Digimarc (DMRC) Risk Analysis

We are involved in securities class action and related stockholder derivative litigation that alleges misstatements and omissions regarding the renewal status of a commercial contract. These proceedings may require significant management time and attention, impose substantial defense costs, and result in extensive discovery obligations, including the production of internal communications and other sensitive information. They may also cause reputational harm and investor uncertainty, complicate commercial negotiations, and contribute to stock price volatility. Adverse outcomes could include monetary damages, settlement payments, attorneys' fees, increased insurance costs or reduced availability of coverage, and changes to our governance, controls, or business practices. From time to time, in our normal course of business, we are a party to various legal claims, actions and complaints. Given the uncertain nature of litigation, we are not able to estimate the amount or range of gain or loss that could result from an outcome of litigation. Litigation can be expensive, lengthy, and disruptive to normal business operations. The results of complex legal proceedings are often uncertain and difficult to predict. We could incur costs in excess of any established accruals and, to the extent available, excess liability insurance. An unfavorable outcome in any legal proceedings could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

As of June 30, 2026, we had $8.8 million in cash, cash equivalents, and marketable securities. For the six months ended June 30, 2026, we used cash in operations of $2.6 million. Our financial statements for the six months ended June 30, 2026 have been prepared assuming that we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have a history of incurring negative cash flows and depending on future results we may continue to incur negative cash flows in the future. These conditions raise substantial doubt about our ability to continue as a going concern. While it is difficult to estimate our future liquidity requirements, we believe our $8.8 million in cash, cash equivalents, and marketable securities at June 30, 2026, will not be sufficient to fund our operations, as currently planned, for at least 12 months from the filing of this Form 10-Q, unless we are able to grow revenues, raise additional capital, and/or reduce planned operating costs. We plan, as necessary, to secure additional capital in the future through increased revenue, partnerships, financing activities, and/or other sources to carry out our planned business activities. If additional capital is not available on acceptable terms, or at all, when required, we may need to take steps to contain costs until such funding is received, which could have a material adverse effect on our business.

The markets in which we compete for business are intensely competitive and rapidly evolving. We expect competition to continue from both existing competitors and new market entrants. We face competition from other companies and from alternative technologies, including some of our customers, partners, and licensees. We also may face competition from unexpected sources. Alternative technologies that may directly or indirectly compete with our products include: - artificial intelligence - the use of AI models to create digital watermarking technologies that embed and detect identifying information within digital content;- traditional anti-counterfeiting technologies - solutions designed to deter counterfeiting including security inks, microglyphs, optically variable devices, and magnetic threads used by government agencies and brands (that compete for budgetary outlays);- object and image recognition (e.g., trained classifiers employing machine learning) - technologies that recognize one or several pre-specified or learned objects or object classes, usually together with their two-dimensional positions in the image or three-dimensional poses in the scene;- digital fingerprints and pattern recognition - a metric, or metrics, computed solely from a source image or audio or video track, that can be used to identify an image or track, or authenticate the image; and - object sorting technologies - chemical tracers, taggants, Near Infrared sorters, dot or matrix codes, used to identify and sort objects, and that can be used in connection with systems using a combination of these methods and machine learning. In the competitive environments in which we operate, product creation, development and marketing processes relating to technology are uncertain and complex and require accurate prediction of demand as well as successful management of various risks inherent in technology development. In light of these uncertainties, it is possible that our failure to successfully accommodate future changes in technologies related to our technology could have a long-term negative effect on our growth and results of operations. As we work to achieve market acceptance of our products and services, new developments are expected to continue, and discoveries by others, including current and potential competitors, could render our products and services uncompetitive. Moreover, because of rapid technological changes, we may be required to expend greater amounts of time and money than anticipated to develop new products and services, which in turn may require greater revenue streams from those products and services to cover developmental costs. Many of the companies that compete with us for some of our business, as well as other companies with whom we may compete with in the future, are larger and may have stronger brand recognition and greater technical, financial, marketing, and/or political resources than we do. These attributes could enable these companies to have more success in the market than we have, either by providing better products or better pricing than we can provide. We may be unable to compete successfully against current or future participants in our markets or against alternative technologies, and the competitive pressures we face may have a materially adverse effect on our financial position, results of operations or cash flows.

Our business endeavors in the commercial market may be impeded or frustrated by larger, more influential companies or industry trade groups downplaying, minimizing or rejecting the value or use of our technology. A negative position by such companies or groups could result in obstacles for us that we would be incapable of overcoming and may block or impede the adoption of our technology. Such a development would make the achievement of our business objectives in this market difficult or impossible.

We have staffed our company with the intent of accelerating our product development and sales growth initiatives while also focusing on achieving and sustaining profitability. Our current staffing levels could affect our ability to respond to increased demand for our products and services. In addition, to meet any increased demand and take advantage of new business opportunities in the future, we may need to increase our workforce through additional employees or contract labor. Although we believe that increasing our workforce would potentially support anticipated growth and profitability, it would increase our costs. If we experience such an increase in costs, we may not succeed in achieving or sustaining profitability in the short term. On February 26, 2025, we announced a corporate reorganization, which impacted our workforce by 96 employees. This reorganization was intended to streamline our team structure to better align with our long-term growth initiatives and profitability objectives. If we do not fully realize or maintain the anticipated benefits of the reorganization and related cost reduction initiatives, our business, financial condition, or results of operations could be adversely affected, and additional reorganization actions and cost reduction initiatives may be necessary. Our reorganization and cost cutting activities may also yield unintended consequences and costs, such as attrition beyond our intended reorganization, a reduction in morale among our remaining employees, and the risk we may not achieve the anticipated benefits of the reorganization, all of which may have an adverse effect on our results of operations or financial condition.

Regulation (EU) 2023/2854 (the "EU Data Act") entered into force on September 12, 2025, and imposes obligations on providers of data processing services intended to reduce obstacles to customers switching to competing services. The EU Data Act's switching regime may require us to modify contractual terms and customer-facing processes to align with mandated switching requirements, including any required transition assistance and information obligations. These changes could reduce differentiation based on platform integration and increase customer leverage in commercial negotiations. To the extent the EU Data Act makes switching easier for customers or increases the value of termination rights and transition assistance, we may experience increased customer turnover, shorter contract durations, reduced renewal rates, and reduced revenue predictability. We may also face increased customer demands for concessions, including pricing, term, and termination in exchange for renewals. In addition, contractual changes made to address switching rights and transition assistance may affect the timing and amount of revenue recognized under our customer contracts, including if we are required to provide additional services, assume additional obligations upon termination or switching, or modify commercial terms in a manner that increases concessions or variability. Any of these developments could adversely affect our business, results of operations, and financial condition.