normal economic and operating conditions resume, the additional governmental actions that may be taken, the extensions of social restrictions that have been imposed to date, and many other factors that can vary materially by geography. Due to the above circumstances and as described generally in this Quarterly Report, the Company’s results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the remainder of the fiscal year.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

We repurchase shares of common stock in satisfaction of required withholding tax liability in connection with the vesting of restricted shares.

The following table sets forth information regarding purchases of our equity securities during the three month period ended September 30, 2020:

							(d)
					(c)		Approximate
					Total number		dollar value
					of shares		of shares that
	(a)		(b)		purchased as		may yet be
	Total number		Average price		part of publicly		purchased
	of shares		paid per		announced plans		under the plans
Period	purchased (1)		share (1)		or programs		or programs
Month 1
July 1, 2020 to July 31, 2020		—	$	—		—	$	—
Month 2
August 1, 2020 to August 31, 2020		27,012	$	15.10		—	$	—
Month 3
September 1, 2020 to September 30, 2020		2,373	$	17.37		—	$	—
Total		29,385	$	15.28		—	$	—

(1)	Fully vested shares of common stock withheld (purchased) by us in satisfaction of required withholding tax liability upon vesting of restricted stock.

Item 6.

Exhibits.

Exhibit Number		Exhibit Description

3.1		Articles of Incorporation of Digimarc Corporation
10.1		Amendment No. 1 to Equity Distribution Agreement, dated August 6, 2020, by and between the Company and Wells Fargo Securities, LLC.
10.2		Subscription Agreement, dated September 29, 2020, by and between the Company and TCM Strategic Partners L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on September 29, 2020 (File No. 001-34108))
10.3		Registration Rights Agreement, dated September 29, 2020, by and between the Company and TCM Strategic Partners L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Commission on September 29, 2020 (File No. 001-34108))
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1		Section 1350 Certification of Chief Executive Officer

32.2		Section 1350 Certification of Chief Financial Officer

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: October 30, 2020	DIGIMARC CORPORATION

	By:	/s/ CHARLES BECK
		CHARLES BECK
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial and Accounting Officer)

Exhibit 3.1

ARTICLES OF INCORPORATION
OF

DIGIMARC CORPORATION

ARTICLE I

NAME

The name of this Corporation (which is hereinafter referred to as the “Corporation”) is Digimarc Corporation.

ARTICLE II

PURPOSE

The Corporation shall have the power to engage in any lawful activity for which corporations may be organized under the Oregon Business Corporation Act as amended from time to time (the “Act”).

ARTICLE III

STOCK

Section 1. Authorization. The aggregate number of shares which the Corporation shall have authority to issue is 52,500,000 shares, consisting of (i) 50,000,000 shares of common stock, $0.001 par value per share (the “Common Stock”); and (ii) 2,500,000 shares of preferred stock (“Preferred Stock”), $0.001 par value per share.

Section 2. Common Stock. Holders of Common Stock are entitled to one vote per share on any matter submitted to the shareholders. Subject to the rights of the holders of any series of Preferred Stock, holders of Common Stock shall be entitled to receive such dividends and distributions (whether payable in cash or otherwise) as may be declared by the Board of Directors of the Corporation from time to time out of assets or funds of the Corporation legally available therefor. On dissolution of the Corporation, after any preferential amount with respect to Preferred Stock has been paid or set aside, the holders of Common Stock and the holders of any series of Preferred Stock entitled to participate in the distribution of assets are entitled to receive the net assets of the Corporation. Holders of the Common Stock shall not have preemptive rights.

Section 3. Series of Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by the Act, and by the provisions of this Article III, to provide for the issuance of the shares of Preferred Stock in series, to establish from time to time the number of shares to be included in each series and to determine the designation, relative rights, preferences and limitations of the shares of each series. The authority of the Board of Directors with respect to each series shall include determination of the following:

(a) The number of shares in and the distinguishing designation of that series;

(b) Whether shares of that series shall have full, special, conditional, limited or no voting rights, except to the extent otherwise provided by the Act;

(c) Whether shares of that series shall be convertible and the terms and conditions of the conversion, including provision for adjustment of the conversion rate in circumstances determined by the Board of Directors;

(d) Whether shares of that series shall be redeemable and the terms and conditions of redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions or at different redemption dates;

(e) The dividend rate, if any, on shares of that series, the manner of calculating any dividends and the preferences of any dividends;

(f) The rights of shares of that series in the event of voluntary or involuntary dissolution of the Corporation and the rights of priority of that series relative to the Common Stock and any other series of Preferred Stock on the distribution of assets on dissolution; and

(g) Any other relative rights, preferences and limitations of the series that are permitted by law to vary.

Section 4. Series A Redeemable Nonvoting Preferred Stock. Ten Thousand (10,000) shares of Preferred Stock of the Corporation are hereby designated as Series A Redeemable Nonvoting Preferred Stock (the “Series A Redeemable Nonvoting Preferred”) with the following powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof:

(a) Certain Definitions. Unless the context otherwise requires, the terms defined in this paragraph shall have, for the purposes of this Section 4, the meanings herein specified.

(i) Issue Date. The term “Issue Date” shall mean the date that shares of Series A Redeemable Nonvoting Preferred are first issued by the Corporation.

(ii) Junior Stock. The term “Junior Stock” shall mean the Common Stock and any class or series of shares of the Corporation issued after the Issue Date not entitled to receive any assets upon the liquidation, dissolution or winding up of the affairs of the Corporation until the shares of Series A Redeemable Nonvoting Preferred shall have received the Stated Value of all outstanding shares of Series A Redeemable Nonvoting Preferred as of the date of such liquidation, dissolution or winding up, plus any accrued and unpaid dividends to such date.

(iii) Parity Stock. The term “Parity Stock” shall mean, for purposes of this Section 4, any class or series of shares of the Corporation issued after the Issue Date entitled to receive assets upon the liquidation, dissolution or winding up of the affairs of the Corporation on a parity with the Series A Redeemable Nonvoting Preferred.

(iv) Senior Stock. The term “Senior Stock” shall mean any class or series of shares of the Corporation issued after the Issue Date ranking senior to the Series A Redeemable Nonvoting Preferred in respect of the right to receive dividends, or assets upon the liquidation, dissolution or winding up of the affairs of the Corporation.

(v) Stated Value. The term “Stated Value” when used in reference to the Series A Redeemable Nonvoting Preferred shall mean $5.00 per share of Series A Redeemable Nonvoting Preferred.

(b) Dividend Rate; Payment. No dividends shall be declared or paid on the Series A Redeemable Nonvoting Preferred.

(c) Liquidation, Dissolution or Other Winding Up of the Corporation. In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or other winding up of the Corporation, subject to the prior preferences and other rights of any shares of Senior Stock, but before any distribution or payment shall be made to the holders of Junior Stock, the holders of the shares of Series A Redeemable Nonvoting Preferred shall be entitled to be paid the Stated Value of all outstanding shares of Series A Redeemable Nonvoting Preferred as of the date of such liquidation or dissolution or such other winding up, in cash or in property taken at its fair value as determined by the Board of Directors, or both, at the election of the Board of Directors. If such payment shall have been made in full to the holders of the Series A Redeemable Nonvoting Preferred, and if payment shall have been made in full to the holders of any Senior Stock and Parity Stock of all amounts to which such holders shall have a preference, then the remaining assets and funds of the Corporation shall be distributed pro rata, on a share-for-share basis, among the holders of shares of Junior Stock. If, upon any such liquidation, dissolution or other winding up of the affairs of the Corporation, the net assets of the Corporation distributable among the holders of all outstanding shares of Series A Redeemable Nonvoting Preferred and of any shares of Parity Stock shall be insufficient to permit the payment in full to such holders of the preferential amounts to which they are entitled, then the entire net assets of the Corporation remaining after the distributions to holders of any shares of Senior Stock of the full amounts to which they may be entitled shall be distributed among the holders of the shares of Series A Redeemable Nonvoting Preferred and of any Parity Stock ratably in proportion to the full amounts to which they would otherwise be respectively entitled. For purposes of this Section 4(c), neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all the property or assets of the Corporation nor the consolidation or merger of the Corporation with or into one or more other corporations shall be deemed to be a liquidation, dissolution, distribution of assets or winding-up of the Corporation, voluntary or involuntary, unless such voluntary sale, conveyance, exchange or transfer shall be in connection with a dissolution or winding-up of the business of the Corporation.

(d) Voting Rights. The Series A Redeemable Nonvoting Preferred shall have no voting rights other than such rights as may be required by law.

(e) Redemption. On or after June 18, 2013, the Corporation at its sole option shall have the right to redeem out of funds lawfully available therefor the Series A Redeemable Nonvoting Preferred, in whole or in part, at any time or from time to time, upon the terms and conditions which shall have been fixed and determined by the Board with respect thereto. The Corporation shall effect redemption by paying cash in an amount per share equal to the Stated Amount.

Notice of any redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of record of the Series A Redeemable Nonvoting Preferred to be redeemed at the address shown in the records of the Corporation; provided that, if the Series A Redeemable Nonvoting Preferred is held in book-entry form through DTC, the Corporation may give notice in any manner permitted by DTC. Each notice will state, as appropriate: (i) the redemption date; (ii) the number of shares of Series A Redeemable Nonvoting Preferred to be redeemed; (iii) the redemption price; (iv) the place or places where certificates for such shares of Series A Redeemable Nonvoting Preferred are to be surrendered for payment of the redemption price if any such certificates are outstanding; and (v) the CUSIP, ISIN or similar identification number or numbers of the Series A Redeemable Nonvoting Preferred to be redeemed. If fewer than all shares of Series A Redeemable Nonvoting Preferred are to be redeemed, the Board of Directors shall select, in such manner as in its sole discretion it deems appropriate, the Series A Redeemable Nonvoting Preferred to be redeemed, and the notice provided to each such holder thereof will specify the number of shares of Series A Redeemable Nonvoting Preferred to be redeemed from such holder. If notice of redemption of any Series A Redeemable Nonvoting Preferred has been given and if the funds necessary for such redemption have been set apart by the Corporation in trust for the benefit of holders of the Series A Redeemable

Nonvoting Preferred so called for redemption, then from and after the redemption date, the Series A Redeemable Nonvoting Preferred will no longer be deemed to be outstanding and all rights of holders of such shares will terminate, except the right to receive the redemption price.

(f) Other Terms. Except as may otherwise be provided in this Section 4 or as required by law, the terms of the Series A Redeemable Nonvoting Preferred shall be identical to those of the Common Stock.

Section 5. Series R Participating Cumulative Preferred Stock. An initial Five Hundred Thousand (500,000) shares of Preferred Stock of the Corporation are hereby designated as Series R Participating Cumulative Preferred Stock (the “Series R Preferred Stock”). Such number of shares may be decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series R Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series R Preferred Stock. The Series R Preferred Stock shall have the following powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof:

(a) Dividends and Distributions. Subject to the prior and superior rights of the holders of shares of any other series of Preferred Stock or other class of capital stock of the Corporation ranking prior and superior to the shares of Series R Preferred Stock with respect to dividends, the holders of shares of Series R Preferred Stock shall be entitled to receive, when, as, and if declared by the Board of Directors, out of the assets of the Corporation legally available therefor, quarterly dividends payable in cash on the last day of each fiscal quarter in each year, or such other dates as the Corporation’s Board of Directors shall approve (each such date being referred to in this Section 5 as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or a fraction of a share of Series R Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $0.001 and (ii) the Formula Number (as hereinafter defined) then in effect times the cash dividends then to be paid on each share of Common Stock. In addition, if the Corporation shall pay any dividend or make any distribution on the Common Stock payable in assets, securities or other forms of noncash consideration (other than dividends or distributions solely in shares of Common Stock), then, in each such case, the Corporation shall simultaneously pay or make on each outstanding whole share of Series R Preferred Stock a dividend or distribution in like kind equal to the Formula Number then in effect times such dividend or distribution on each share of Common Stock. As used in this Section 5 and in the Rights Agreement, dated as of July 31, 2008, between Digimarc Corporation and Computershare Trust Company, N.A., as Rights Agent (the “Rights Agreement”), the “Formula Number” shall be 100; provided, however , that if the Corporation shall (i) declare or pay any dividend on the Common Stock payable in shares of Common Stock or make any distribution on the Common Stock in shares of Common Stock, (ii) subdivide (by a stock split or otherwise) the outstanding shares of Common Stock into a larger number of shares of Common Stock, or (iii) combine (by a reverse stock split or otherwise) the outstanding shares of Common Stock into a smaller number of shares of Common Stock, then in each such event the Formula Number shall be adjusted to a number determined by multiplying the Formula Number in effect immediately prior to such event by a fraction, the numerator of which is the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event (and rounding the result to the nearest whole number); and provided further, that if the Corporation shall issue any shares of its capital stock in a merger, reclassification or change of the outstanding shares of Common Stock, then in each such event the Formula Number shall be appropriately adjusted to reflect such merger, reclassification or change so that each share of Preferred Stock continues to be the economic equivalent of a Formula Number of shares of Common Stock prior to such merger, reclassification or change.

The Corporation shall declare a dividend or distribution on the Series R Preferred Stock as provided in Section 5(a) immediately prior to or at the same time it declares a dividend or distribution on the Common Stock (other than a dividend or distribution solely in shares of Common Stock); provided, however, that in the event no dividend or distribution (other than a dividend or distribution in shares of Common Stock) shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $0.001 per share on the Series R Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. The Corporation’s Board of Directors may fix a record date for the determination of holders of shares of Series R Preferred Stock entitled to receive a dividend or distribution declared thereon, which record date shall be the same as the record date for any corresponding dividend or distribution on the Common Stock and which shall not be more than 60 days prior to the date fixed for payment thereof.

Dividends shall begin to accrue and be cumulative on outstanding shares of Series R Preferred Stock from and after the Quarterly Dividend Payment Date next preceding the date of original issue of such shares of Series R Preferred Stock; provided, however, that dividends on such shares that are originally issued after the record date for the determination of holders of shares of Series R Preferred Stock entitled to receive a quarterly dividend on or prior to the next succeeding Quarterly Dividend Payment Date shall begin to accrue and be cumulative from and after such Quarterly Dividend Payment Date. Notwithstanding the foregoing, dividends on shares of Series R Preferred Stock that are originally issued prior to the record date for the determination of holders of shares of Series R Preferred Stock entitled to receive a quarterly dividend on or prior to the first Quarterly Dividend Payment Date shall be calculated as if cumulative from and after the last day of the fiscal quarter (or such other Quarterly Dividend Payment Date as the Corporation’s Board of Directors shall approve) next preceding the date of original issuance of such shares. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series R Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding.

So long as any shares of Series R Preferred Stock are outstanding, no dividends or other distributions shall be declared, paid or distributed, or set aside for payment or distribution, on the Common Stock unless, in each case, the dividend required by this Section 5(a) to be declared on the Series R Preferred Stock shall have been declared.

The holders of shares of Series R Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided in this Section 5.

(b) Voting Rights. The holders of shares of Series R Preferred Stock shall have the following voting rights:

(i) Each holder of Series R Preferred Stock shall be entitled to a number of votes equal to the Formula Number then in effect for each share of Series R Preferred Stock held of record on each matter on which holders of the Common Stock or shareholders generally are entitled to vote, multiplied by the maximum number of votes per share that any holders of the Common Stock or shareholders generally then have with respect to such matter (assuming any holding period or other requirement to vote a greater number of shares is satisfied).

(ii) Except as otherwise provided in this Section 5 or by applicable law, the holders of shares of Series R Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class for the

election of directors of the Corporation and on all other matters submitted to a vote of shareholders of the Corporation.

(iii) Except as provided in this Section 5 or by applicable law, holders of Series R Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth in this Designation) for authorizing or taking any corporate action.

(i) Whenever quarterly dividends or other dividends or distributions payable on the Series R Preferred Stock as provided in Section 5(a) are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series R Preferred Stock outstanding shall have been paid in full, the Corporation shall not:

(1) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series R Preferred Stock;

(2) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series R Preferred Stock, except dividends paid ratably on the Series R Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

(3) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) with the Series R Preferred Stock; provided, however, that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series R Preferred Stock; or

(4) redeem or purchase or otherwise acquire for consideration any shares of Series R Preferred Stock, or any shares of stock ranking on a parity with the Series R Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Corporation’s Board of Directors) to all holders of such shares upon such terms as the Corporation’s Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective Preferred Stock classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

(ii) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (i) of this Section 5(c), purchase or otherwise acquire such shares at such time and in such manner.

(d) Liquidation Rights. Upon the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, no distribution shall be made to (a) the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series R Preferred Stock unless, prior thereto, the holders of shares of Series R Preferred Stock shall have received an amount equal to the greater of (i) $0.001 per share and (ii) the accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, plus an aggregate amount per

share equal to the Formula Number then in effect times the aggregate amount to be distributed per share to holders of Common Stock or (b) the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series R Preferred Stock, except distributions made ratably on the Series R Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up.

(e) Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the then outstanding shares of Series R Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share equal to the Formula Number then in effect times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is exchanged or changed. In the event both this Section 5(e) and Section 5(a) appear to apply to a transaction, this Section 5(e) will control.

(f) No Redemption; No Sinking Fund.

(i) The shares of Series R Preferred Stock shall not be subject to redemption by the Corporation or at the option of any holder of Series R Preferred Stock; provided, however, that the Corporation may purchase or otherwise acquire outstanding shares of Series R Preferred Stock in the open market or by offer to any holder or holders of shares of Series R Preferred Stock.

(ii) The shares of Series R Preferred Stock shall not be subject to or entitled to the operation of a retirement or sinking fund.

(g) Ranking. The Series R Preferred Stock shall rank junior to all other series of Preferred Stock of the Corporation, unless the Corporation’s Board of Directors shall specifically determine otherwise in fixing the powers, preferences and relative, participating, optional and other special rights of the shares of such Preferred Stock and the qualifications, limitations and restrictions thereof.

(h) Fractional Shares. The Series R Preferred Stock shall be issuable upon exercise of the Rights issued pursuant to the Rights Agreement in whole shares or in any fractional share that is one one-hundredth (1/100th) of a share or any integral multiple of such fraction, and shall entitle the holder, in proportion to such holder’s fractional shares, to receive dividends, exercise voting rights, participate in distributions and have the benefit of all other rights of holders of Series R Preferred Stock. In lieu of fractional shares, the Corporation, prior to the first issuance of a share or a fractional share of Series R Preferred Stock, may elect to (a) make a cash payment as provided in the Rights Agreement for a fractional share other than one one-hundredth (1/100th) of a share or any integral multiple thereof or (b) issue depository receipts evidencing such authorized fractional share of Series R Preferred Stock pursuant to an appropriate agreement between the Corporation and a depository selected by the Corporation; provided, however , that such agreement shall provide that the holders of such depository receipts shall have all the rights, privileges and preferences to which they are entitled as holders of the Series R Preferred Stock.

(i) Reacquired Shares. Any shares of Series R Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, without designation as to series until such shares are once more designated as part of a particular Series by the Corporation’s Board of Directors pursuant to the provisions of this Article III.

(j) Amendment. None of the powers, preferences and relative, participating, optional and other special rights of the Series R Preferred Stock as provided in this Section 5 shall be amended in any manner that would alter or change the powers, preferences, rights or privileges of the holders of Series R Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series R Preferred Stock, voting as a separate class.

ARTICLE IV

BOARD OF DIRECTORS

Section 1. Number of Directors. Except as otherwise provided by the resolution or resolutions adopted by the Board of Directors designating the rights, powers and preferences of any series of Preferred Stock, the number of directors of the Corporation shall be fixed, and may be increased or decreased from time to time, exclusively by resolution of the Board of Directors.

Section 2. Quorum and Manner of Acting. Unless otherwise provided by applicable law, the presence of a majority of the total number of directors constituting the whole Board (including vacancies and unfilled newly-created directorships) shall be necessary to constitute a quorum for the transaction of business. At all meetings of the Board at which a quorum is present, all matters shall be decided by the affirmative vote of the majority of the directors present, except as otherwise required by law.

Section 3. Removal. Except as otherwise provided by the resolution or resolutions adopted by the Board of Directors designating the rights, powers and preferences of any series of Preferred Stock, any director, or the entire Board of Directors, may be removed from office at any time, with or without cause but only by the affirmative vote of the holders of a majority of the voting power of the outstanding shares of the Corporation entitled to vote for the election of directors.

Section 5. Vacancies and Newly Created Directorships. Except as otherwise provided by law or by the resolution or resolutions adopted by the Board of Directors designating the rights, powers and preferences of any series of Preferred Stock or unless the Board of Directors determines by resolution that any vacancy or newly created directorship shall be filled by the shareholders, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by the sole remaining director. Any director so chosen shall hold office until the next annual meeting of shareholders and until such director’s successor shall be elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director.

ARTICLE V

AMENDING THE BYLAWS

In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized and empowered to adopt, amend and repeal the Bylaws of the Corporation at any regular or special meeting of the Board of Directors or by written consent, subject to the power of the shareholders of the Corporation to adopt, amend or repeal any Bylaws. The foregoing notwithstanding, the shareholders of the Corporation shall have no power to adopt, amend or repeal any Bylaws unless such adoption, amendment or repeal is approved by the affirmative vote of the holders of not less than sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for purposes of this Article V as a single class.

ARTICLE VI

AMENDING THE ARTICLES OF INCORPORATION

The Corporation reserves the right at any time from time to time to amend, alter, change or repeal any provision contained in these Articles of Incorporation, and any other provisions authorized by the laws of the State of Oregon at the time in force may be added or inserted, in the manner now or hereafter prescribed by law. All rights, preferences and privileges of whatsoever nature conferred upon shareholders, directors or any other persons whomsoever by and pursuant to these Articles of Incorporation in their present form or as hereafter amended are granted subject to the right reserved in this Article. Notwithstanding any other provisions of these Articles of Incorporation or the Bylaws (and notwithstanding that a lesser percentage may be specified by law), the provisions of Article IV, Article V, Article VII, and this Article VI hereof may not be altered, amended or repealed unless such alteration, amendment or repeal is approved by the affirmative vote of the holders of not less than sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for purposes of this Article VI as a single class.

ARTICLE VII

SHAREHOLDER MEETINGS

Section 1. Written Action. Any action required or permitted to be taken at any annual or special meeting of the shareholders of the Corporation may be taken without a meeting if the action is taken by all the shareholders entitled to vote on the action. The action must be evidenced by one or more written consents describing the action taken, signed by all the shareholders entitled to vote on the action and delivered to the Corporation for inclusion in the minutes for filing with the corporate records.

Section 2. Special Meetings. Except as otherwise required by law or provided by the resolution or resolutions adopted by the Board of Directors designating the rights, powers and preferences of any series of Preferred Stock, special meetings of shareholders of the Corporation may be called only by (a) the Chairman of the Board of Directors, or (b) the Board of Directors pursuant to a resolution approved by a majority of the total number of directors that the Corporation would have if there were no vacancies or unfilled newly created directorships, and any power of shareholders to call a special meeting is specifically denied.

ARTICLE VIII

INDEMNIFICATION

The Corporation shall indemnify to the fullest extent not prohibited by law any current or former officer or director who is made, or threatened to be made, a party to an action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise (including an action, suit or proceeding by or in the right of the Corporation) by reason of the fact that the person is or was acting as a director, officer or agent of the Corporation or as a fiduciary within the meaning of the Employee Retirement Income Security Act of 1974 with respect to any employee benefit plan of the Corporation, or serves or served at the request of the Corporation as a director or officer, or as a fiduciary of an employee benefit plan, of another corporation, partnership, joint venture, trust or other enterprise. The Corporation shall pay for or reimburse the reasonable expenses incurred by any such current or former director, officer or employee in any such proceeding in advance of the final disposition of the proceeding if the officer or director sets forth in writing (i) the person’s good faith belief that the person is entitled to indemnification under this Article VIII and (ii) the person’s agreement to repay all advances if it is ultimately determined that the person is not entitled to indemnification under this Article VIII. The indemnification and advancement of

expenses specifically provided hereby shall not be deemed exclusive of any other rights to which such person may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in the official capacity of the person indemnified and as to action in another capacity while holding office.

The rights to indemnification and advancement of expenses conferred upon any current or former director or officer of the Corporation pursuant to this Article VIII (whether by reason of the fact that such person is or was acting as a director, officer or agent of the Corporation or as a fiduciary within the meaning of the Employee Retirement Income Security Act of 1974 with respect to any employee benefit plan of the Corporation, or serves or served at the request of the Corporation as a director or officer, or as a fiduciary of an employee benefit plan, of another corporation, partnership, joint venture, trust or other enterprise) shall be contract rights, shall vest when such person becomes a director or officer of the Corporation, and shall continue as vested contract rights even if such person ceases to be a director or officer of the Corporation. Any amendment, repeal, or modification of, or adoption of any provision inconsistent with, this Article VIII (or any provision hereof) shall not adversely affect any right to indemnification or advancement of expenses granted to any person pursuant hereto with respect to any act or omission of such person occurring prior to the time of such amendment, repeal, modification, or adoption (regardless of whether the proceeding relating to such acts or omissions, or any proceeding relating to such person’s rights to indemnification or to advancement of expenses, is commenced before or after the time of such amendment, repeal, modification, or adoption), and any such amendment, repeal, modification, or adoption that would adversely affect such person’s rights to indemnification or advancement of expenses hereunder shall be ineffective as to such person, except with respect to any threatened, pending, or completed proceeding that relates to or arises from (and only to the extent such proceeding relates to or arises from) any act or omission of such person occurring after the effective time of such amendment, repeal, modification, or adoption.

ARTICLE IX

DIRECTOR LIABILITY

No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for conduct as a director; provided that this Article IX shall not eliminate the liability of a director for any act or omission for which such elimination of liability is not permitted under the Act. Any repeal or modification of this Article IX by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. If the Act is hereafter amended to authorize corporate action further limiting or eliminating the personal liability of directors, then the personal liability of the directors to the Corporation or its shareholders shall be limited to the full extent permitted by the Act, as so amended from time to time. No amendment, modification or repeal of this Article, adoption of any provision in these Articles of Incorporation, or change in the law or interpretation of the law shall adversely affect any right or protection of a director or officer of the Corporation under this Article IX with respect to any act or omission that occurred prior to the time of such amendment, modification, repeal, adoption or change.

ARTICLE X

REGISTERED OFFICE AND AGENT

The name of the initial registered agent of the corporation and the address of its registered office are as follows:

Corporation Service Company
285 Liberty Street, NE
Salem, OR 97301-3865

ARTICLE XI

INCORPORATOR

The name and address of the incorporator are:

John R. Thomas
1120 NW Couch Street, Tenth Floor
Portland, Oregon 97209-4128

ARTICLE XII

NOTICES

The address where the State of Oregon Corporation Division may mail notices to the corporation is:

9405 S.W. Gemini Drive

Beaverton, Oregon 97008

The undersigned incorporator has executed these Articles of Incorporation this 29th day of April, 2010.

/s/ John R. Thomas

John R. Thomas, Incorporator

ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION

DIGIMARC CORPORATION

Pursuant to Section 60.134 of the Oregon Revised Statutes, Digimarc Corporation, a corporation organized and existing under the Oregon Revised Statutes (the “Corporation”), DOES HEREBY CERTIFY:

FIRST:That pursuant to the authority conferred upon the Board of Directors of the Corporation (the “Board”) by the Articles of Incorporation of the Corporation filed with the Secretary of State of the State of Oregon on April 29, 2010 (the “Articles of Incorporation”), which authorizes the issuance of up to 2,500,000 shares of preferred stock, $0.001 par value per share, of the Corporation (“Preferred Stock”) in one or more series, and expressly authorizes the Board, subject to limitations prescribed by law and the Articles of Incorporation, to issue, out of the unissued shares of Preferred Stock, one or more series of Preferred Stock, and, with respect to each such series, to fix the number of shares to be included in any series of Preferred Stock and the designation, relative rights, preferences and limitations of the shares of such series, the following resolution was duly adopted by the Board at a meeting of the Board held on September 28, 2020. The amendments approved by the following resolution were adopted by the Board without shareholder action and shareholder action was not required.

RESOLVED, that the Articles of Incorporation are hereby amended to add a new Section 6 to the end of Article III:

“Section 6. Series B Convertible Preferred Stock. 16,970 shares of Preferred Stock of the Corporation are hereby designated as Series B Convertible Preferred Stock with the powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions set forth on Exhibit A hereto (the “Series B Preferred Designations”).”

SECOND:Principal place of business of the Corporation is 9405 SW Gemini Drive, Beaverton, Oregon 97008.

THIRD:Robert Chamness whose address is 9405 SW Gemini Drive, Beaverton, Oregon 97008 has direct knowledge of the operations and business activities of the Corporation.

I declare as an authorized signer, under penalty of perjury, that this document does not fraudulently conceal, fraudulently obscure, fraudulently alter or otherwise misrepresent the identity of the person or any officers, directors, employees or agents of the Corporation. This filing has been examined by me and is, to the best of my knowledge and belief true, correct, and complete. Making false statements in this document is against the law and may be penalized by fines, imprisonment or both.

/s/ Robert P. Chamness

Robert P. Chamness

Executive Vice President, Chief Legal Officer and Secretary

Contact Name and Phone Number:

Noralyn Danielle

(503) 727-2145

EXHIBIT A

Section 1. Designation and Number of Shares. The shares of such series of Preferred Stock shall be designated as “Series B Convertible Preferred Stock” (the “Series B Preferred Stock”). The number of authorized shares constituting the Series B Preferred Stock shall be 16,970. That number from time to time may be increased or decreased (but not below the number of shares of Series B Preferred Stock then outstanding) by further resolution duly adopted by the Board, or any duly authorized committee thereof and by the filing of a certificate or amendment pursuant to the provisions of the Oregon Business Corporation Act stating that such increase or decrease, as applicable, has been so authorized. The Company shall not have the authority to issue fractional shares of Series B Preferred Stock.

Section 2. Ranking. The Series B Preferred Stock will rank, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company:

(a) on a parity basis with each other class or series of Capital Stock of the Company hereafter authorized, the terms of which expressly provide that such class or series ranks on a parity basis with the Series B Preferred Stock as to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company (such Capital Stock, “Parity Stock”);

(b) junior to each other class or series of Capital Stock of the Company hereafter authorized, the terms of which expressly provide that such class or series ranks senior to the Series B Preferred Stock as to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company (such Capital Stock, “Senior Stock”); and

(c) senior to the Common Stock and each other class or series of Capital Stock of the Company, including, without limitation, the Company’s Series A Redeemable Nonvoting Preferred Stock and the Company’s Series R Participating Cumulative Preferred Stock, now existing or hereafter authorized, the terms of which do not expressly provide that such class or series ranks on a parity basis with or senior to the Series B Preferred Stock as to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company (such Capital Stock, “Junior Stock”).

Section 3. Definitions. As used herein with respect to the Series B Preferred Stock:

“Affiliate” of any Person means any Person, directly or indirectly, Controlling, Controlled by or under common Control with such Person.

“Articles of Amendment” means the Articles of Amendment to the Articles of Incorporation of Digimarc Corporation to which this Exhibit A is attached.

“Articles of Incorporation” has the meaning set forth in the Articles of Amendment.

Any Person shall be deemed to “beneficially own”, to have “beneficial ownership” of, or to be “beneficially owning” any securities (which securities shall also be deemed “beneficially owned” by such Person) that such Person is deemed to “beneficially own” within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act; provided that any Person shall be deemed to beneficially own any securities that such Person has the right to acquire, whether or not such right is exercisable within sixty (60) days or thereafter (assuming conversion of all Series B Preferred Stock, if any, owned by such Person to Common Stock).

“Board” has the meaning set forth in the Articles of Amendment.

“Business Day” means any day other than a Saturday, a Sunday or any day on which the Federal Reserve Bank of New York is authorized or required by law or executive order to close or be closed.

“Bylaws” means the Bylaws of the Company, adopted on April 29, 2010, as the same may be further amended, supplemented or restated.

“Capital Stock” means, with respect to any Person, any and all shares of, interests in, rights to purchase, warrants to purchase, options for, participations in or other equivalents of or interests in (however designated) stock issued by such Person.

“Change of Control” means the occurrence of one of the following, whether in a single transaction or a series of transactions:

(a) a “person” or “group” (within the meaning of Section 13(d)(3) of the Exchange Act), other than the Company, its wholly owned Subsidiaries or a Holder (together with its Affiliates), has become the direct or indirect “beneficial owner” (as defined below) of shares of the Company’s common equity representing more than fifty percent (50%) of the voting power of all of the Company’s then-outstanding common equity; or

(b) the consummation of (i) any sale, lease or other transfer, in one transaction or a series of transactions, of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any Person; or (ii) any transaction or series of related transactions in connection with which (whether by means of merger, consolidation, share exchange, combination, reclassification, recapitalization, acquisition, liquidation or otherwise) all of the Common Stock is exchanged for, converted into, acquired for, or constitutes solely the right to receive, other securities, cash or other property; provided, however, that any merger, consolidation, share exchange or combination of the Company pursuant to which the Persons that directly or indirectly “beneficially owned” (as defined below) all classes of the Company’s common equity immediately before such transaction directly or indirectly “beneficially own,” immediately after such transaction, more than fifty percent (50%) of all classes of common equity of the surviving, continuing or acquiring company or other transferee, as applicable, or the parent thereof, in substantially the same proportions vis-à-vis each other as immediately before such transaction will be deemed not to be a Change of Control pursuant to this clause (b).

For the purposes of this definition, (x) any transaction or event described in both clause (a) and in clause (b)(i) or (ii) above (without regard to the proviso in clause (b)) will be deemed to occur solely pursuant to clause (b) above (subject to such proviso); and (y) whether a Person is a “beneficial owner” and whether shares are “beneficially owned” will be determined in accordance with Rule 13d-3 under the Exchange Act.

“Change of Control Redemption Price” has the meaning set forth in Section 8(a).

“Change of Control Notice” has the meaning set forth in Section 8(b).

“Close of Business” means 5:00 p.m. (New York City time).

“Common Stock” means the common stock, par value $0.001 per share, of the Company.

“Common Stock Liquidity Conditions” will be satisfied with respect to a conversion of the Series B Preferred Stock pursuant to Section 6 if:

(a) each share of Common Stock will, when issued, be listed and admitted for trading, without suspension or material limitation on trading, on any of The New York Stock Exchange, The NYSE American, The NASDAQ Capital Market, The NASDAQ Global Market or The NASDAQ Global Select Market (or any of their respective successors); and

(b) (i) the Company has not received any written threat or notice of delisting or suspension by the applicable exchange referred to in clause (a) above with a reasonable prospect of delisting, after giving effect to all applicable notice and appeal periods; and (ii) no such delisting or suspension is pending based on the Company falling below the minimum listing maintenance requirements of such exchange.

“Common Stock Change Event” has the meaning set forth in Section 7(e)(i).

“Company” means Digimarc Corporation.

“Company Shareholder Meeting” has the meaning set forth in the Subscription Agreement.

“Control” (including its correlative meanings “under common Control with” and “Controlled by”) means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through ownership of securities or partnership or other interests, by contract or otherwise.

“Conversion Agent” means the Transfer Agent acting in its capacity as conversion agent for the Series B Preferred Stock and its successors and assigns.

“Conversion Date” has the meaning set forth in Section 6(b).

“Conversion Price” means $14.37, subject to adjustment as set forth herein.

“Conversion Restriction” has the meaning set forth in Section 6(a).

“Daily VWAP” means, for any VWAP Trading Day, the per share volume-weighted average price of the Common Stock as displayed under the heading “Bloomberg VWAP” on Bloomberg page “DMRC <EQUITY> AQR” (or, if such page is not available, its equivalent successor page) in respect of the period from the scheduled open of trading until the scheduled close of trading of the primary trading session on such VWAP Trading Day (or, if such volume-weighted average price is unavailable, the market value of one (1) share of Common Stock on such VWAP Trading Day, determined, using a volume-weighted average price method, by a nationally recognized independent investment banking firm the Board selects in its reasonable and good faith discretion). The Daily VWAP will be determined without regard to after-hours trading or any other trading outside of the regular trading session.

“Dividend Payment Date” means, with respect to any share of Series B Preferred Stock, December 31 of each year, beginning on December 31, 2020.

“Dividend Period” means each period from, and including, a Dividend Payment Date (or, in the case of the first Dividend Period, from, and including, the Initial Issue Date) to, but excluding, the next Dividend Payment Date.

“Dividend Rate” means seven and one-half percent (7.5%) per annum.

“Dividend Record Date” means December 15.

“Dividends” has the meaning set forth in Section 4(a).

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Holder” means a Person in whose name the shares of the Series B Preferred Stock are registered, which Person shall be treated by the Company, Transfer Agent, Registrar, paying agent and Conversion Agent as the absolute owner of the shares of Series B Preferred Stock for the purpose of making payment and settling conversions and for all other purposes; provided that, to the fullest extent permitted by law, no Person that has received shares of Series B Preferred Stock in violation of the Subscription Agreement shall be a Holder; the Transfer Agent, Registrar, paying agent and Conversion Agent, as applicable, shall not, unless directed otherwise by the Company, recognize any such Person as a Holder; and the Person in whose name the shares of the Series B Preferred Stock were registered immediately prior to such transfer shall remain the Holder of such shares.

“Independent Financial Advisor” means an accounting, appraisal, investment banking firm or consultant of nationally recognized standing; provided, however, that such firm or consultant is not an Affiliate of the Company.

“Initial Issue Date” means the Preferred Closing Date, as defined in the Subscription Agreement.

“Issuance Date” means, with respect to any share of Series B Preferred Stock, the date of issuance of such share.

“Junior Stock” has the meaning set forth in Section 2(c).

“Last Reported Sale Price” of the Common Stock for any Trading Day means the closing sale price per share (or, if no closing sale price is reported, the average of the last bid price and the last ask price per share or, if more than one in either case, the average of the average last bid prices and the average last ask prices per share) of the Common Stock on such Trading Day as reported in composite transactions for the principal U.S. national or regional securities exchange on which the Common Stock is then listed. If the Common Stock is not listed on a U.S. national or regional securities exchange on such Trading Day, then the Last Reported Sale Price will be the last quoted bid price per share of Common Stock on such Trading Day in the over-the-counter market as reported by OTC Markets Group Inc. or a similar organization. If the Common Stock is not so quoted on such Trading Day, then the Last Reported Sale Price will be the average of the mid-point of the last bid price and the last ask price per share of Common Stock on such Trading Day from each of at least three Independent Financial Advisors the Company reasonably selects in good faith.

“Liquidation Preference” means, with respect to the Series B Preferred Stock, an amount initially equal to the Stated Value per share of Series B Preferred Stock; provided, however, that the Liquidation Preference is subject to adjustment pursuant to Section 4(c)(i).

“NASDAQ” means The Nasdaq Stock Market.

“Officer’s Certificate” means a certificate signed by the Chief Executive Officer, the Chief Financial Officer, the Chief Legal Officer or the Secretary of the Company.

“Parity Stock” has the meaning set forth in Section 2(a).

“Person” means any individual, corporation, estate, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or any other entity.

“Preferred Stock” has the meaning set forth in the Articles of Amendment.

“Record Date” means, with respect to any dividend, distribution or other transaction or event in which the holders of the Common Stock have the right to receive any cash, securities or other property or in which the Common Stock is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of holders of the Common Stock entitled to receive such cash, securities or other property (whether such date is fixed by the Board or by statute, contract or otherwise).

“Redemption Date” has the meaning set forth in Section 8(c).

“Reference Property” has the meaning set forth in Section 7(e)(i).

“Reference Property Unit” has the meaning set forth in Section 7(e)(i).

“Registrar” means the Transfer Agent acting in its capacity as registrar for the Series B Preferred Stock and its successors and assigns.

“Registration Rights Agreement” means the Registration Rights Agreement, dated as of September 28, 2020, between the Company and TCM Strategic Partners L.P., as the same may be amended, supplemented or restated in accordance with its terms.

“Securities Act” means the Securities Act of 1933, as amended.

“Senior Stock” has the meaning set forth in Section 2(b).

“Series B Preferred Designations” has the meaning set forth in the Articles of Amendment.

“Series B Preferred Stock” has the meaning set forth in Section 1.

“Stated Value” means $1,000 per share of Series B Preferred Stock.

“Shareholder Approval” has the meaning set forth in the Subscription Agreement.

“Subscription Agreement” means the Subscription Agreement, dated as of September 28, 2020, between the Company and TCM Strategic Partners L.P., as the same may be amended, supplemented or restated in accordance with its terms.

“Subsidiary” means, when used with respect to any Person, any corporation or other organization, whether incorporated or unincorporated, of which such party or any other Subsidiary of such party is a general partner or serves in a similar capacity, or, with respect to such corporation or other organization, at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries.

“Successor Person” has the meaning set forth in Section 7(e)(iii).

“Trading Day” means any day on which (a) trading in the Common Stock generally occurs on the principal U.S. national or regional securities exchange on which the Common Stock is then listed or, if the Common Stock is not then listed on a U.S. national or regional securities exchange, on the principal other market on which the Common Stock is then traded; and (b) there is no VWAP Market Disruption Event. If the Common Stock is not so listed or traded, then “Trading Day” means a Business Day.

“Transfer” means, with respect to any security, any direct or indirect (a) sale, transfer, conveyance or encumbrance of such security, or the grant of any option or other right to an interest therein, whether

voluntary, involuntary or by operation of law; provided that such transaction with respect to any security or ownership of Holder shall not constitute a Transfer so long as the Principal (as defined in the Subscription Agreement) continues to Control Holder following such transaction, or (b) entry into any hedge, swap or other agreement or transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of Common Stock. The term “Transferred” shall have a correlative meaning.

“Transfer Agent” means the Person acting as Transfer Agent, Registrar and paying agent and Conversion Agent for the Series B Preferred Stock, and its successors and assigns. The Transfer Agent initially shall be Broadridge Financial Solutions, Inc.

“Voting Conversion Price” means $17.01, subject to adjustment as set forth herein.

“VWAP Market Disruption Event” means, with respect to any date, (a) the failure by the principal U.S. national or regional securities exchange on which the Common Stock is then listed, or, if the Common Stock is not then listed on a U.S. national or regional securities exchange, the principal other market on which the Common Stock is then traded, to open for trading during its regular trading session on such date; or (b) the occurrence or existence, for more than one half hour period in the aggregate, of any suspension or limitation imposed on trading (by reason of movements in price exceeding limits permitted by the relevant exchange or otherwise) in the Common Stock or in any options contracts or futures contracts relating to the Common Stock, and such suspension or limitation occurs or exists at any time before 1:00 p.m., New York City time, on such date.

“VWAP Trading Day” means a day on which (a) there is no VWAP Market Disruption Event; and (b) trading in the Common Stock generally occurs on the principal U.S. national or regional securities exchange on which the Common Stock is then listed or, if the Common Stock is not then listed on a U.S. national or regional securities exchange, on the principal other market on which the Common Stock is then traded. If the Common Stock is not so listed or traded, then “VWAP Trading Day” means a Business Day.

Section 4. Dividends.

(a) Accumulation and Payment of Dividends. The Series B Preferred Stock will accumulate cumulative dividends at a rate per annum equal to the Dividend Rate on the Liquidation Preference thereof (calculated in accordance with Section 4(b)), regardless of whether or not declared or funds are legally available for their payment (the “Dividends”). Such Dividends will be payable when, as and if declared by the Board, out of funds legally available for their payment to the extent paid in cash, annually in arrears on the Dividend Payment Date, to the Holders as of the Close of Business on the immediately preceding Dividend Record Date. Dividends on the Series B Preferred Stock will accumulate from, and including, the last date to which Dividends have been paid (or, if no Dividends have been paid, from, and including, the Initial Issue Date) to, but excluding, the next Dividend Payment Date.

(b) Computation of Accumulated Regular Dividends. Accumulated Dividends will be computed on the basis of a 360-day year comprised of twelve 30-day months. Dividends on each share of Series B Preferred Stock will accrue on the Liquidation Preference of such share as of immediately before the Close of Business on the preceding Dividend Payment Date (or, if there is no preceding Dividend Payment Date, on the Stated Value of such share).

(i) Generally. Subject to the next sentence, each declared Dividend on the Series B Preferred Stock will be paid in cash. Notwithstanding anything to the contrary in these Series B Preferred Designations, if as of the Close of Business on any Dividend Payment Date, the Company

has not paid all or any portion of the full amount of the Dividends (regardless of whether or not declared) that have accumulated on the Series B Preferred Stock in respect of the Dividend Period ending on, but excluding, such Dividend Payment Date, then, the dollar amount (expressed as an amount per share of Series B Preferred Stock) of such Dividend (or, if applicable, portion thereof) not paid in cash will (without duplication) be added, effective immediately before the Close of Business on the related Dividend Payment Date, to the Liquidation Preference of each share of Series B Preferred Stock outstanding as of such time.

(ii) Construction. Any Dividends the amount of which is added to the Liquidation Preference thereof pursuant to Section 4(c)(i) will be deemed to be “declared” and “paid” on the Series B Preferred Stock for all purposes of these Series B Preferred Designations.

Section 5. Liquidation Rights.

(a) Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the Holders shall be entitled, out of assets legally available therefor, before any distribution or payment out of the assets of the Company may be made to or set aside for the holders of any Junior Stock, and subject to the rights of the holders of any Senior Stock or Parity Stock and the rights of the Company’s existing and future creditors, to receive in full a liquidating distribution in cash and in the amount per share of Series B Preferred Stock equal to the greater of (i) the sum of (x) the Liquidation Preference with respect to such share of Series B Preferred Stock as of the date of such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, and (y) accumulated and unpaid Dividends on such share to, but excluding, the date of such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, and (ii) the amount such Holders would have received had such Holders, immediately prior to such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, converted such share of Series B Preferred Stock into Common Stock (pursuant to Section 6 without regard to any of the limitations on convertibility contained therein). Holders shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company other than what is expressly provided for in this Section 5 and will have no right or claim to any of the Company’s remaining assets.

(b) Partial Payment. If in connection with any distribution described in Section 5(a) above, the assets of the Company or proceeds therefrom are not sufficient to pay in full the aggregate liquidating distributions required to be paid pursuant to Section 5(a) to all Holders and the liquidating distributions payable to all holders of any Parity Stock, the amounts distributed to the Holders and to the holders of all such Parity Stock shall be paid pro rata in accordance with the respective aggregate liquidating distributions to which they would otherwise be entitled if all amounts payable thereon were paid in full.

(c) Merger, Consolidation and Sale of Assets Not Liquidation. For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Company shall not be deemed a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, nor shall the merger, consolidation, statutory exchange or any other business combination transaction of the Company into or with any other Person or the merger, consolidation, statutory exchange or any other business combination transaction of any other Person into or with the Company be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.

Section 6. Conversion.

(a) Notwithstanding the foregoing or anything else in these Series B Preferred Designations to the contrary, unless and until the Shareholder Approval is obtained, neither the Company nor the

Holders shall have the right to convert any shares of Series B Preferred Stock into shares of Common Stock pursuant to the terms of these Series B Preferred Designations (the “Conversion Restriction”).

(b) On the first Business Day following the date the Shareholder Approval is attained as contemplated by Section 4.10 of the Subscription Agreement on which the Common Stock Liquidity Conditions are satisfied (the “Conversion Date”), each share of Series B Preferred Stock will automatically convert without the need for any action on the part of the Holder(s) thereof into (i) the number of shares of Common Stock equal to the quotient of (A) the sum of (x) the Liquidation Preference with respect to such share of Series B Preferred Stock as of the Conversion Date, and (y) accumulated and unpaid Dividends on such share to, but excluding, the Conversion Date, divided by (B) the Conversion Rate plus (ii) cash in lieu of fractional shares as set out in Section 7(i). For avoidance of any doubt, the Series B Preferred Stock will not be converted into Common Stock unless and until (I) the Shareholder Approval is attained by the Company and (II) the Common Stock Liquidity Conditions are satisfied.

(c) The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of the Series B Preferred Stock, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of Series B Preferred Stock then outstanding. Any shares of Common Stock issued upon conversion of Series B Preferred Stock shall be duly authorized, validly issued, fully paid and nonassessable and free and clear of all liens, claims, security interests, charges and other encumbrances (other than restrictions arising under applicable securities laws, or restrictions imposed by the Subscription Agreement, the Articles of Amendment or the Registration Rights Agreement).

Section 7. Conversion Procedures and Effect of Conversion.

(a) Conversion Procedure. Upon the automatic conversion of the Series B Preferred Stock pursuant to Section 6, the Holder thereof shall:

(i) deliver to the Conversion Agent the certificate or certificates (if any) representing the shares of Series B Preferred Stock that have converted;

(ii) if required, furnish appropriate endorsements and transfer documents; and

(iii) if required, pay any stock transfer, documentary, stamp or similar taxes not payable by the Company pursuant to Section 17.

(b) Effect of Conversion. Effective immediately prior to the Close of Business on the Conversion Date, Dividends shall no longer accrue or be declared on any shares of Series B Preferred Stock, and such shares of Series B Preferred Stock shall cease to be outstanding.

(c) Record Holder of Underlying Securities as of Conversion Date. The Person or Persons entitled to receive the Common Stock and, to the extent applicable, cash, securities or other property issuable upon conversion of the Series B Preferred Stock on the Conversion Date shall be treated for all purposes as the record holder(s) of such shares of Common Stock and/or cash, securities or other property as of the close of business on such Conversion Date. As promptly as practicable on or after the Conversion Date and compliance by the applicable Holder with the relevant procedures contained in Section 7(a) (and in any event no later than three (3) Business Days thereafter), the Company shall issue the number of whole shares of Common Stock issuable upon conversion (and deliver payment of cash in lieu of fractional shares as set out in Section 7(i)) and, to the extent applicable, any cash, securities or other property issuable thereon. Such delivery of shares of Common Stock, securities or other property shall be made by book-entry or, at the request of the Holder, through the facilities of The

Depositary Trust Company (to the extent eligible) or in certificated form. Any such certificate or certificates shall be delivered by the Company to the appropriate Holder on a book-entry basis, through the facilities of The Depositary Trust Company (to the extent eligible), or by mailing certificates evidencing the shares to the Holders at their respective addresses as notified in writing by such Holders to the Conversion Agent. The Company shall be entitled to register and deliver such shares, securities or other property, and make such payment, in the name of the Holder and in the manner shown on the records of the Company.

(d) Conversion Price and Voting Conversion Price Adjustments.

(i) Stock Dividends, Splits and Combinations. If the Company issues solely shares of Common Stock as a dividend or distribution on all or substantially all shares of the Common Stock, or if the Company effects a stock split or a stock combination of the Common Stock (in each case excluding an issuance solely pursuant to a Common Stock Change Event, as to which Section 7(e) will apply), then the Conversion Price and the Voting Conversion Price in effect immediately prior to the Close of Business on the Record Date for such dividend or distribution, or immediately prior to the Close of Business on the effective date of such stock split or stock combination, as applicable, shall be adjusted by multiplying such Conversion Price or Voting Conversion Price, as applicable, by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the Close of Business on such Record Date or effective date, as applicable, without giving effect to such dividend, distribution, stock split or stock combination and the denominator of which shall be the number of shares of Common Stock outstanding immediately after giving effect to such dividend distribution, stock split or stock combination.

(ii) Other Dividends and Distributions. In the event the Company at any time or from time to time after the Initial Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company (other than a distribution of shares of Common Stock in respect of outstanding shares of Common Stock) or in cash or other property or rights, then and in each such event the holders of Series B Preferred Stock shall receive, simultaneously with the distribution to the holders of Common Stock, a dividend or other distribution of such securities, cash or other property or rights in an amount equal to the amount of such cash, securities or other property or rights as they would have received if all outstanding shares of Series B Preferred Stock had been converted into Common Stock on the date of such event (pursuant to Section 6 without regard to any of the limitations on convertibility contained therein). In the event that the Company offers to repurchase or exchange shares of Common Stock (other than open market purchases pursuant to a stock repurchase plan or in connection with the vesting of equity awards), the Company shall offer to repurchase or exchange shares of Series B Preferred Stock pro rata based upon the number of shares of Common Stock such holders would be entitled to receive if such shares were converted into shares of Common Stock immediately prior to such repurchase (pursuant to Section 6 without regard to any of the limitations on convertibility contained therein).

(iii) Determination of the Number of Outstanding Shares of Common Stock. For purposes of Section 7(d)(i), the number of shares of Common Stock outstanding at any time will exclude shares of Common Stock held in the Company’s treasury (unless the Company pays any dividend or makes any distribution on shares of Common Stock held in its treasury).

(iv) Calculations. All calculations with respect to the Conversion Price and the Voting Conversion Price and adjustments thereto will be made to the nearest 1/100th of a cent (with 5/1,000ths rounded upward).

(v) Notice of Conversion Price and Voting Conversion Price Adjustments. Upon the effectiveness of any adjustment to the Conversion Price and the Voting Conversion Price pursuant to Section 7(d)(i), the Company will, as soon as reasonably practicable and no later than ten (10) Business Days after the date of such effectiveness, send notice to the Holders containing (1) a brief description of the transaction or other event on account of which such adjustment was made; (2) the Conversion Price and the Voting Conversion Prices in effect immediately after such adjustment; and (3) the effective time of such adjustment. If any dividend, distribution, stock split or stock combination of the type described in this Section 7(d)(i) is declared or announced, but not so paid or made, then the Conversion Price and the Voting Conversion Price will be readjusted to the Conversion Price and the Voting Conversion Price that would then be in effect had such dividend, distribution, stock split or stock combination not been declared or announced, effective as of the date the Board, or any Officer acting pursuant to authority conferred by the Board, determines not to pay such dividend or distribution or to effect such stock split or stock combination.

(e) Effect of Common Stock Change Event.

(i) Generally. If there occurs any of the following, other than, in each case, any such transaction that constitutes a Change of Control, with respect to which, for the avoidance of doubt, the provisions of Section 8 shall apply:

(1) recapitalization, reclassification or change of the Common Stock, other than (x) changes solely resulting from a subdivision or combination of the Common Stock, (y) a change only in par value or from par value to no par value or no par value to par value or (z) stock splits and stock combinations that do not involve the issuance of any other series or class of securities;

(2) consolidation, merger, combination or binding or statutory share exchange involving the Company;

(3) sale, lease or other transfer of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any Person; or

(4) other similar event,

and, as a result of which, the Common Stock is converted into, or is exchanged for, or represents solely the right to receive, other securities, cash or other property, or any combination of the foregoing (such an event, a “Common Stock Change Event,” and such other securities, cash or property, the “Reference Property,” and the amount and kind of Reference Property that a holder of one (1) share of Common Stock would be entitled to receive on account of such Common Stock Change Event (without giving effect to any arrangement not to issue or deliver a fractional portion of any security or other property), a “Reference Property Unit”), then, notwithstanding anything to the contrary in these Series B Preferred Designations:

(A) from and after the effective time of such Common Stock Change Event, the Holders shall have the right to acquire and receive, upon conversion of such Series B Preferred Stock, in lieu of each share of Common Stock receivable upon the conversion of such share of Series B Preferred Stock prior to the Common Stock Change Event, one Reference Property Unit; and

(B) for these purposes, (I) the Daily VWAP of any Reference Property Unit or portion thereof that consists of a class of common equity securities will be determined by reference to the definition of “Daily VWAP,” substituting, if applicable, the Bloomberg

page for such class of securities in such definition; and (II) the Daily VWAP of any Reference Property Unit or portion thereof that does not consist of a class of common equity securities, and the Last Reported Sale Price of any Reference Property Unit or portion thereof that does not consist of a class of securities, will be the fair value of such Reference Property Unit or portion thereof, as applicable, determined in good faith by the Company (or, in the case of cash denominated in U.S. dollars, the face amount thereof).

If the Reference Property consists of more than a single type of consideration to be determined based in part upon any form of stockholder election, then the composition of the Reference Property Unit will be deemed to be the weighted average of the types and amounts of consideration actually received, per share of Common Stock, by the holders of Common Stock. The Company will notify the Holders of such weighted average as soon as practicable after such determination is made.

(ii) Compliance Covenant. The Company will not become a party to any Common Stock Change Event unless its terms are consistent with this Section 7(e).

(iii) Execution of Supplemental Instruments. On or before the date the Common Stock Change Event becomes effective, the Company and, if applicable, the resulting, surviving or transferee Person (if not the Company) of such Common Stock Change Event (the “Successor Person”) will execute and deliver such supplemental instruments, if any, as the Company reasonably determines are necessary or desirable to (1) provide for subsequent adjustments to the Conversion Price pursuant to Section 7(d) in a manner consistent with this Section 7(e); and (2) give effect to such other provisions, if any, as the Company reasonably determines are appropriate to preserve the economic interests of the Holders and to give effect to Section 7(e)(i). If the Reference Property includes shares of stock or other securities or assets of a Person other than the Successor Person, then such other Person will also execute such supplemental instrument(s) and such supplemental instrument(s) will contain such additional provisions, if any, that the Company reasonably determines are appropriate to preserve the economic interests of Holders.

(f) Notice of Common Stock Change Event. The Company will provide notice of each Common Stock Change Event to Holders no later than the second (2nd) Business Day after the effective date of the Common Stock Change Event.

(g) Schedule of Calculations. Except as otherwise provided in these Series B Preferred Designations, the Company will be responsible for making all calculations called for under these Series B Preferred Designations or the Series B Preferred Stock, including determinations of the Conversion Price, the Voting Conversion Price and accumulated Dividends on the Series B Preferred Stock. The Company will make all calculations in good faith, and, absent manifest error, its calculations will be final and binding on all Holders. The Company will provide a schedule of such calculations to any Holder upon written request.

(h) Conversion Agent. The Conversion Agent shall not at any time be under any duty or responsibility to any Holder to determine whether any facts exist that may require any adjustment of the Conversion Price or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed in making the same. The Conversion Agent shall be fully authorized and protected in relying on any Officer’s Certificate delivered by the Company setting forth its calculation of the Conversion Price and any adjustment contained therein and the Conversion Agent shall not be deemed to have knowledge of any adjustment unless and until it has received such certificate. The Conversion Agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, that may at the time be issued or delivered with respect to any Series B Preferred Stock and the Conversion Agent makes no representation with respect thereto. The Conversion Agent shall not be responsible for any failure

of the Company to issue, transfer or deliver any shares of Common Stock pursuant to the conversion of Series B Preferred Stock or to comply with any of the duties, responsibilities or covenants of the Company contained in this Section 7.

(i) No Fractional Shares. No fractional shares of Common Stock will be delivered to the Holders upon conversion. In lieu of fractional shares otherwise issuable, the Holders will be entitled to receive, the greater in dollar value of (i) an amount in cash equal to the product of (A) such fractional share amount multiplied by (B) the Conversion Rate and (ii) one additional whole share of Common Stock (the value of which shall be determined based on the Last Reported Sale Price per share of Common Stock on the Conversion Date (or, if such Conversion Date is not a Trading Day, the immediately preceding Trading Day)). In order to determine whether the number of shares of Common Stock to be delivered to a Holder upon conversion of such Holder’s shares of Series B Preferred Stock will include a fractional share, such determination shall be based on the aggregate number of shares of Series B Preferred Stock of such Holder that are being converted on the Conversion Date.

(j) Status of Converted or Reacquired Shares. Shares of Series B Preferred Stock converted in accordance with these Series B Preferred Designations, or otherwise acquired by the Company in any manner whatsoever, shall be retired promptly after the conversion or acquisition thereof. All such shares shall, upon their retirement and any filing required by the Oregon Business Corporation Act, become authorized but unissued shares of Preferred Stock, without designation as to series until such shares are once more designated as part of a particular series by the Board pursuant to the provisions of the Articles of Incorporation.

Section 8. Change of Control.

(a) Subject to Section 8(d), upon the occurrence of a Change of Control, the Company shall be required to redeem the outstanding shares of Series B Preferred Stock at a redemption price per share of Series B Preferred Stock, payable in cash, equal to the greater of (i) the sum of (x) the Liquidation Preference with respect to such share of Series B Preferred Stock as of the date of the Change of Control, and (y) accumulated and unpaid Dividends on such share to, but excluding, the date of such Change of Control, and (ii) the amount such Holders would have received had such Holders, immediately prior to such Change of Control converted such share of Series B Preferred Stock into Common Stock (pursuant to Section 6 without regard to any of the limitations on convertibility contained therein) (the “Change of Control Redemption Price”).

(b) Initial Change of Control Notice. On or before the tenth (10th) Business Day prior to the date on which the Company anticipates consummating a Change of Control (or, if later, promptly after the Company discovers that a Change of Control may occur), a written notice (a “Change of Control Notice”) shall be sent by or on behalf of the Company to the Holders as they appear in the records of the Company, which notice shall contain the date on which the Change of Control is anticipated to be effected (or, if applicable, the date on which a Schedule TO or other schedule, form or report disclosing a Change of Control was filed). The Change of Control Notice shall include (i) a description of the material terms and conditions of the Change of Control, (ii) the date on which the Change of Control is anticipated to be consummated, (iii) the Change of Control Redemption Price and the calculation thereof, and (iv) the instructions a Holder must follow to receive payment.

(c) Delivery upon Change of Control. Upon the consummation of a Change of Control (such date, the “Redemption Date”), subject to Section 8(d), the Company (or its successor) shall deliver or cause to be delivered to the Holder by wire transfer the Change of Control Redemption Price of such Holder’s shares of Series B Preferred Stock.

(d) Sufficient Funds. If the Company shall not have sufficient funds legally available under the Oregon Business Corporation Act to redeem all outstanding shares of Series B Preferred Stock if it redeems outstanding shares of Series B Preferred Stock, the Company shall (i) redeem, pro rata among the Holders, a number of shares of Series B Preferred Stock with an aggregate Change of Control Redemption Price equal to the amount legally available for the redemption of shares of Series B Preferred Stock under the Oregon Business Corporation Act and (ii) redeem any shares of Series B Preferred Stock not purchased because of the foregoing limitations at the applicable Change of Control Redemption Price as soon as practicable after the Company is able to make such redemption out of assets legally available for the purchase of such shares of Series B Preferred Stock. The inability of the Company (or its successor) to make a redemption payment for any reason shall not relieve the Company (or its successor) from its obligation to effect any required purchase when, as and if permitted by applicable law.

(e) Change of Control Agreements. The Company shall not voluntarily engage in any transaction that would result in a Change of Control unless (i) such transaction provides for the payment in full of the Change of Control Redemption Price pursuant to this Section 8 and (ii) the acquiring or surviving Person in such Change of Control represents or covenants, in form and substance reasonably satisfactory to the Board acting in good faith, that at the closing of such Change of Control, such Person shall have sufficient funds (which may include, without limitation, cash and cash equivalents on the Company’s balance sheet, the proceeds of any debt or equity financing, available lines of credit or uncalled capital commitments) to consummate such Change of Control and effect the payment of the Change of Control Redemption Price in respect of the outstanding shares of Series B Preferred Stock.

(f) Effect of Redemption. Effective immediately prior to the close of business on the Redemption Date for any shares of Series B Preferred Stock redeemed pursuant to this Section 8, Dividends shall no longer be declared on any such shares of Series B Preferred Stock, and such shares of Series B Preferred Stock shall cease to be outstanding.

(g) Status of Redeemed Shares. Shares of Series B Preferred Stock redeemed in accordance with this Section 8 shall return to the status of and constitute authorized but unissued shares of Preferred Stock, without classification as to series until such shares are once more classified as a particular series by the Board pursuant to the provisions of the Articles of Incorporation.

Section 9. Voting Rights.

(a) General. Except as provided in Section 9(b), Holders of shares of Series B Preferred Stock shall be entitled to vote as a single class with the holders of the Common Stock and the holders of any other class or series of Capital Stock of the Company then entitled to vote with the Common Stock on all matters submitted to a vote of the holders of Common Stock (and, if applicable, holders of any other class or series of Capital Stock of the Company); provided, however, that shares of Series B Preferred Stock shall not be entitled to vote with respect to the Shareholder Approval to the extent limited by the NASDAQ listing rules. Each Holder shall be entitled to the number of votes equal to the largest number of whole shares of Common Stock obtained by dividing (A) the aggregate Stated Value with respect to all shares of Series B Preferred Stock held by such Holder, divided by (B) the Voting Conversion Price, in each case at and calculated as of the record date for the determination of shareholders entitled to vote or consent on such matters or, if no such record date is established, at and as of the date such vote or consent is taken or any written consent of shareholders is first executed. The Holders shall be entitled to notice of any meeting of holders of Common Stock in accordance with the Articles of Incorporation and Bylaws of the Company.

(b) Voting Limitation. Notwithstanding the foregoing, or anything else in the Series B Preferred Designations to the contrary, for so long as the Conversion Restriction remains in effect, no

Holder shall be entitled to cast a number of votes with respect to their shares of Series B Preferred Stock and any shares of Common Stock beneficially owned by such Holder in excess of 19.9% of the outstanding shares of Capital Stock then entitled to vote.

(c) Consent Rights. The vote or consent of the Holders of at least a majority of the shares of Series B Preferred Stock outstanding at such time, voting together as a separate class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, will be necessary for effecting or validating any of the following actions, whether or not such approval is required pursuant to the Oregon Business Corporation Act:

(i) any amendment, alteration or repeal (whether by merger, consolidation or otherwise) of any provision of the Articles of Incorporation (including these Series B Preferred Designations) or Bylaws that would have an adverse effect on the rights, preferences, privileges or voting power of the Series B Preferred Stock;

(ii) any amendment or alteration (whether by merger, consolidation or otherwise) of, or any supplement to, the Articles of Incorporation or any provision thereof, or any other action to authorize or create, or increase the number of authorized or issued shares of, or any securities convertible into shares of, or reclassify any security into, or issue, any Parity Stock or Senior Stock or any other class or series of Capital Stock of the Company ranking senior to, or on a parity basis with, the Series B Preferred Stock as to dividend rights or rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company;

(iii) any transaction between the Company, on the one hand, and any of its Affiliates, on the other hand (excluding (A) any transaction between the Company and any of its Subsidiaries, (B) any compensation that has been approved by the Compensation Committee (or any successor committee) of the Board or (C) any transaction that has been approved by a majority of the disinterested directors on the Board);

(iv) except to the extent any of the following would constitute a Change of Control (in which case the provisions of Section 8(a) shall apply), the Company’s consolidation or combination with, or merger with or into, another Person, or any binding or statutory share exchange or reclassification involving the Series B Preferred Stock, in each case unless:

(1) the Series B Preferred Stock either (x) remains outstanding after such consolidation, combination, merger, share exchange or reclassification; or (y) is converted or reclassified into, or is exchanged for, or represents solely the right to receive, preference securities of the continuing, resulting or surviving Person of such consolidation, combination, merger, share exchange or reclassification, or the parent thereof;

(2) the Series B Preferred Stock that remains outstanding or such preference securities, as applicable, have rights, preferences and voting powers that, taken as a whole, are not materially less favorable (as determined by the Board in good faith) to the Holders or the holders thereof, as applicable, than the rights, preferences and voting powers, taken as a whole, of the Series B Preferred Stock immediately before the consummation of such consolidation, combination, merger, share exchange or reclassification; and

(3) the issuer of the Series B Preferred Stock that remains outstanding or such preference securities, as applicable, is a corporation duly organized and existing under the laws of the United States of America, any State thereof or the District of Columbia that, if not the Company, will succeed to the Company under the Articles of Incorporation and the Series B Preferred Stock; or

(v) agree or consent to any of the actions prohibited by this Section 9(c),

provided, however, that (x) a consolidation, combination, merger, share exchange or reclassification that satisfies the requirements of clauses (1), (2) and (3) of Section 9(c)(iv) will not require any vote or consent pursuant to Section 9(c)(i), Section 9(c)(ii) or Section 9(c)(v); and (y) each of the following will be deemed, without limitation, not to adversely affect the rights, preferences or voting powers of the Series B Preferred Stock (or cause any of the rights, preferences or voting powers of any such preference securities to be “materially less favorable” for purposes of Section 9(c)(iv)(2)) and will not require any vote or consent pursuant to Section 9(c)(i), Section 9(c)(ii), Section 9(c)(iv) or Section 9(c)(v):

(1) any increase in the number of the authorized but unissued shares of the Company’s undesignated preferred stock;

(2) the creation and issuance, or increase in the authorized or issued number, of any class or series of stock that constitutes Junior Stock; and

(3) the application of Section 7(e), including the execution and delivery of any supplemental instruments pursuant to Section 7(e)(iii) solely to give effect to such provision.

(d) Certain Amendments Permitted Without Consent. Notwithstanding anything to the contrary in Section 9(c)(i) or Section 9(c)(ii), the Company may amend, modify or repeal any of the terms of the Series B Preferred Stock without the vote or consent of any Holder to: (i) cure any ambiguity or correct any omission, defect or inconsistency in these Series B Preferred Designations or the Certificates representing the Series B Preferred Stock, including the filing of a certificate of correction, or a corrected instrument in connection therewith; or (ii) make any other change to the Articles of Incorporation, these Series B Preferred Designations or the Certificates representing the Series B Preferred Stock that does not, individually or in the aggregate with all other such changes, adversely affect the rights of any Holder (other than any Holders that have consented to such change), as such, in any material respect (as determined by the Board in good faith).

(e) Each Holder of Series B Preferred Stock will have one vote per share of Series B Preferred Stock on any matter on which Holders of Series B Preferred Stock are entitled to vote separately as a class, whether at a meeting or by written consent.

(f) The vote or consent of the Holders of a majority of the shares of Series B Preferred Stock outstanding at such time, voting together as a single class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, will be sufficient to waive or amend the provisions of Section 9(c) of the Series B Preferred Designations, and any amendment or waiver of any of the provisions of Section 9(c) approved by such percentage of the Holders shall be binding on all of the Holders.

(g) For the avoidance of doubt and notwithstanding anything to the contrary in the Articles of Incorporation or Bylaws of the Company, the Holders of Series B Preferred Stock shall have the exclusive consent and voting rights set forth in Section 9(c) and may take action or consent to any action with respect to such rights without a meeting by delivering a consent in writing or by electronic transmission of the Holders of the Series B Preferred Stock entitled to cast not less than the minimum number of votes that would be necessary to authorize, take or consent to such action at a meeting of stockholders.

Section 10. Transfers.

(a) Restrictions on Transfer.

(i) Without the prior written consent of the Company, no Holder may Transfer any shares of Series B Preferred Stock prior to the date that is the six-month anniversary of the Initial Issue Date.

(ii) Notwithstanding anything to the contrary contained in this Section 10, (i) during the period commencing on the six-month anniversary of the Initial Issue Date and continuing until the one-year anniversary of the Initial Issue Date, as a condition to transfer of the Series B Preferred Stock, the transferee must agree to be bound by the terms of Section 4.2 and Section 4.3 of the Subscription Agreement pursuant to a written agreement in form and substance reasonably satisfactory to the Company, and (ii) without the consent of the Company, Holder may Transfer Series B Preferred Stock at any time (A) to a Permitted Transferee of the Holder that agrees to be bound by the terms of Section 4.2 and Section 4.3 of the Subscription Agreement pursuant to a written agreement in form and substance reasonably satisfactory to the Company; (B) pursuant to a tender or exchange offer, merger, consolidation, division, acquisition, reorganization or recapitalization involving the Company that has been recommended or approved by a majority of the Board; or (C) following the date the Company commences a voluntary case under Title 11 of the United States Bankruptcy Code or any other similar insolvency laws.

(b) Legends.

(i) The shares of Series B Preferred Stock (unless and until transferred in a sale registered under the Securities Act or transferred pursuant to Rule 144 promulgated under the Securities Act, or any successor rule or regulation hereafter adopted by the Securities and Exchange Commission, as such rule may be amended from time to time), will be stamped or imprinted with a legend in substantially the following form: (in addition to any legend required under applicable state securities laws):

“THE OFFER AND SALE OF THIS SECURITY AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY, IF ANY, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND THIS SECURITY AND SUCH SHARES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT (A) PURSUANT TO A REGISTRATION STATEMENT THAT IS EFFECTIVE UNDER THE SECURITIES ACT; OR (B) PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.”

(ii) In addition, for so long as the Series B Preferred Stock and/or the shares of Common Stock issuable upon conversion of the Series B Preferred Stock are subject to the restrictions set forth in Section 4.2 of the Subscription Agreement, each certificate representing the Series B Preferred Stock or the Common Stock issued upon conversion of the Series B Preferred Stock shall be stamped or otherwise imprinted with a legend in substantially the following form:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER SET FORTH IN A SUBSCRIPTION AGREEMENT. THE COMPANY WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF SUCH SUBSCRIPTION AGREEMENT, AS IN EFFECT ON THE DATE OF MAILING, WITHOUT CHARGE, PROMPTLY AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR.”

(iii) The Holder consents to the Company making a notation on its records and giving instructions to any transfer agent of the Series B Preferred Stock or the Common Stock issued upon conversion of the Series B Preferred Stock in order to implement the restrictions on transfer set forth in the Subscription Agreement.

Section 11. Preemptive Rights. The Holders shall not have any preemptive rights.

Section 12. Term. Except as expressly provided in these Series B Preferred Designations, the shares of Series B Preferred Stock shall not be redeemable or otherwise mature and the term of the Series B Preferred Stock shall be perpetual.

Section 13. Creation of Capital Stock. Subject to Section 9(c), the Board, or any duly authorized committee thereof, without the vote of the Holders, may authorize and issue additional shares of Capital Stock of the Company.

Section 14. No Sinking Fund. Shares of Series B Preferred Stock shall not be subject to or entitled to the operation of a retirement or sinking fund.

Section 15. Transfer Agent, Conversion Agent, Registrar and Paying Agent. The duly appointed Transfer Agent, Conversion Agent, Registrar and paying agent for the Series B Preferred Stock shall be Broadridge Financial Solutions, Inc. The Company may, in its reasonable discretion, appoint any other Person to serve as Transfer Agent, Conversion Agent, Registrar or paying agent for the Series B Preferred Stock and thereafter may remove or replace such other Person at any time. Upon any such appointment or removal, the Company shall send notice thereof by first class mail, postage prepaid, to the Holders.

Section 16. Replacement Certificates.

(a) Mutilated, Destroyed, Stolen and Lost Certificates. If physical certificates evidencing the Series B Preferred Stock are issued, the Company shall replace any mutilated certificate at the Holder’s expense upon surrender of that certificate to the Transfer Agent. The Company shall replace certificates that become destroyed, stolen or lost at the Holder’s expense upon delivery to the Company and the Transfer Agent of reasonably satisfactory evidence that the certificate has been destroyed, stolen or lost, together with any indemnity that may be reasonably required by the Transfer Agent and the Company.

(b) Certificates Following Conversion. If physical certificates representing the Series B Preferred Stock are issued, the Company shall not be required to issue replacement certificates representing shares of Series B Preferred Stock on or after the Conversion Date applicable to such shares. In place of the delivery of a replacement certificate following the applicable Conversion Date, the Transfer Agent, upon receipt of the reasonably satisfactory evidence and indemnity described in clause (a) above, shall deliver the shares of Common Stock issuable upon conversion of such shares of Series B Preferred Stock formerly evidenced by the physical certificate.

Section 17. Taxes.

(a) Transfer Taxes. The Company shall pay any and all stock transfer, documentary, stamp and similar taxes that may be payable in respect of any issuance or delivery of shares of Series B Preferred Stock or shares of Common Stock or other securities issued on account of Series B Preferred Stock pursuant hereto or certificates representing such shares or securities. However, in the case of conversion of Series B Preferred Stock, the Company shall not be required to pay any such tax that may be payable in respect of any transfer involved in the issuance or delivery of shares of Series B Preferred Stock, shares of Common Stock or other securities to a beneficial owner other than the beneficial owner of the

Series B Preferred Stock immediately prior to such conversion, and shall not be required to make any such issuance, delivery or payment unless and until the Person otherwise entitled to such issuance, delivery or payment has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid or is not payable.

(b) Withholding. All payments and distributions (or deemed distributions) on the shares of Series B Preferred Stock (and on the shares of Common Stock received upon their conversion) shall be subject to withholding and backup withholding of taxes to the extent required by law, subject to applicable exemptions, and amounts withheld, if any, shall be treated as received by the Holders.

Section 18. Notices. All notices referred to herein shall be in writing and, unless otherwise specified herein, all notices hereunder shall be deemed to have been given (a) upon the earlier of receipt thereof or three (3) Business Days after the mailing thereof if sent by registered or certified mail with postage prepaid, or by private courier service addressed: (i) if to the Company, to its office at Digimarc Corporation, 9405 SW Gemini Drive, Beaverton, Oregon 97008 (Attention: Chief Legal Officer), (ii) if to any Holder, to such Holder at the address of such Holder as listed in the stock record books of the Company (which may include the records of the Transfer Agent) or (iii) to such other address as the Company or any such Holder, as the case may be, shall have designated by notice similarly given; or (b) on the date transmitted to an email address designated by the Company or any such Holder if sent during normal business hours, and on the next Business Day if sent after normal business hours of the recipient.

Section 19. Interpretation; Facts Ascertainable. For the purposes of these Series B Preferred Designations: (i) words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires; (ii) the terms “hereof,” “herein,” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to the Series B Preferred Designations as a whole (including all of the Schedules and Exhibits) and not to any particular provision of these Series B Designations, and Article, Section, paragraph, Exhibit and Schedule references are to the Articles, Sections, paragraphs, Exhibits, and Schedules to these Series B Preferred Designations unless otherwise specified. When the terms of these Series B Preferred Designations refers to a specific agreement or other document to determine the meaning or operation of a provision hereof, the Secretary of the Company shall maintain a copy of such agreement or document at the principal executive offices of the Company and a copy thereof shall be provided free of charge to any Holder who makes a request therefor. The Secretary of the Company shall also maintain a written record of the Issuance Date, the number of shares of Series B Preferred Stock issued to a Holder and the date of each such issuance, and shall furnish such written record free of charge to any Holder who makes a request therefor.

Section 20. Waiver. Notwithstanding any provision in these Series B Preferred Designations to the contrary, any provision contained herein and any right of the Holders of Series B Preferred Stock granted hereunder may be waived as to all shares of Series B Preferred Stock (and the Holders thereof) upon the vote or written consent of the Holders of a majority of the shares of Series B Preferred Stock then outstanding.

Section 21. Severability. If any term of the Series B Preferred Stock set forth herein is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other terms set forth herein which can be given effect without the invalid, unlawful or unenforceable term will, nevertheless, remain in full force and effect, and no term herein set forth will be deemed dependent upon any other such term unless so expressed herein.

Section 22.Compliance with Law. Prior to the delivery of any securities that the Company shall be obligated to deliver upon conversion of the Series B Preferred Stock, the Company shall use its reasonable best efforts to comply with any federal and state laws and regulations thereunder requiring the

registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority.

Section 23. Listing. The Company hereby covenants and agrees that, if at any time the Common Stock shall be traded on any national securities exchange, the Company will, if permitted by the rules of such exchange, list and keep listed, so long as the Common Stock shall be so listed on such exchange, all the Common Stock issuable upon conversion of the Series B Preferred Stock; provided, however, that if the rules of such exchange require the Company to defer the listing of such Common Stock until the first conversion of Series B Preferred Stock into Common Stock in accordance with the provisions hereof, the Company covenants to list such Common Stock issuable upon conversion of the Series B Preferred Stock in accordance with the requirements of such exchange at such time.

Exhibit 10.1

AMENDMENT NO. 1

This Amendment No. 1 (this “Amendment”) to the Equity Distribution Agreement (the “Equity Distribution Agreement”), dated as of May 16, 2019, by and between Digimarc Corporation, an Oregon corporation (the “Company”), and Wells Fargo Securities, LLC (“Wells Fargo,” and together with the Company, each, a “Party,” and collectively, the “Parties”), shall be effective as of August 6, 2020 (the “Effective Date”).

RECITALS

WHEREAS, the Parties desire to amend the Equity Distribution Agreement upon the terms and conditions hereinafter set forth.

NOW, THEREFOR, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

ARTICLE I DEFINITIONS

Section 1.1Defined Terms. Capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings given to such terms in the Equity Distribution Agreement.

ARTICLE II

AMENDMENTS TO THE EQUITY DISTRIBUTION AGREEMENT

Section 2.1Amendment to the Equity Distribution Agreement. As of the Effective Date, the Equity Distribution Agreement is hereby amended by making the additions in bold, double-underlined text (indicated textually in the same manner as the following example: double-underlined text) and deletions in bold, stricken text (indicated textually in the same manner as the following example: ~~stricken text~~) as set forth in Exhibit A attached hereto.

ARTICLE III MISCELLANEOUS

Section 3.1Effect on the Equity Distribution Agreement. This Amendment shall be deemed incorporated into the Equity Distribution Agreement and shall be construed and interpreted as though fully set forth therein. Except as amended and modified herein, the Equity Distribution Agreement remains in full force and effect, and the amendments contained herein will not be construed as an amendment to or waiver of any other provision of the Equity

Distribution Agreement or as a waiver of or consent to any further or future action on the part of either Party that would require the waiver or consent of the other Party. On and after the Effective Date, each reference in the Equity Distribution Agreement to “this Agreement,” “the Agreement,” “hereunder,” “hereof,” “herein,” or words of like import will mean and be a reference to the Equity Distribution Agreement as amended by this Amendment.

Section 3.2Representations and Warranties. Each Party hereby represents and warrants to the other Party that:

(a)it has the full right, power, and authority to enter into this Amendment and to perform its obligations hereunder and under the Equity Distribution Agreement as amended by this Amendment;

(b)the execution of this Amendment by the individual whose signature is set forth at the end of this Amendment on behalf of such Party, and the delivery of this Amendment by such Party, have been duly authorized by all necessary action on the part of such Party; and

(c)this Amendment has been executed and delivered by such Party and (assuming due authorization, execution, and delivery by the other Party hereto) constitutes the legal, valid, and binding obligation of such Party, enforceable against such Party in accordance with its terms, except as may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws and equitable principles related to or affecting creditors' rights generally or the effect of general principles of equity.

Section 3.3Governing Law. This Amendment and all related documents and all matters arising out of or relating to the making or performance of this Amendment, are governed by and construed in accordance with and enforced under the laws of the State of New York, without giving effect to the conflict of laws provisions thereof to the extent such principles or rules would require or permit the application of the laws of any jurisdiction other than those of the State of New York.

Section 3.4Headings. The headings in this Amendment are for reference only and do not affect the interpretation of this Amendment.

Section 3.5Counterparts. This Amendment may be executed in counterparts, each of which is deemed an original, but all of which constitute one and the same agreement.

[Remainder of this page is intentionally left blank]

IN WITNESS WHEREOF, the undersigned have caused this Amendment to be executed effective as of the day and year first written above.

DIGIMARC CORPORATION

By: /s/ Charles Beck Name: Charles Beck

Title: Chief Financial Officer

[Signature Page to the Amendment No. 1]

WELLS FARGO SECURITIES, LLC

By: /s/ James Bohm Name: James (Beau) Bohm

Title: Managing Director

[Signature Page to the Amendment No. 1]

EXHIBIT A

Equity Distribution Agreement

Digimarc Corporation

Up to $30,000,000 of Common Stock

EQUITY DISTRIBUTION AGREEMENT

Wells Fargo Securities, LLC

~~375 Park Avenue~~

500 West 33rd Street, 14th Floor

New York, New York ~~10152~~10001

Ladies and Gentlemen:

May 16, 2019

Digimarc Corporation, an Oregon corporation (the “Company”), confirms its agreement, as amended from time to time (this “Agreement”) with Wells Fargo Securities, LLC (“Wells Fargo Securities”), as follows (capitalized terms used but not defined herein shall have the respective meanings set forth in Section 20 below):

SECTION 1. Description of Securities.

The Company agrees that, from time to time during the term of this Agreement, on the terms and subject to the conditions set forth herein, it may issue and sell through Wells Fargo Securities, acting as agent and/or principal, shares (the “Securities,” and each, a “Security”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), having an aggregate sale price of up to $30,000,000 (the “Maximum Amount”). Notwithstanding anything to the contrary contained herein, the parties hereto agree that compliance with the limitations set forth in this Section 1 regarding the number and aggregate sale price of the Securities issued and sold under this Agreement shall be the sole responsibility of the Company, and Wells Fargo Securities shall have no obligation in connection with such compliance. The issuance and sale of the Securities through Wells Fargo Securities will be effected pursuant to the Registration Statement (as defined below) filed by the Company and declared effective by the Securities and Exchange Commission (the “Commission”), although nothing in this Agreement shall be construed as requiring the Company to use the Registration Statement to issue the Securities. The Company agrees that whenever it determines to sell Securities directly to Wells Fargo Securities as principal it will enter into a separate written agreement containing the terms and conditions of such sale.

The Company has filed, in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively, the “Securities Act”), with the Commission a registration statement on Form S-3 (File No. 333-~~218300~~ 238995), including a base prospectus, relating to certain securities, including the Securities to be issued from time to time by the Company, and which incorporates by reference documents that the Company has filed or will file in accordance with the provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (collectively, the “Exchange Act”). The Company has prepared a prospectus supplement specifically relating to the Securities (the

foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any of its subsidiaries which is required to be disclosed in the Registration Statement or the Prospectus (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement or the performance by the Company of its obligations under this Agreement; the aggregate of all pending legal or governmental proceedings to which the Company or any of its subsidiaries is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement and the Prospectus, including ordinary routine litigation incidental to the business, would not reasonably be expected to result in a Material Adverse Effect.

(15)

Accuracy of Descriptions and Exhibits. The information in (i) the Prospectus under the captions “Description of Capital Stock,” “Oregon Control Share Act and Oregon Business Combination Act,” and “Risk Factors,” (ii) the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018~~2019 under “Item 3: Legal Proceedings,” “Item 1: Business,” and “Item 1A: Risk Factors” and (iii) the Registration Statement under Item 15, in each case to the extent that it constitutes matters of law, summaries of legal matters, summaries of provisions of the Company’s charter or bylaws or other instruments or agreements, summaries of legal proceedings, or legal conclusions, is correct in all material respects; all descriptions in the Registration Statement and the Prospectus of any Company Documents are accurate in all material respects; and there are no franchises, contracts, indentures, mortgages, deeds of trust, loan or credit agreements, bonds, notes, debentures, evidences of indebtedness, leases or other instruments, agreements or documents required to be described or referred to in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement which have not been so described and filed as required.

(16)

Possession of Intellectual Property. The Company and its subsidiaries own or possess or have the right to use or can otherwise obtain on reasonable terms all intellectual property or proprietary rights in any applicable jurisdiction throughout the world, including all rights in patents, patent applications, copyrights and other rights associated with works of authorship (whether or not registered), know-how (including rights in trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names, service names, product names, domain names and any goodwill associated with, and any applications and registrations in respect to, the foregoing (collectively, “Intellectual Property”) necessary to carry on their respective businesses as described in the Prospectus and as proposed to be conducted. For the avoidance of doubt, the representation and warranty in the preceding sentence shall not be deemed to be a representation and warranty as to non-infringement or misappropriation of the Intellectual Property rights of a third party. Neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any registered Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interests of the Company or any of its subsidiaries therein, and which

Wells Fargo Securities, impracticable or inadvisable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in the Common Stock has been suspended or limited by the Commission or Nasdaq, or if trading generally on the NYSE American, the New York Stock Exchange or Nasdaq has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by order of the Commission, FINRA or any other governmental authority, or a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States or in Europe, or (iv) if a banking moratorium has been declared by either Federal or New York authorities.

(b)

Termination by the Company. The Company shall have the right, by giving three

(3) days’ notice as hereinafter specified to terminate this Agreement in its sole discretion at any time after the date of this Agreement.

(c)

Termination by Wells Fargo Securities. Wells Fargo Securities shall have the right, by giving three (3) days’ notice as hereinafter specified to terminate this Agreement in its sole discretion at any time after the date of this Agreement.

(d)

Automatic Termination. Unless earlier terminated pursuant to this Section 13, this Agreement shall automatically terminate upon the issuance and sale of all of the Placement Securities through Wells Fargo Securities on the terms and subject to the conditions set forth herein with an aggregate sale price equal to the amount set forth in Section 1 of this Agreement.

(e)

Continued Force and Effect. This Agreement shall remain in full force and effect unless terminated pursuant to Sections 13(a), (b), (c) or (d) above or otherwise by mutual agreement of the parties.

(f)

Effectiveness of Termination. Any termination of this Agreement shall be effective on the date specified in such notice of termination; provided, however, that such termination shall not be effective until the close of business on the date of receipt of such notice by Wells Fargo Securities or the Company, as the case may be. If such termination shall occur prior to the Settlement Date for any sale of Placement Securities, such Placement Securities shall settle in accordance with the provisions of this Agreement.

(g)

Liabilities. If this Agreement is terminated pursuant to this Section 13, such termination shall be without liability of any party to any other party except as provided in Section 8 hereof, and except that, in the case of any termination of this Agreement, Section 5, Section 10, Section 11, Section 12, Section 15 and Section 23 hereof shall survive such termination and remain in full force and effect.

SECTION 14. Notices. Except as otherwise provided in this Agreement, all notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to Wells Fargo Securities shall be directed to Wells Fargo Securities at Wells Fargo Securities, LLC, ~~375~~ ~~Park~~ ~~Avenue~~500 West 33rd Street, 14th Floor, New York, New York ~~10152~~10001, Attention: Equity Syndicate Department, Facsimile: (212) 214-5918; notices to the Company shall be directed to it at Digimarc Corporation, 9405 SW Gemini Drive, Beaverton, Oregon 97008,

EXHIBIT B

AUTHORIZED INDIVIDUALS FOR PLACEMENT NOTICES AND ACCEPTANCES

Wells Fargo Securities, LLC


Special Equities Desk	Name Jennifer Lynch	Email jennifer.r.lynch@wellsfargo.com
	William O’Connell	william.oconnell@wellsfargo.com
	Josie Callanan	josephine.callanan@wellsfargo.com
Equity Capital Markets	Beau Bohm	beau.bohm@wellsfargo.com
	~~Greg Ogborn~~	~~gregory.ogborn@wellsfargo.com~~
	Corinne Bortniker	corinne.bortniker@wellsfargo.com
	Curtis Pierce	curtis.pierce@wellsfargo.com
~~Investment Banking~~	~~Sohan Talwalker~~	~~sohan.talwalker@wellsfargo.com~~
Investment Banking	Nicholas Williams	nicholas.m.williams@wellsfargo.co m
	Ryan Bassett	ryan.bassett@wellsfargo.com

***Names and emails in red underlined italics indicate individuals that are currently on the public side of the wall and should not be included on any correspondence until advised by the Wells Fargo Securities transaction team***

B-1

EXHIBIT D SUBSIDIARIES OF THE COMPANY


Name	Jurisdiction of Organization	Type of Entity
Digimarc International LLC**	~~Oregon~~	~~Limited Liability Company~~ ~~Sole Member: Digimarc Corporation~~
Digital Watermarking Holdings C.V.**	~~Curacao~~	~~Limited Partnership~~ ~~General Partner: Digimarc International LLC~~ ~~Limited Partner: Digimarc Corporation~~
Digimarc B.V.*	~~The Netherlands~~	~~Corporation~~ ~~Sole Shareholder: Digimarc Watermarking Holdings C.V.~~
TVaura LLC	Delaware	Limited Liability Company Members: Digimarc Corporation and The Nielsen Company (US) LLC
TVaura Mobile LLC	Delaware	Limited Liability Company Members: Digimarc Corporation and The Nielsen Company (US) LLC
Digimarc GmbH	Germany	Limited Liability Company
Material Subsidiaries
Attributor Corporation	Oregon	Corporation
____________________________________________________
^* ~~Entity is in the process of being dissolved~~ ^** ~~Entity to be dissolved.~~

D-1

Exhibit 31.1

DIGIMARC CORPORATION

CERTIFICATION

I, Bruce Davis, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Digimarc Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 30, 2020

By:

/S/ BRUCE DAVIS

BRUCE DAVIS

Chief Executive Officer

Exhibit 31.2

DIGIMARC CORPORATION

CERTIFICATION

I, Charles Beck, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Digimarc Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 30, 2020

By:

/S/ CHARLES BECK

CHARLES BECK

Chief Financial Officer

Exhibit 32.1

DIGIMARC CORPORATION

CERTIFICATION

In connection with the periodic report of Digimarc Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2020 as filed with the Securities and Exchange Commission (the “Report”), I, Bruce Davis, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the U.S. Code, that to the best of my knowledge:

The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date: October 30, 2020

By:

/S/ Bruce Davis

Bruce Davis

Chief Executive Officer

Exhibit 32.2

DIGIMARC CORPORATION

CERTIFICATION

In connection with the periodic report of Digimarc Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2020 as filed with the Securities and Exchange Commission (the “Report”), I, Charles Beck, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the U.S. Code, that to the best of my knowledge:

The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date: October 30, 2020

By:

/S/ CHARLES BECK

CHARLES BECK

Chief Financial Officer