Al

 

Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


(Mark One)

☒     QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

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

For the quarterly period ended June 30, 2022March 31, 2023

OR

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

☐     TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

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.)

 

(I.R.S. Employer

Identification No.)

8500 SW Creekside Place, Beaverton, Oregon 97008

(Address of principal executive offices) (Zip Code)

(503) 469-4800

(503)469-4800

(Registrant’sRegistrants telephone number, including area code)


Securities registered pursuant to Section12(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

 

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 July 29, 2022,May 4, 2023, there were 19,970,74120,273,530 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 June 30, 2022March 31, 2023 and December 31, 20212022

3

Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30,March 31, 2023 and 2022 and 2021

4

Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30,March 31, 2023 and 2022 and 2021

5

Consolidated Statements of Cash Flows for the sixthree months ended June 30,March 31, 2023 and 2022 and 2021

6

Notes to Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 4.

Controls and Procedures

3837

PART II OTHER INFORMATION

Item 1.

Legal Proceedings

3938

Item 1A.

Risk Factors

3938

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3938

Item 6.

Exhibits

4039

SIGNATURES

4140

 

 


PART I. FINANCIAL INFORMATION

 

Item1.Financial Statements.

Item 1.

Financial Statements.

DIGIMARC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(UNAUDITED)

 

 

June 30,

 

 

December 31,

 

 

March 31,

 

December 31,

 

 

2022

 

 

2021

 

 

2023

 

2022

 

ASSETS

 

 

 

 

 

 

 

 

      

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,051

 

 

$

13,789

 

 $32,301  $33,598 

Marketable securities

 

 

21,339

 

 

 

19,537

 

 10,724  18,944 

Trade accounts receivable, net

 

 

5,870

 

 

 

6,368

 

 4,826  5,427 

Loan receivable from related party

 

 

0

 

 

 

2,001

 

Other current assets

 

 

4,655

 

 

 

2,316

 

  4,457   6,172 

Total current assets

 

 

78,915

 

 

 

44,011

 

 52,308  64,141 

Marketable securities

 

 

0

 

 

 

8,292

 

Property and equipment, net

 

 

2,882

 

 

 

2,875

 

 2,024  2,390 

Intangibles, net

 

 

37,984

 

 

 

6,611

 

 32,396  33,170 

Goodwill

 

 

6,325

 

 

 

1,114

 

 8,435  8,229 

Lease right of use assets

 

 

5,476

 

 

 

1,300

 

 4,554  4,720 

Other assets

 

 

1,172

 

 

 

673

 

  1,309   1,127 

Total assets

 

$

132,754

 

 

$

64,876

 

 $101,026  $113,777 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

      

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

7,549

 

 

$

4,727

 

 $5,059  $5,989 

Deferred revenue

 

 

3,581

 

 

 

2,989

 

  3,264   4,145 

Total current liabilities

 

 

11,130

 

 

 

7,716

 

 8,323  10,134 

Long-term lease liabilities

 

 

6,120

 

 

 

1,028

 

 5,901  5,977 

Other long-term liabilities

 

 

225

 

 

 

752

 

  143   76 

Total liabilities

 

 

17,475

 

 

 

9,496

 

 14,367  16,187 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 16)

       

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares

issued and outstanding at June 30, 2022 and December 31, 2021)

 

 

50

 

 

 

50

 

Common stock (par value $0.001 per share, 50,000 authorized, 19,959 and

16,940 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively)

 

 

20

 

 

 

17

 

Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares issued and outstanding at March 31, 2023 and December 31, 2022)

 50  50 

Common stock (par value $0.001 per share, 50,000 authorized, 20,271 and 20,260 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively)

 20  20 

Additional paid-in capital

 

 

357,509

 

 

 

261,324

 

 369,925  367,692 

Accumulated deficit

 

 

(238,431

)

 

 

(206,011

)

 (279,849) (265,809)

Accumulated other comprehensive loss

 

 

(3,869

)

 

 

0

 

  (3,487)  (4,363)

Total shareholders’ equity

 

 

115,279

 

 

 

55,380

 

  86,659   97,590 

Total liabilities and shareholders’ equity

 

$

132,754

 

 

$

64,876

 

 $101,026  $113,777 

 

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

 

3

 


DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)

(UNAUDITED)

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

2023

  

2022

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription

 $3,885  $3,791 

Service

 

$

4,503

 

 

$

3,791

 

 

$

8,123

 

 

$

7,575

 

  3,958   3,620 

Subscription(1)

 

 

3,244

 

 

 

2,487

 

 

 

7,035

 

 

 

5,403

 

Total revenue

 

 

7,747

 

 

 

6,278

 

 

 

15,158

 

 

 

12,978

 

 7,843  7,411 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription(1)

 795  1,042 

Service (1)

 

 

1,744

 

 

 

1,515

 

 

 

3,575

 

 

 

3,085

 

 1,715  1,831 

Subscription (1)

 

 

886

 

 

 

534

 

 

 

1,928

 

 

 

1,325

 

Amortization expense on acquired intangible assets

 

 

1,120

 

 

 

0

 

 

 

2,314

 

 

 

0

 

  1,089   1,194 

Total cost of revenue

 

 

3,750

 

 

 

2,049

 

 

 

7,817

 

 

 

4,410

 

 3,599  4,067 

Gross profit

 

 

3,997

 

 

 

4,229

 

 

 

7,341

 

 

 

8,568

 

 4,244  3,344 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

8,073

 

 

 

6,277

 

 

 

16,018

 

 

 

11,218

 

 6,298  7,945 

Research, development and engineering

 

 

6,065

 

 

 

4,213

 

 

 

12,156

 

 

 

8,344

 

 7,826  6,091 

General and administrative

 

 

4,487

 

 

 

9,175

 

 

 

10,895

 

 

 

12,668

 

 4,627  6,408 

Amortization expense on acquired intangible assets

 

 

321

 

 

 

0

 

 

 

663

 

 

 

0

 

 260  342 

Impairment of lease right of use assets and leasehold improvements

 

 

0

 

 

 

0

 

 

 

574

 

 

 

0

 

     574 

Total operating expenses

 

 

18,946

 

 

 

19,665

 

 

 

40,306

 

 

 

32,230

 

  19,011   21,360 

Operating loss

 

 

(14,949

)

 

 

(15,436

)

 

 

(32,965

)

 

 

(23,662

)

  (14,767)  (18,016)

Other income, net

 

 

93

 

 

 

18

 

 

 

89

 

 

 

28

 

Other income (loss), net

  745   (4)

Loss before income taxes

 

 

(14,856

)

 

 

(15,418

)

 

 

(32,876

)

 

 

(23,634

)

 (14,022) (18,020)

Benefit (provision) for income taxes

 

 

217

 

 

 

(4

)

 

 

456

 

 

 

(10

)

(Provision) benefit for income taxes

  (18)  239 

Net loss

 

$

(14,639

)

 

$

(15,422

)

 

$

(32,420

)

 

$

(23,644

)

 $(14,040) $(17,781)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share — basic

 

$

(0.75

)

 

$

(0.94

)

 

$

(1.76

)

 

$

(1.44

)

 $(0.70) $(1.03)

Loss per common share — diluted

 

$

(0.75

)

 

$

(0.94

)

 

$

(1.76

)

 

$

(1.44

)

 $(0.70) $(1.03)

Weighted average common shares outstanding — basic

 

 

19,539

 

 

 

16,430

 

 

 

18,448

 

 

 

16,382

 

 20,093  17,344 

Weighted average common shares outstanding — diluted

 

 

19,539

 

 

 

16,430

 

 

 

18,448

 

 

 

16,382

 

 20,093  17,344 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on marketable securities, net of tax of $0

 

$

(52

)

 

$

0

 

 

$

(250

)

 

$

0

 

Foreign currency translation adjustment, net of tax of $0

 

 

(2,700

)

 

 

0

 

 

 

(3,619

)

 

 

0

 

Other comprehensive loss

 

$

(2,752

)

 

$

0

 

 

$

(3,869

)

 

$

0

 

Unrealized gain (loss) on marketable securities, net of tax of $0

 $101  $(198)

Foreign currency translation adjustment, net of tax of $0

  775   (919)

Other comprehensive income (loss)

 $876  $(1,117)

Net loss

 

 

(14,639

)

 

 

(15,422

)

 

 

(32,420

)

 

 

(23,644

)

  (14,040)  (17,781)

Comprehensive loss

 

$

(17,391

)

 

$

(15,422

)

 

$

(36,289

)

 

$

(23,644

)

 $(13,164) $(18,898)

(1) Cost of revenue for Service and Subscription excludes amortization expense on acquired intangible assets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1) Cost of revenue for Subscription and Service excludes amortization expense on acquired intangible assets.

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

4

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(In thousands)

(UNAUDITED)

                          

Accumulated

     
                  

Additional

      

Other

  

Total

 
  

Preferred Stock

  

Common Stock

  

Paid-in

  

Accumulated

  

Comprehensive

  

Shareholders'

 
  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Deficit

  

Loss

  

Equity

 

BALANCE AT DECEMBER 31, 2022

  10  $50   20,260  $20  $367,692  $(265,809) $(4,363) $97,590 

Issuance of common stock

        10                

Vesting of restricted stock units

        29                

Vesting of performance stock units

        2                

Purchase of common stock

        (30)     (656)        (656)

Stock-based compensation

              2,889         2,889 

Unrealized gain on marketable securities

                    101   101 

Foreign currency translation adjustments

                    775   775 

Net loss

                 (14,040)     (14,040)

BALANCE AT MARCH 31, 2023

  10  $50   20,271  $20  $369,925  $(279,849) $(3,487) $86,659 
                                 

BALANCE AT DECEMBER 31, 2021

  10  $50   16,940  $17  $261,324  $(206,011) $  $55,380 

Issuance of common stock for acquisition

        772   1   31,518         31,519 

Issuance of warrants for acquisition

              1,601         1,601 

Vesting of restricted stock units

        1                

Forfeiture of restricted common stock

        (8)               

Purchase of common stock

        (18)     (583)        (583)

Stock-based compensation

              2,504         2,504 

Unrealized loss on marketable securities

                    (198)  (198)

Foreign currency translation adjustments

                    (919)  (919)

Net loss

                 (17,781)     (17,781)

BALANCE AT MARCH 31, 2022

  10  $50   17,687  $18  $296,364  $(223,792) $(1,117) $71,523 

 

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

 

5

 


DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYCASH FLOWS

(In thousands)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Three months ended June 30, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT MARCH 31, 2022

 

 

10

 

 

$

50

 

 

 

17,687

 

 

$

18

 

 

$

296,364

 

 

$

(223,792

)

 

$

(1,117

)

 

$

71,523

 

Issuance of common stock

 

 

0

 

 

 

0

 

 

 

2,250

 

 

 

2

 

 

 

58,218

 

 

 

0

 

 

 

0

 

 

 

58,220

 

Issuance of restricted common stock

 

 

0

 

 

 

0

 

 

 

40

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Vesting of restricted stock units

 

 

0

 

 

 

0

 

 

 

16

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Forfeiture of restricted common stock

 

 

0

 

 

 

0

 

 

 

(13

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Purchase of common stock

 

 

0

 

 

 

0

 

 

 

(21

)

 

 

0

 

 

 

(391

)

 

 

0

 

 

 

0

 

 

 

(391

)

Stock-based compensation

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

3,318

 

 

 

0

 

 

 

0

 

 

 

3,318

 

Unrealized loss on marketable securities

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(52

)

 

 

(52

)

Foreign currency translation adjustments

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(2,700

)

 

 

(2,700

)

Net loss

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

0

 

 

 

(14,639

)

 

 

0

 

 

 

(14,639

)

BALANCE AT JUNE 30, 2022

 

 

10

 

 

$

50

 

 

 

19,959

 

 

$

20

 

 

$

357,509

 

 

$

(238,431

)

 

$

(3,869

)

 

$

115,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT MARCH 31, 2021

 

 

10

 

 

$

50

 

 

 

16,850

 

 

$

17

 

 

$

256,200

 

 

$

(179,474

)

 

$

0

 

 

$

76,793

 

Exercise of stock options

 

 

0

 

 

 

0

 

 

 

70

 

 

 

0

 

 

 

1,075

 

 

 

0

 

 

 

0

 

 

 

1,075

 

Issuance of restricted common stock

 

 

0

 

 

 

0

 

 

 

44

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Vesting of restricted stock units

 

 

0

 

 

 

0

 

 

 

112

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Forfeiture of restricted common stock

 

 

0

 

 

 

0

 

 

 

(16

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Purchase of common stock

 

 

0

 

 

 

0

 

 

 

(117

)

 

 

0

 

 

 

(3,979

)

 

 

0

 

 

 

0

 

 

 

(3,979

)

Stock-based compensation

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

6,775

 

 

 

0

 

 

 

0

 

 

 

6,775

 

Net loss

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

0

 

 

 

(15,422

)

 

 

0

 

 

 

(15,422

)

BALANCE AT JUNE 30, 2021

 

 

10

 

 

$

50

 

 

 

16,943

 

 

$

17

 

 

$

260,071

 

 

$

(194,896

)

 

$

0

 

 

$

65,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2021

 

 

10

 

 

$

50

 

 

 

16,940

 

 

$

17

 

 

$

261,324

 

 

$

(206,011

)

 

$

0

 

 

$

55,380

 

Issuance of common stock

 

 

0

 

 

 

0

 

 

 

3,022

 

 

 

3

 

 

 

89,736

 

 

 

0

 

 

 

0

 

 

 

89,739

 

Issuance of warrants for acquisition

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

1,601

 

 

 

0

 

 

 

0

 

 

 

1,601

 

Issuance of restricted common stock

 

 

0

 

 

 

0

 

 

 

40

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Vesting of restricted stock units

 

 

0

 

 

 

0

 

 

 

17

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Forfeiture of restricted common stock

 

 

0

 

 

 

0

 

 

 

(21

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Purchase of common stock

 

 

 

 

 

0

 

 

 

(39

)

 

 

0

 

 

 

(974

)

 

 

0

 

 

 

0

 

 

 

(974

)

Stock-based compensation

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

5,822

 

 

 

0

 

 

 

0

 

 

 

5,822

 

Unrealized loss on marketable securities

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(250

)

 

 

(250

)

Foreign currency translation adjustments

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(3,619

)

 

 

(3,619

)

Net loss

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

0

 

 

 

(32,420

)

 

 

0

 

 

 

(32,420

)

BALANCE AT JUNE 30, 2022

 

 

10

 

 

$

50

 

 

 

19,959

 

 

$

20

 

 

$

357,509

 

 

$

(238,431

)

 

$

(3,869

)

 

$

115,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2020

 

 

10

 

 

$

50

 

 

 

16,735

 

 

$

17

 

 

$

255,024

 

 

$

(171,252

)

 

$

0

 

 

$

83,839

 

Exercise of stock options

 

 

0

 

 

 

0

 

 

 

70

 

 

 

0

 

 

 

1,075

 

 

 

0

 

 

 

0

 

 

 

1,075

 

Issuance of restricted common stock

 

 

0

 

 

 

0

 

 

 

198

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Vesting of restricted stock units

 

 

0

 

 

 

0

 

 

 

112

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Forfeiture of restricted common stock

 

 

0

 

 

 

0

 

 

 

(35

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Purchase of common stock

 

 

 

 

 

0

 

 

 

(137

)

 

 

0

 

 

 

(4,849

)

 

 

0

 

 

 

0

 

 

 

(4,849

)

Stock-based compensation

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

8,821

 

 

 

0

 

 

 

0

 

 

 

8,821

 

Net loss

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

0

 

 

 

(23,644

)

 

 

0

 

 

 

(23,644

)

BALANCE AT JUNE 30, 2021

 

 

10

 

 

$

50

 

 

 

16,943

 

 

$

17

 

 

$

260,071

 

 

$

(194,896

)

 

$

0

 

 

$

65,242

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Cash flows from operating activities:

        

Net loss

 $(14,040) $(17,781)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Depreciation and write-off of property and equipment

  428   390 

Amortization of acquired intangible assets

  1,349   1,536 

Amortization and write-off of other intangible assets

  183   171 

Amortization of lease right of use assets under operating leases

  166   271 

Amortization of net premiums on marketable securities

     26 

Stock-based compensation

  2,876   2,468 

Impairment of lease right of use assets and leasehold improvements

     574 

Changes in operating assets and liabilities:

        

Trade accounts receivable

  631   1,731 

Other current assets

  1,766   (17)

Other assets

  (191)  (601)

Accounts payable and other accrued liabilities

  (910)  219 

Deferred revenue

  (925)  (423)

Lease liability and other long-term liabilities

  (77)  (420)

Net cash used in operating activities

  (8,744)  (11,856)

Cash flows from investing activities:

        

Net cash paid for acquisition

     (3,512)

Purchase of property and equipment

  (51)  (414)

Capitalized patent costs

  (112)  (119)

Proceeds from maturities of marketable securities

  10,247   5,937 

Purchases of marketable securities

  (1,975)   

Net cash provided by investing activities

  8,109   1,892 

Cash flows from financing activities:

        

Purchase of common stock

  (656)  (583)

Repayment of loans

  (26)  (15)

Net cash used in financing activities

  (682)  (598)

Effect of exchange rate on cash

  20   1 

Net decrease in cash and cash equivalents

  (1,297)  (10,561)

Cash and cash equivalents at beginning of period

  33,598   13,789 

Cash and cash equivalents at end of period

 $32,301  $3,228 

Supplemental disclosure of cash flow information:

        

Cash paid for income taxes, net

 $2  $3 

Supplemental schedule of non-cash activities:

        

Property and equipment and patent costs in accounts payable

 $4  $29 

Stock-based compensation capitalized to software and patent costs

 $13  $36 

Common stock issued for acquisition

 $  $31,519 

Warrants issued for acquisition

 $  $1,601 

Right of use assets obtained in exchange for lease obligations

 $  $5,176 

 

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

 


6

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(32,420

)

 

$

(23,644

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and write-off of property and equipment

 

 

720

 

 

 

717

 

Amortization of acquired intangible assets

 

 

2,977

 

 

 

0

 

Amortization and write-off of other intangible assets

 

 

344

 

 

 

345

 

Amortization of lease right of use assets under operating leases

 

 

520

 

 

 

240

 

Amortization of net premiums (discounts) on marketable securities

 

 

0

 

 

 

(498

)

Stock-based compensation

 

 

5,742

 

 

 

8,747

 

Impairment of lease right of use assets and leasehold improvements

 

 

574

 

 

 

0

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

1,776

 

 

 

(950

)

Other current assets

 

 

(600

)

 

 

392

 

Other assets

 

 

(568

)

 

 

(19

)

Accounts payable and other accrued liabilities

 

 

(2,881

)

 

 

1,859

 

Deferred revenue

 

 

(1,043

)

 

 

(331

)

Lease liability and other long-term liabilities

 

 

(808

)

 

 

656

 

Net cash used in operating activities

 

 

(25,667

)

 

 

(12,486

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net cash paid for acquisition

 

 

(3,512

)

 

 

0

 

Purchase of property and equipment

 

 

(716

)

 

 

(569

)

Capitalized patent costs

 

 

(271

)

 

 

(290

)

Proceeds from maturities of marketable securities

 

 

11,148

 

 

 

49,722

 

Purchases of marketable securities

 

 

(4,908

)

 

 

(30,941

)

Net cash provided by investing activities

 

 

1,741

 

 

 

17,922

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Issuance of common stock, net of issuance costs

 

 

58,220

 

 

 

0

 

Purchase of common stock

 

 

(974

)

 

 

(3,774

)

Loan repayment

 

 

(17

)

 

 

0

 

Net cash provided by (used in) financing activities

 

 

57,229

 

 

 

(3,774

)

Effect of exchange rate on cash

 

 

(41

)

 

 

0

 

Net increase in cash and cash equivalents

 

 

33,262

 

 

 

1,662

 

Cash and cash equivalents at beginning of period

 

 

13,789

 

 

 

19,696

 

Cash and cash equivalents at end of period

 

$

47,051

 

 

$

21,358

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes, net

 

$

(14

)

 

$

(31

)

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

 

 

Property and equipment and patent costs in accounts payable

 

$

4

 

 

$

(67

)

Stock-based compensation capitalized to software and patent costs

 

$

80

 

 

$

74

 

Common stock issued for acquisition

 

$

31,519

 

 

$

0

 

Warrants issued for acquisition

 

$

1,601

 

 

$

0

 

Right of use assets obtained in exchange for lease obligations

 

$

5,176

 

 

$

0

 

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 a global leader in product digitization, delivering business value across industries through unique identifiers and cloud-based solutions. OurDigimarc’s technology illuminateshighlights a product's journey to provide completegreater visibility into all relevant product data, allowing companies to make intelligent business decisions.

The Digimarc Illuminate Platform is a uniquedistinctive software as a service platform that combines Digimarc’s digital watermarks and/or Quick Response (“QR Codes”) codes with product cloud technologies. By digitizing products using Digimarc’s unique digital watermarks, QR codes, and/or other digital tags, products can connect with the web and interact with consumers and digital devices. Interactions are powered by the product cloud, where data and instructions are provided based on context, and which captures a record of every interaction.

The Digimarc product suite is built on top of the Digimarc Illuminate Platform to manageaddress specific business needs. All of the Company’s products are complementary to each other, providing exceptional benefits when combined. By enabling customers to create digital identities connectfor physical items using most existing data carriers, and digital media objects, Digimarc’s technologies provide a digital twin to help connected physical items interact with machines, devices, and applications. The Digimarc Platform is underpinned by:many benefits, including:

Digimarc Validate protects product authenticity to ensure real products are in the right place. Digimarc’s technology delivers exclusive, covert digital watermarks and/or QR codes and a cloud-based record of product authentication information. In addition, consumer engagement capabilities provide a direct digital communications channel with consumers. 

Digital Watermarks: BuiltDigimarc Engage unlocks an interactive communications channel connecting brands and consumers. Digimarc’s technology activates products and media through on-package QR codes, enabling consumers to scan for more information. Combined with cloud-based rules, brands can deliver contextually relevant content based on time, location, and more. 

Digimarc Recycle increases the recyclability of products and packaging through unique digital watermarks.Digimarc’s technology activates products and packaging with unique digital watermarks to improve accuracy and performance in recycling facilities. In addition, consumer engagement capabilities deliver a patented foundation, these data carriersdirect digital communications channel with consumers, and a cloud-based record of recycling information provides new insights. 

Digimarc Retail Experience helps brands meet the evolving needs of retail partners and consumers. Digimarc's technology leverages covert digital watermarks to provide an imperceptibleeasier, frictionless shopping experience. In addition, consumer engagement capabilities deliver a direct digital identity and make scanning much more efficient than traditional visual barcodes as they are repeated many times throughout product packaging.

communication channel with consumers.

Detection Software: A software program for computing devices and network interfaces that recognizes and decodes Digimarc watermarks and easily scans most digital identifiers.

Verification/QC Software: Verification and quality control software that offers detailed reports enabling printers and premedia professionals to validate Digimarc watermarks and assess the expected performance.

EVRYTHNG Product Cloud: The Product Cloud assigns products a unique digital identity, making products trackable, intelligent, and interactive by applying analytics and real-time intelligence to a company’s data.

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-K10-K for the year ended December 31, 2021,2022, which was filed with the U.S. Securities and Exchange Commission (“SEC”) on March 4, 2, 2023 (the “2022 (the “2021 Annual Report”). The Company has added “Business Combinations” below as a new significant accounting policy.

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 Generally Accepted Accounting Principles in the United States (“GAAP”) have been condensed or omitted in accordance with the rules and regulations of the SEC.

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the 20212022 Annual Report. 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.

Principles of Consolidation

The consolidated financial statements include the accounts of Digimarc and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated. Digimarc acquired EVRYTHNG Limited (“EVRYTHNG”) on January 3, 2022. The financial results of EVRYTHNG are consolidated with Digimarc’s financial results for the post-acquisition period. See Notes 6 and Note 9 for information related to the EVRYTHNG acquisition.

Reclassifications

Certain prior period amounts in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to current period presentation. These reclassifications had no material effect on the results

7

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)
(UNAUDITED)

(UNAUDITED)Business Combinations

 

its single reporting unit using a market approach, which takes into account the Company’s market capitalization plus an estimated control premium.

In connection with the Company’s annual impairment test of goodwill as of June 30, 2022 and 2021, management concluded that there was 0 impairment to goodwill as the estimated fair value of the Company’s reporting unit substantially exceeded the carrying value.

Business Combinations

The Company allocates purchase price consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is determined based on the fair value of the assets transferred, liabilities assumed and equity interests issued, after considering any transactions that are separate from the business combination. The fair value of equity issued as part of a business combination is determined based on the closing price of the Company’s stock on the date of  issuance.the acquisition closed. The excess of fair value of purchase price consideration over the fair values of the identifiable assets and liabilities is recorded as goodwill. Such fair value calculations require management to make significant estimates and assumptions, especially with respect to intangible assets and contingent liabilities. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer bases,customers, the cost to develop acquired technology, useful lives, discount rates, and discount rates.customer attrition rate. 

The estimates are inherently uncertain and subject to revision as additional information is obtained during the measurement period for an acquisition, which may last up to one year from the acquisition date. During the measurement period, the Company may record adjustments to the fair value of tangible and intangible assets acquired and liabilities assumed, with a corresponding offset to goodwill. After the conclusion of the measurement period or the final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to earnings.

Foreign Currency Translation

The Company translates the accounts of our non-U.S. subsidiaries into U.S. dollars as follows: revenues, expenses, gains and losses are translated at average exchange rates during the period; and assets and liabilities are translated at the exchange rate on the balance sheet date. Translation gains and losses are reported in our Consolidated Balance Sheets as a component of “accumulated other comprehensive income (loss).”

Accounting Pronouncements Adopted

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08,2021-08,Business Combination (Topic 805)805): Accounting for Contract Assets and Liabilities from Contracts with Customers,” which improves the accounting for acquired revenue contracts with customers in a business combination. The amendments in this update primarily address the accounting for contract assets and liabilities from revenue contracts with customers in a business combination, and improves comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. 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 early adopted this standard on January 1, 2022. TheThe impact of adopting this standard was not material to the Company’s consolidated financial statements.

Accounting Pronouncements Issued But Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13,2016-13, “Financial Instruments - Credit Losses (Topic 326)(ASC326): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update remove 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 theadopted this new standard on January 1, 2023.  The adoption of this standard todid not have a material impact on its consolidatedthe Company’s financial statements.

8


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)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 now classified as available-for-sale as the Company recently sold a marketable security, which was previously classified as held-to-maturity. The Company has reassessed classification of the remaining marketable securities and therefore adjusted them to beare reported at fair value. Unrealized holding gains and losses are excluded from earnings and are reported net of tax in “accumulated other comprehensive income (loss)” in the Consolidated Balance Sheets until realized. Realized gains and losses are included in “other income (loss), net” in the Consolidated Statement of Operations and are derived using the specific identification method for determining the cost of marketable securities sold.

As

8

DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(UNAUDITED)

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

 

June 30, 2022

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

March 31, 2023

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Money market securities

 

$

10,847

 

 

$

0

 

 

$

0

 

 

$

10,847

 

 $4,698  $  $  $4,698 

Commercial paper

 

 

0

 

 

 

38,723

 

 

 

0

 

 

 

38,723

 

   19,437    19,437 

Federal agency notes

 

 

0

 

 

 

11,210

 

 

 

0

 

 

 

11,210

 

   15,000    15,000 

Corporate notes

 

 

0

 

 

 

6,407

 

 

 

0

 

 

 

6,407

 

     1,986      1,986 

Pre-refunded municipals

 

 

0

 

 

 

150

 

 

 

0

 

 

 

150

 

Total

 

$

10,847

 

 

$

56,490

 

 

$

0

 

 

$

67,337

 

 $4,698  $36,423  $  $41,121 

 

December 31, 2021

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

December 31, 2022

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Money market securities

 

$

2,478

 

 

$

0

 

 

$

0

 

 

$

2,478

 

 $2,073  $  $  $2,073 

Commercial paper

 

 

0

 

 

 

13,382

 

 

 

0

 

 

 

13,382

 

   35,468    35,468 

Corporate notes

 

 

0

 

 

 

9,585

 

 

 

0

 

 

 

9,585

 

   8,432    8,432 

Federal agency notes

 

 

0

 

 

 

3,799

 

 

 

0

 

 

 

3,799

 

     4,423      4,423 

Pre-refunded municipals

 

 

0

 

 

 

1,063

 

 

 

0

 

 

��

1,063

 

Total

 

$

2,478

 

 

$

27,829

 

 

$

0

 

 

$

30,307

 

 $2,073  $48,323  $  $50,396 

 

The fair value maturities of the Company’s cash equivalents and marketable securities as of June 30, 2022,March 31, 2023, were 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

 

$

67,337

 

 

$

67,337

 

 

$

0

 

 

$

0

 

 

$

0

 

  

Maturities by Period

 
      

Less than

  1-5  5-10  

More than

 
  

Total

  

1 year

  

years

  

years

  

10 years

 

Cash equivalents and marketable securities

 $41,121  $41,121  $  $  $ 

 

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 commercial paper, federal agency notes, money market securities, commercial paper and federal agencycorporate notes totaling $45,998$30,397 and $2,478$31,452 at June 30, 2022,March 31, 2023, and December 31, 2021,2022, respectively. Cash equivalents are carried at either cost or fair value, depending on the type of security.

  

9


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)3. Revenue Recognition

 

3. Revenue Recognition

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

Subscription revenue consists primarily of revenue earned from subscription fees for access to the Company's software as a service platform and products and, to a lesser extent, licensing fees for software products. 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.

Service revenue consists primarily of revenue earned from the performance of software development services and, to a lesser extent, professional services. The majority of servicessoftware development 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 licensing of software products and, to a lesser extent, the licensing and sale 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 subscriptions, software products, software development services, software products, andand/or 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.

9

DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(UNAUDITED)

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 target market in the Company’s single reporting segment:

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

 

$

3,389

 

 

$

3,522

 

 

$

6,661

 

 

$

7,107

 

Subscription

 

 

488

 

 

 

300

 

 

 

788

 

 

 

600

 

Total Government

 

 

3,877

 

 

 

3,822

 

 

 

7,449

 

 

 

7,707

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

 

$

1,114

 

 

$

269

 

 

$

1,462

 

 

$

468

 

Subscription

 

 

2,756

 

 

 

2,187

 

 

 

6,247

 

 

 

4,803

 

Total Commercial

 

 

3,870

 

 

 

2,456

 

 

 

7,709

 

 

 

5,271

 

Total

 

$

7,747

 

 

$

6,278

 

 

$

15,158

 

 

$

12,978

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Commercial

        

Subscription

 $3,585  $3,491 

Service

  298   348 

Total Commercial

  3,883   3,839 

Government

        

Subscription

 $300  $300 

Service

  3,660   3,272 

Total Government

  3,960   3,572 

Total

 $7,843  $7,411 

 

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

The Company has contract assets from capitalized contract acquisition costs that are classified as “other current assets” and “other assets.” These contract acquisition costs are recognized in proportion to the revenue recognized from the contract they are associated with.

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

  

March 31,

  

December 31,

 
  

2023

  

2022

 

Contract acquisition costs, current

 $210  $197 

Contract acquisition costs, long-term

  68   104 

Total

 $278  $301 

 

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

10


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)

 

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

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Deferred revenue, current

 

$

3,581

 

 

$

2,989

 

Deferred revenue, long-term

 

 

43

 

 

 

33

 

Total

 

$

3,624

 

 

$

3,022

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 

Deferred revenue, current

 $3,264  $4,145 

Deferred revenue, long-term

  21   15 

Total

 $3,285  $4,160 

The Company recognized $2,096$2,196 of revenue during the sixthree months ended June 30, 2022,March 31, 2023, that was included in the contract liability balance as of December 31, 2021.2022.

The aggregate amount of the transaction prices from contractual obligations that are unsatisfied or partially unsatisfied was $22,623$28,025 and $16,870$29,600 as of June 30, 2022,March 31, 2023, and December 31, 2021,2022, respectively.

 

4. Segment Information

Geographic Information

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

10

DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(UNAUDITED)

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

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

2023

  

2022

 

Domestic

 

$

2,007

 

 

$

1,640

 

 

$

4,370

 

 

$

3,362

 

 $2,767  $2,363 

International (1)

 

 

5,740

 

 

 

4,638

 

 

 

10,788

 

 

 

9,616

 

  5,076   5,048 

Total

 

$

7,747

 

 

$

6,278

 

 

$

15,158

 

 

$

12,978

 

 $7,843  $7,411 

 


(1)(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

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Central Banks

 

 

47

%

 

 

61

%

 

 

47

%

 

 

59

%

Walmart Inc.

 

*

 

 

 

13

%

 

*

 

 

 

12

%

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Customer A

  50%  47%

Customer B

  23%  10%

 

Long-Lived Tangible Assets by Geographical Area

Long-lived tangible assets by geographic area was as follows:

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

United States

 

$

2,796

 

 

$

2,875

 

Europe

 

 

86

 

 

 

0

 

Total

 

$

2,882

 

 

$

2,875

 

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 

United States

 $1,966  $2,324 

Europe

  58   66 

Total

 $2,024  $2,390 

11


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)5. Stock-Based Compensation

 

5. Stock-Based Compensation

Stock-based compensation includes expense charges for all stock-based awards to employees and directors. These awards include stock options, restricted stock, restricted stock units and performance stock units.

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 pricing model. The Company recognizes the fair value of stock option awards on a straight-line basis over the service period of the award.

There were 1no stock options granted during the sixthree months ended June 30,March 31, 2023. There were 1 stock options granted during the three months ended March 31, 2022, as replacement equity awards for vested stock options held by EVRYTHNG employees. NaN stock options were granted during the six months ended June 30, 2021.

11

DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(UNAUDITED)

Restricted Stock Awards

The fair value of restricted stock awards ("RSA") that 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 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 that 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 three to four years for employee grants.

Performance Stock Units

The fair value of performance stock unit (“PSU”) awards that vest upon meeting a service condition and a performance condition, such as the Company exceeding a future annual recurring revenue target and a service condition, is determined based on the probability of achievement of the performance criteria as of each reporting date (measurement date). The probability of achievement is subject to judgment, and could change from period to period, impacting the fair value of the award. The Company recognizes the fair value of the award on a straight-line basis over the service period of the award, which is generally three years for employee grants.

The fair value of PSU awards that vest upon meeting a service condition and a market condition, such as the Company exceeding shareholder returns as compared to an index of peer companies and a service condition, is determined on the date of grant (measurement date) using the Monte Carlo valuation model. The Company recognizes the fair value of the award on a straight-line basis over the service period of the award, which is generally three years for employee grants.

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

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

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 term 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 term of the award.

Monte Carlo valuation inputs:

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Stock price

 $22.37  $32.02 

Expected volatility

  74.7%  82.8%

Risk-free interest rate

  4.3%  1.8%

12


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)

(UNAUDITED)Stock-Based Compensation

 

Monte Carlo valuation inputs:

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Stock price

 

$

 

 

$

0

 

 

$

32.02

 

 

$

0

 

Expected volatility

 

 

0

 

 

 

0

 

 

 

82.8

%

 

 

0

 

Risk-free interest rate

 

 

0

 

 

 

0

 

 

 

1.8

%

 

 

0

 

Stock-Based Compensation

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

2023

  

2022

 

Stock-based compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

265

 

 

$

178

 

 

$

466

 

 

$

351

 

 $238  $201 

Sales and marketing

 

 

1,149

 

 

 

1,550

 

 

 

1,893

 

 

 

1,990

 

 761  744 

Research, development and engineering

 

 

643

 

 

 

405

 

 

 

1,150

 

 

 

801

 

 936  507 

General and administrative

 

 

1,217

 

 

 

4,604

 

 

 

2,233

 

 

 

5,605

 

  941   1,016 

Stock-based compensation expense

 

 

3,274

 

 

 

6,737

 

 

 

5,742

 

 

 

8,747

 

 2,876  2,468 

Capitalized to software and patent costs

 

 

44

 

 

 

38

 

 

 

80

 

 

 

74

 

  13   36 

Total stock-based compensation

 

$

3,318

 

 

$

6,775

 

 

$

5,822

 

 

$

8,821

 

 $2,889  $2,504 

 

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Total unrecognized compensation costs

 

$

22,060

 

 

$

11,301

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 

Total unrecognized compensation costs

 $21,576  $16,051 

 

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 June 30, 2022,March 31, 2023, for all non-vested stock-based awards over weighted average periods through June 30, 2026, March 31, 2027, as follows:

 

Restricted

Stock

RSUs

PSUs

Weighted average period

1.23 years

1.64 years

1.89 years

  

RSAs

  

RSUs

  

PSUs

 

Weighted average period (in years)

  0.90   1.85   2.93 

 

As of June 30, 2022,March 31, 2023, under the Company’s stock-based compensation plan, an additional 430196 shares remained available for future grants. The Company issues new shares upon exercises of stock options, grants of restricted stock awardsRSAs and vesting of RSU and PSU awards.

 

Stock Option Activity

The following table presents the outstanding stock option activity:

      

Weighted

  

Weighted

     
      

Average

  

Average

  

Aggregate

 
  

Number of

  

Exercise

  

Grant Date

  

Intrinsic

 

Three Months Ended March 31, 2023:

 

Options

  

Price

  

Fair Value

  

Value

 

Outstanding at December 31, 2022

  51  $39.14  $21.72     

Granted

    $  $     

Exercised

    $  $     

Forfeited or expired

    $  $     

Outstanding at March 31, 2023

  51  $39.14  $21.72  $ 

Exercisable at March 31, 2023

  51  $39.14      $ 

Unvested at March 31, 2023

    $      $ 

13


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)

Stock Option Activity

The following tables present the outstanding stock option activity:

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Grant Date

 

 

Intrinsic

 

Three months ended June 30, 2022:

 

Options

 

 

Price

 

 

Fair Value

 

 

Value

 

Outstanding at March 31, 2022

 

 

51

 

 

$

39.14

 

 

$

21.72

 

 

 

 

 

Granted

 

 

0

 

 

$

0

 

 

$

0

 

 

 

 

 

Exercised

 

 

0

 

 

$

0

 

 

$

0

 

 

 

 

 

Forfeited or expired

 

 

0

 

 

$

0

 

 

$

0

 

 

 

 

 

Outstanding at June 30, 2022

 

 

51

 

 

$

39.14

 

 

$

21.72

 

 

$

0

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Grant Date

 

 

Intrinsic

 

Six months ended June 30, 2022:

 

Options

 

 

Price

 

 

Fair Value

 

 

Value

 

Outstanding at December 31, 2021

 

 

50

 

 

$

39.54

 

 

$

22.23

 

 

 

 

 

Granted

 

 

1

 

 

$

22.15

 

 

$

0

 

 

 

 

 

Exercised

 

 

0

 

 

$

0

 

 

$

0

 

 

 

 

 

Forfeited or expired

 

 

0

 

 

$

0

 

 

$

0

 

 

 

 

 

Outstanding at June 30, 2022

 

 

51

 

 

$

39.14

 

 

$

21.72

 

 

$

0

 

Exercisable at June 30, 2022

 

 

51

 

 

$

39.14

 

 

 

 

 

 

$

0

 

The aggregate intrinsic value is based on the closing price of $14.14$19.65 per share of Digimarc common stock on June 30, 2022,March 31, 2023, which would have been received by the optionees had all of the options with exercise prices less than $14.14$19.65 per share been exercised on that date.

Restricted Stock Awards Activity

The following tables presenttable presents the unvested restricted stockRSA activity:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

Number of

 

 

Grant Date

 

Three months ended June 30, 2022:

 

Shares

 

 

Fair Value

 

Unvested balance, March 31, 2022

 

 

302

 

 

$

35.29

 

Granted

 

 

40

 

 

$

19.82

 

Vested

 

 

(56

)

 

$

31.49

 

Forfeited

 

 

(13

)

 

$

38.09

 

Unvested balance, June 30, 2022

 

 

273

 

 

$

33.65

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

Number of

 

 

Grant Date

 

Six months ended June 30, 2022:

 

Shares

 

 

Fair Value

 

Unvested balance, December 31, 2021

 

 

360

 

 

$

34.90

 

Granted

 

 

40

 

 

$

19.82

 

Vested

 

 

(106

)

 

$

31.85

 

Forfeited

 

 

(21

)

 

$

37.60

 

Unvested balance, June 30, 2022

 

 

273

 

 

$

33.65

 

14


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)

      

Weighted

 
      

Average

 
  

Number of

  

Grant Date

 

Three months ended March 31, 2023:

 

Shares

  

Fair Value

 

Unvested balance, December 31, 2022

  196  $32.06 

Granted

    $ 

Vested

  (46) $33.29 

Forfeited

    $44.36 

Unvested balance, March 31, 2023

  150  $31.66 

 

The fair value of restricted stock awardsRSAs vested is as follows:

 

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Fair value of restricted stock awards vested

 

$

1,175

 

 

$

2,285

 

 

$

2,778

 

 

$

4,460

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Fair value of RSAs vested

 $1,019  $1,603 

Restricted Stock Units Activity

The following tables presenttable presents the unvested RSU activity:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

Number of

 

 

Grant Date

 

Three months ended June 30, 2022:

 

Shares

 

 

Fair Value

 

Unvested balance, March 31, 2022

 

 

308

 

 

$

32.31

 

Granted

 

 

163

 

 

$

18.31

 

Vested

 

 

(16

)

 

$

32.13

 

Forfeited

 

 

(18

)

 

$

28.37

 

Unvested balance, June 30, 2022

 

 

437

 

 

$

27.25

 

 

 

 

 

 

Weighted

 

    

Weighted

 

 

 

 

 

 

Average

 

    

Average

 

 

Number of

 

 

Grant Date

 

 

Number of

 

Grant Date

 

Six months ended June 30, 2022:

 

Shares

 

 

Fair Value

 

Unvested balance, December 31, 2021

 

 

0

 

 

$

0

 

Three months ended March 31, 2023:

 

Shares

 

Fair Value

 

Unvested balance, December 31, 2022

 370  $24.77 

Granted

 

 

472

 

 

$

27.50

 

 270  $22.37 

Vested

 

 

(17

)

 

$

32.88

 

 (29) $25.52 

Forfeited

 

 

(18

)

 

$

28.39

 

  (45) $25.49 

Unvested balance, June 30, 2022

 

 

437

 

 

$

27.25

 

Unvested balance, March 31, 2023

  566  $23.53 

 

The fair value of RSU awards vested is as follows:

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Fair value of RSU awards vested

 $624  $47 

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Fair value of RSU awards vested

 

$

286

 

 

$

1,050

 

 

$

333

 

 

$

1,050

 

14


15


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)

(UNAUDITED)

Performance Stock Units Activity

The following tables presenttable presents the unvested PSU activity:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

Number of

 

 

Grant Date

 

Three months ended June 30, 2022:

 

Shares

 

 

Fair Value

 

Unvested balance, March 31, 2022

 

 

144

 

 

$

32.02

 

Granted

 

 

0

 

 

$

0

 

Vested

 

 

0

 

 

$

0

 

Forfeited

 

 

0

 

 

$

0

 

Unvested balance, June 30, 2022

 

 

144

 

 

$

32.02

 

 

 

 

 

 

Weighted

 

    

Weighted

 

 

 

 

 

 

Average

 

    

Average

 

 

Number of

 

 

Grant Date

 

 

Number of

 

Grant Date

 

Six months ended June 30, 2022:

 

Shares

 

 

Fair Value

 

Unvested balance, December 31, 2021

 

 

0

 

 

$

0

 

Three months ended March 31, 2023:

 

Shares

  

Fair Value

 

Unvested balance, December 31, 2022

 67  $31.92 

Change in units based on performance expectations

 (6) $(32.02)

Granted

 

 

144

 

 

$

32.02

 

 134  $27.75 

Vested

 

 

0

 

 

$

0

 

 (2) $(32.02)

Forfeited

 

 

0

 

 

$

0

 

  (1) $(32.02)

Unvested balance, June 30, 2022

 

 

144

 

 

$

32.02

 

Unvested balance, March 31, 2023

  192  $29.01 

 

The fair value of PSU awards vested is as follows:

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Fair value of PSU awards vested

 $54  $ 

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Fair value of PSU awards vested

 

$

0

 

 

$

2,886

 

 

$

0

 

 

$

2,886

 

6. Shareholders Equity

 

6. Shareholders’ Equity

EVRYTHNG Acquisition

On January 3, 2022, the Company closed on its acquisition of EVRYTHNG pursuant to the Share Purchase Agreement (“Purchase Agreement”) entered into on November 15, 2021. Upon closing, EVRYTHNG became a wholly owned subsidiary of the Company.

The Company acquired all outstanding shares of EVRYTHNG’s share capital in exchange for aggregate initial consideration consisting of 772 shares of common stock of the Company and warrants to purchase 231 shares of common stock of the Company. A portion of the consideration was held back by the Company to secure any post-closing adjustments to the initial consideration and the indemnification obligations of the EVRYTHNG sellers. The Company also paid $3,986 of closing costs on behalf of the EVRYTHNG sellers.

The warrants had a per share exercise price of $36.56 and could only be exercised by payment of the exercise price in cash. All of the warrants expired unexercised.

The Company granted replacement equity awards to the holders of vested and unvested EVRYTHNG options, pursuant to the terms of the Purchase Agreement. The replacement equity awards had substantially equivalent economic value and vesting terms as the cancelled vested and unvested EVRYTHNG options.

The Purchase Agreement provided for additional shares of the Company’s common stock, subject to certain conditions, to be issued in September 2022. The number of additional common shares, before any downward adjustments, was equivalent to $50,000 of the Company’s common stock. The number of additional common shares would be adjusted downward if EVRYTHNG failed to meet

16


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)Registered Direct Offering

 

its Product Annual Recurring Revenue target of $10,000 by February 28, 2022, and/or if the Company’s average stock price during the applicable measurement period was higher than its stock price as of the closing of the EVRYTHNG acquisition. NaN additional shares of the Company’s common stock are expected to be issued, outside of the issuance of shares held back for any post-closing adjustments and indemnification obligations, as the conditions for the additional shares have not been met.

Registered Direct Offering

On April 5, 2022, the Company entered into purchase agreements with certain investors providing for the issuance and sale by the Company of 2,250 common shares in a registered direct offering. The common shares were offered at a price of $25.90 per share, and the gross cash proceeds to the Company were $58,275. The Company incurred $55 of legal costs related to the offering. The closing of the registered direct offering occurred on April 7, 2022.

 

15

DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(UNAUDITED)

7. Loss Per Common Share

The Company calculates basic and diluted earnings per common share in accordance with ASC 260,Earnings Per Share,” using the two-classtwo-class method because the Company’s unvested restricted stock isRSAs are a participating security since these awards contain non-forfeitable rights to receive dividends. Under the two-classtwo-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, RSUs and PSUs. The dilutive effect of stock options, RSUs and PSUs is determined using the treasury stock method.

The following table reconciles loss per common share:

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

2023

  

2022

 

Basic Loss per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Net loss attributable to common shares — basic

 

$

(14,639

)

 

$

(15,422

)

 

$

(32,420

)

 

$

(23,644

)

 $(14,040) $(17,781)

Weighted average common shares outstanding — basic

 

 

19,539

 

 

 

16,430

 

 

 

18,448

 

 

 

16,382

 

  20,093   17,344 

Basic loss per common share

 

$

(0.75

)

 

$

(0.94

)

 

$

(1.76

)

 

$

(1.44

)

 $(0.70) $(1.03)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Loss per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Net loss attributable to common shares — diluted

 

$

(14,639

)

 

$

(15,422

)

 

$

(32,420

)

 

$

(23,644

)

 $(14,040) $(17,781)

Weighted average common shares outstanding — diluted

 

 

19,539

 

 

 

16,430

 

 

 

18,448

 

 

 

16,382

 

  20,093   17,344 

Diluted loss per common share

 

$

(0.75

)

 

$

(0.94

)

 

$

(1.76

)

 

$

(1.44

)

 $(0.70) $(1.03)

 

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

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

March 31,

 

March 31,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

2023

  

2022

 

Anti-dilutive shares due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Exercise prices higher than the average market price

 

 

51

 

 

 

100

 

 

 

50

 

 

 

100

 

 51  50 

Net loss

 

 

0

 

 

 

0

 

 

 

0

 

 

 

61

 

 59   

 

17


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)8. Trade Accounts Receivable

 

8. Trade Accounts Receivable

Trade Accounts Receivable

Trade accounts receivable are recorded at the contractual or invoiced amount.

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 

Trade accounts receivable, current

 $4,940  $5,541 

Trade accounts receivable, long-term

  23   37 

Allowance for doubtful accounts

  (114)  (114)

Trade accounts receivable, net

 $4,849  $5,464 

Unpaid deferred revenue included in trade accounts receivable

 $1,204  $2,183 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Trade accounts receivable, current

 

$

5,908

 

 

$

6,393

 

Trade accounts receivable, long-term

 

 

60

 

 

 

186

 

Allowance for doubtful accounts

 

 

(38

)

 

 

(25

)

Trade accounts receivable, net

 

$

5,930

 

 

$

6,554

 

Unpaid deferred revenue included in trade

   accounts receivable

 

$

1,393

 

 

$

1,891

 

 

 

 

 

 

 

 

 

 

16

DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(UNAUDITED)

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 existingoutstanding 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:

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 

Company A

  50%  55%

Company B

  10%  * 


*         Less than 10%

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Company A

 

 

37

%

 

 

43

%

Company B

 

 

14

%

 

*

 

Company C

 

*

 

 

 

15

%

Company D

 

*

 

 

 

11

%

9. Business Combination

 

*Less than 10%

9. Business Combination

On January 3, 2022, the Company completed its acquisition of EVRYTHNG, a London-based product cloud company. The aggregate preliminary purchase price for the acquisition was $36,634, which included the fair value of the 772 shares issued of common stock of the Company of $31,519 and the warrants issued to purchase 231 shares of common stock of the Company of $1,601 (see Note 6 for more information).$1,601. The fair value of the warrants was determined using the Black-Scholes option pricing model using the Company’s stock price on the date of issuance of $40.84, the strike price on the warrants of $36.56 and expected volatility of 60%. The aggregate preliminary purchase price also included $3,986 of cash paid by the Company to pay closing costs on behalf of the EVRYTHNG sellers, less cash acquired of $474. A portion of the consideration was held back by the Company to secure any post-closing adjustments to the initial consideration and the indemnification obligations of the EVRYTHNG sellers.The aggregate purchase price remains preliminary, as

In August 2022, the Company is still finalizing the issuanceissued 22 additional shares of common stock of the Company at the fair value of $872, that were originally held back consideration.for post-closing adjustments.

In January 2023, the Company issued 10 additional shares of common stock of the Company at the fair value of $428, that were originally held back for indemnification obligations.

On December 10, 2021, the Company entered into a Loan Agreement with EVRYTHNG (the “Loan Agreement”) pursuant to the Purchase Agreement.terms of the acquisition. The Loan Agreement provided a loan facility of $2,000 to EVRYTHNG at an interest rate of 1% per annum. The original loan matures on maturity date was December 9, 2022. The loan balance of $2,001 on January 3, 2022, was included in “loan payable to related party” below in the preliminary purchase price allocation below, as the liability was assumed by the combined company. The loan payable balance is eliminated in consolidation in the Consolidated Balance Sheet asSheets.

17

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)

The following table presents the preliminaryfinal purchase price allocation:

 

 

Preliminary

 

 

 

Purchase Price

 

 

 

Allocation

 

 

 

January 3, 2022

 

Trade accounts receivable, net

 

$

717

 

Other current assets

 

 

1,947

 

Property and equipment, net

 

 

99

 

Lease right of use assets and other long-term assets

 

 

484

 

Intangibles

 

 

37,740

 

Goodwill

 

 

5,749

 

Accounts payable and other accrued liabilities

 

 

(6,092

)

Deferred revenue

 

 

(1,804

)

Loan payable to related party

 

 

(2,001

)

Lease liability and other long-term liabilities

 

 

(205

)

Total preliminary purchase price

 

$

36,634

 

  

Purchase Price

 
  

Allocation

 
  

January 3, 2022

 

Trade accounts receivable, net

 $762 

Other current assets

  2,178 

Property and equipment, net

  99 

Lease right of use assets and other long-term assets

  484 

Intangibles

  35,720 

Goodwill

  7,970 

Accounts payable and other accrued liabilities

  (5,395)

Deferred revenue

  (1,678)

Loan payable to related party

  (2,001)

Lease liability and other long-term liabilities

  (205)

Total purchase price

 $37,934 

The Company preliminarily allocated $37,740$35,720 of the purchase price to intangible assets, which was comprisedconsisted of$23,990 allocated to $24,170 of developed technology and $13,750 allocated to$11,550 of customer relationships. Preliminary goodwillGoodwill recognized of $5,749$7,970 from the acquisition was primarily attributed to an assembled workforce and expected synergies. The preliminary allocation above is subject to future adjustments during the measurement period. Open areas in the preliminary allocation include finalizing the opening balance sheet, the fair value of acquired intangible assets and recognition of income tax assets and liabilities. The Company incurred transaction costs related to the acquisition of $1,140 during 2021 and $447 in 2022, respectively.2022.

Developed Technology

Developed technology primarily consists of intellectual property of proprietary software products and platforms that are marketed for sale. The Company valued the developed technology by applying the cost method. The significant assumption and estimate used under the cost method was development costs. The Company is amortizing the developed technology intangible asset on a straight-line basis over an estimated useful life of five years.

Customer Relationships

The Company recorded the customer relationships intangible asset separately from goodwill based on a determination of the length, strength and contractual nature of the relationships that EVRYTHNG shared with its customers. The Company valued the single group of customer relationships using the multi-period excess earnings method, which is an income approach. The significant assumptions used in the income approach include estimates about future expected cash flows from customer contracts, the customer attrition rate and the discount rate. The Company is amortizing the customer relationships intangible asset on a straight-line basis over an estimated useful life of 10 years.

The following unaudited pro forma consolidated results of operations include the financial results of Digimarc and EVRYTHNG assuming the acquisition was completed on January 1, 2021, 2022, the beginning of the earliest period presented. Pro forma adjustments are primarily comprised of preliminary estimates of amortization expense on acquired intangible assets, transaction expenses and the elimination of EVRYTHNG’s historical interest expense on long-term debt that was settled at closing. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved or of results that may occur in the future.

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenue

 

$

7,747

 

 

$

7,573

 

 

$

15,158

 

 

$

15,506

 

Net loss

 

$

(14,636

)

 

$

(20,088

)

 

$

(31,973

)

 

$

(36,447

)

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.75

)

 

$

(1.17

)

 

$

(1.73

)

 

$

(2.12

)

Diluted

 

$

(0.75

)

 

$

(1.17

)

 

$

(1.73

)

 

$

(2.12

)

 

  Three Months Ended March 31, 
  

2023

  

2022

 

Revenue

 $7,843  $7,411 

Net loss

 $(14,040) $(17,337)

Loss per common share:

        

Basic

 $(0.70) $(1.00)

Diluted

 $(0.70) $(1.00)

10. Property and Equipment

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

19

18

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)

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.

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 

Office furniture and fixtures

 $1,616  $1,613 

Software

  5,593   5,747 

Equipment

  4,875   4,785 

Leasehold improvements

  1,861   1,861 

Gross property and equipment

  13,945   14,006 

Less accumulated depreciation and amortization

  (11,921)  (11,616)

Property and equipment, net

 $2,024  $2,390 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Office furniture and fixtures

 

$

1,613

 

 

$

1,648

 

Software

 

 

6,005

 

 

 

5,674

 

Equipment

 

 

5,766

 

 

 

5,250

 

Leasehold improvements

 

 

1,918

 

 

 

1,658

 

Gross property and equipment

 

 

15,302

 

 

 

14,230

 

Less accumulated depreciation and amortization

 

 

(12,420

)

 

 

(11,355

)

Property and equipment, net

 

$

2,882

 

 

$

2,875

 

11. Goodwill

 

11.The Company performs its annual goodwill impairment test during the second quarter of each fiscal year or whenever events or changes in circumstances indicate that the carrying value may exceed the fair value. If the carrying value exceeds the estimated fair value, an impairment is recorded. The Company operates as a single reporting unit. The Company estimates the fair value of its single reporting unit using a market approach, which takes into account the Company’s market capitalization plus an estimated control premium.

Balance at December 31, 2022

 $8,229 

Currency translation adjustments

  206 

Balance at March 31, 2023

 $8,435 

12. 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. NaNNo impairment charges were recorded for the sixthree months ended June 30, 2022 March 31, 2023 and 2021.2022.

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, but generally approximating approximates seventeen years.

19

DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(UNAUDITED)

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

 

 

Estimated Life

 

June 30,

 

 

December 31,

 

 

Estimated Life

 

March 31,

 

December 31,

 

 

(years)

 

2022

 

 

2021

 

 

(years)

  

2023

  

2022

 

Capitalized patent costs

 

17-20

 

$

10,427

 

 

$

10,219

 

 ~17  $10,665  $10,646 

 

 

 

 

 

 

 

 

 

 

   

Intangible assets acquired:

 

 

 

 

 

 

 

 

 

 

   

Purchased intellectual property

 

10

 

 

250

 

 

 

250

 

 10  250  250 

Developed technology

 

5

 

 

23,303

 

 

 

1,560

 

 5  22,209  21,661 

Customer relationships

 

10

 

 

12,752

 

 

 

290

 

 10   10,613   10,351 

Gross intangible assets

 

 

 

 

46,732

 

 

 

12,319

 

    43,737  42,908 

Accumulated amortization

 

 

 

 

(8,748

)

 

 

(5,708

)

     (11,341)  (9,738)

Intangibles, net

 

 

 

$

37,984

 

 

$

6,611

 

    $32,396  $33,170 

The amortization of capitalized patent costs, purchased intellectual property, and developed technology is recorded in “cost of revenue” and the amortization of customer relationships is recorded in “sales and marketing”“operating expenses” in the Consolidated Statements of Operations.

Amortization expense on intangible assets was as follows:

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Amortization expense

 

$

1,583

 

 

$

143

 

 

$

3,260

 

 

$

285

 


20


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Amortization expense

 $1,493  $1,677 

 

For intangible assets recorded at June 30, 2022,March 31, 2023, the estimated future aggregate amortization expense for the years ending December 31, 20222023 through December 31, 20262027 is as follows:

 

 

Amortization

 

As of June 30, 2022:

 

Expense

 

Remaining in 2022

 

$

3,070

 

2023

 

 

6,135

 

2024

 

 

6,122

 

2025

 

 

6,103

 

2026

 

 

6,071

 

 

  

Amortization

 

As of March 31, 2023

 

Expense

 

Remaining in 2023

 $4,557 

2024

  6,068 

2025

  6,047 

2026

  6,014 

2027

  1,537 

 

12.13. Leases

The Company leases office space in Beaverton, Oregon. The term of the lease runs through March 2024, with remaining rent payments as of June 30, 2022,March 31, 2023, totaling $1,489$860 plus operating expenses, payable in monthly installments. The Company stopped using this office space as its corporate headquarters in March 2022 and is now marketing the office space for sublease.

The Company entered into a sublease agreement and lease extension agreement for another facility in Beaverton, Oregon in February 2022 to move the Company’s corporate headquarters. The term of the sublease and lease extension runs through September 2030, with remaining rent payments as of June 30, 2022,March 31, 2023, totaling $8,756 plus operating expenses, payable in monthly installments. The first26 months of rent payments and operating expenses are abated to cover the remaining lease term on the Company’s prior corporate headquarters.

The Company leases office space in London, England under an existing lease entered into by EVRYTHNG in July 2019. The term of the lease runs through July 2023, with remaining rent payments as of June 30, 2022,March 31, 2023, totaling $270$68 plus operating expenses, payable in quarterly installments.

The

The Company accounts for leases in accordance with ASC 842,Leases.

20

DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(UNAUDITED)

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

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Lease right of use assets

 

$

5,476

 

 

$

1,300

 

Lease liabilities, current

 

$

1,030

 

 

$

745

 

Lease liabilities, long-term

 

$

6,120

 

 

$

1,028

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining life

 

6.7 years

 

 

2.2 years

 

Weighted-average discount rate

 

 

9

%

 

 

8

%

  

March 31,

  

December 31,

 
  

2023

  

2022

 

Lease right of use assets

 $4,554  $4,720 

Lease liabilities, current

  891   939 

Lease liabilities, long-term

  5,901   5,977 
         

Weighted-average remaining life (in years)

  6.6   6.7 

Weighted-average discount rate

  9%  9%

The current lease liabilities are included in “accounts payable and other accrued liabilities” in the Consolidated Balance Sheets.

The carrying value of the lease right of use assets is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. No impairment was recorded for the three months ended March 31, 2023. 

The Company recorded an “impairment of lease right of use assets and leasehold improvements” of $574 in the Consolidated Statements of Operations in for the three months ended March 31, 2022. The impairment was triggered when the Company vacated its prior corporate headquarters. headquarters in March 2022. The impairment charge was determined by comparing the carrying value of the assets to the net present value of estimated cash flows from the future sublease of the office space over the remaining lease term.

21


DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)

(UNAUDITED)

 

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 included in operating lease expense. Additional details of the Company’s operating leases are presented in the following table:

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Operating lease expense

 

$

463

 

 

$

253

 

 

$

924

 

 

$

510

 

Cash paid for operating leases

 

$

406

 

 

$

294

 

 

$

790

 

 

$

591

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Operating lease expense

 $373  $461 

Cash paid for operating leases

 $412  $384 

The table below reconciles the aggregate cash payment obligations for the firstfive years and total of the remaining years for the operating lease liability recorded in the Consolidated Balance Sheet as of June 30, 2022:March 31, 2023:

  

Cash

 
  

Payment

 

As of March 31, 2023:

 

Obligations

 

Remaining in 2023

 $716 

2024

  1,178 

2025

  1,309 

2026

  1,349 

2027

  1,389 

Thereafter

  3,749 

Total lease payments

  9,690 

Imputed interest

  (2,898)

Total minimum lease payments

 $6,792 

 

 

Cash

 

 

 

Payment

 

As of June 30, 2022:

 

Obligations

 

Remaining in 2022

 

$

570

 

2023

 

 

1,002

 

2024

 

 

1,178

 

2025

 

 

1,309

 

2026

 

 

1,349

 

Thereafter

 

 

5,138

 

Total lease payments

 

 

10,546

 

Imputed interest

 

 

(3,396

)

Total minimum lease payments

 

$

7,150

 

21

DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(UNAUDITED)

14. Other Income (Loss)

 

13.The following table provides information about other income (loss), net:

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Interest income

 $421  $7 

Refundable tax credit

  255    

Foreign currency gains (losses)

  67   (17)

Other income

  2   6 

Total other income (loss), net

 $745  $(4)

15. Income Taxes

The (provision) benefit (provision) for income taxes reflects current taxes, deferred taxes, and withholding taxes. The effective tax rate for the sixthree months ended June 30, 2022 March 31, 2023 and 20212022 was 1%0% and 0%1%, respectively. The tax benefit for the six months ended June 30, 2022 reflects an estimated refundable tax credit to be filed for in the United Kingdom for the 2022 tax year.

The valuation allowance against net deferred tax assets as of June 30, 2022,March 31, 2023, was $69,834,$86,804, an increase of $5,561$3,804 from $64,273$83,000 as of December 31, 2021. 2022. The Company continues to provide for a full valuation allowance to offset its net deferred tax assets until such time it is more likely than not the tax assets or portions thereof will be realized.

Excess tax deficienciesdeficiency of $820$544 and $815excess tax benefit of $5 were recognized in the provision for income taxes for the three and six months ended June 30, March 31, 2023 and 2022, respectively, which were offset by $820$544 and $815 of valuation allowance, respectively.

Excess tax benefits of $3,101 and $3,897 were recognized in the provision for income taxes for the three and six months ended June 30, 2021, respectively, which were offset by $3,101 and $3,897$5 of valuation allowance, respectively.

 

14.16. 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 consolidated financial statements.

 

 

 


Item2.Management’sManagements Discussion and Analysis ofof Financial Condition and Results of Operations

The following Management’sManagements 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 Form10-Q under the caption “SafeSafe 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, 20212022 filed on March 4, 20222, 2023 (our “2021“2022 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 Form10-Q to “Company,Company, “Digimarc,Digimarc, “we,we, “our”our and “us”us refer to Digimarc Corporation. On January 3, 2022, the Company completed the acquisition of EVRYTHNG Limited and its subsidiaries (“EVRYTHNG”), a London-based product cloud company. Unless context otherwise requires, references to EVRYTHNG refer to our wholly owned subsidiary following the acquisition.

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, The Barcode of Everything, Barcode of Everything, and the circle-d logo are registered trademarks of Digimarc Corporation. EVRYTHNG and EVRYTHNG PRODUCT CLOUD are registered trademarks of EVRYTHNG Limited.Limited (EVRYTHNG), a wholly owned subsidiary of Digimarc. 

Overview

Digimarc Corporation is a global leader in product digitization, delivering business value across industries through unique identifiersidentities and cloud-based solutions. Our technology illuminateshighlights a product’s journey to provide completegreater visibility into all relevant product data, allowing companies to make more intelligent business decisions.

The Digimarc Illuminate Platform is a uniquedistinctive software as a service to manageplatform that combines Digimarc’s digital identities,watermarks and/or Quick Response (“QR”) codes with product cloud technologies. By digitizing products using our unique digital watermarks, QR codes, and/or other digital tags, products can connect physical items using most existing data carriers,with the web and provide a digital twin to help connected physical items interact with machines, devices,consumers and applications. digital devices. Interactions are powered by our product cloud, where data and instructions are provided based on context, and which captures a record of every interaction. 

The Digimarc product suite is built on top of the Digimarc Illuminate Platform is underpinned by:

Digital Watermarks: Built on a patented foundation, these data carriers provide an imperceptible digital identity and make scanning much more efficient than traditional visual barcodes as they are repeated many times throughout product packaging.

Detection Software: A software program for computing devices and network interfaces that recognizes and decodes Digimarc watermarks and easily scans most digital identifiers.

Verification/QC Software: Verification and quality control software that offers detailed reports enabling printers and premedia professionals to validate Digimarc watermarks and assess the expected performance.

EVRYTHNG Product Cloud: The Product Cloud assigns products a unique digital identity, making products trackable, intelligent, and interactive by applying analytics and real-time intelligence to a company’s data.

to address specific business needs. All our products are complementary to each other, providing exponential benefits when combined. By enabling customers to create digital identities for physical and digital media objects, Digimarc’s technologies provide many benefits, including:

Digimarc Validate protects product authenticity to ensure real products are in the right place. Our technology delivers exclusive, covert digital watermarks and/or QR codes and a cloud-based record of product authentication information. In addition, consumer engagement capabilities provide a direct digital communications channel with consumers. 

Brand Integrity:Digimarc Engage unlocks an interactive communications channel connecting brands and consumers. Our technology can verify product authenticity, provide more in-depth insight intoactivates products and pinpoint themedia through on-package QR codes, enabling consumers to scan for more information. Combined with cloud-based rules, brands can deliver contextually relevant content based on time, location, of counterfeit goods. Because Digimarc watermarks are covert, they can easily confirm the credibility of real products without attracting attention.and more.

Recycling Accuracy:Digimarc watermarks create aRecycle increases the recyclability of products and packaging through unique digital identity in any plastic or other packaging product that overcomes existing challenges in sortation and gives products a “Digital Recycling Passport,” linked to virtually unlimited attributes in the cloud.

Supply Chain Traceability:watermarks. Our technology activates products and packaging with unique digital watermarks to improve accuracy and performance in recycling facilities. In addition, consumer engagement capabilities deliver a direct digital communications channel with consumers, and a cloud-based record of recycling information provides unique, serialized identities on product packaging via digital printing, industrial inkjet printers, and laser etching techniques to support consumer brand traceability initiatives.new insights.

 

Digimarc Retail Experience helps brands meet the evolving needs of retail partners and consumers. Our technology leverages covert digital watermarks to provide an easier, frictionless shopping experience. In addition, consumer engagement capabilities deliver a direct digital communication channel with consumers.

Retail Operations & Consumer Experience: The digital identity can be applied to product packaging, allowing for faster and more accurate inventory scanning, unique consumer experiences, and easier checkout.

Digimarc has also maintained a relationship with a consortium of central banks (the “Central Banks”) for over 2024 years, providing trusted technology to help deter digital counterfeiting of currency. The relationship was the first commercially successful large-scale use of our technologies and protects billions of banknotes in circulation globally.

We seek patent protection for our inventions to differentiate our products and technologies, mitigate infringement risks, and develop opportunities for licensing. Our broad patent portfolio covers a wide range of methods, applications, system architectures and processes.

Our intellectual property contains many innovations in digital watermarking, content and object recognition, 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. We seek patent protection for our inventions to differentiate our products and technologies, mitigate infringement risks, and develop opportunities for licensing. Our intellectual property contains many innovations in digital watermarking, content and object recognition, product authentication, and related fields. Our broad patent portfolio covers a wide range of methods, applications, system architectures and processes. As a result, we believe we have one of the world’s most extensive patent portfolios in digital watermarking and related fields, with approximately 1,000920 U.S. and foreign patents granted and applications pending as of June 30, 2022.March 31, 2023. The patents in our portfolio each have a life of approximately 20 years from the patent’s effective filing date.

On January 3, 2022, we completed the acquisition of EVRYTHNG. The EVRYTHNG product cloudProduct Cloud allows the combined company to now offer a complete automatic identification solutionsoftware as a service product digitization platform to existing customers and prospective customers. The aggregate initial consideration for the acquisition was 772804 thousand shares of common stock of the Company and warrants to purchase 231 thousand shares of common stock of the Company at the closing. A portion of the consideration was held back by us to secure any post-closing adjustments to the initial consideration and the indemnification obligations of the sellers. Company. The warrants expired unexercised. We also paid $4.0$4.0 million of closing costs on behalf of the EVRYTHNG sellers.The financial results of EVRYTHNG are consolidated with Digimarc’s financial results for the post-acquisition period.

COVID-19 Pandemic

The coronavirus 2019 (“COVID-19”) pandemic continues to pose 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 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.

Critical Accounting Policies and Estimates

Detailed information about our critical accounting policies and estimates is set forth in Part III, Item 15 of our 20212022 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. We also added a new critical accounting policy for “Business Combinations” in Note 1

24

 

Results of Operations

The following table presents statements of operations data for the periods indicated as a percentage of total revenue. The statements of operations for the three and six month periodsmonths ended June 30,March 31, 2022 reflect the operating results of EVRYTHNG from January 3, 2022, the date the acquisition closed, through June 30,March 31, 2022.

Unless stated otherwise, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to the three and six month periodsperiod ended June 30, 2022,March 31, 2023, and all changes discussed with respect to such periods reflect changes compared to the three and six month periodsperiod ended June 30, 2021.March 31, 2022.

 

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Percentages are percent of total revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

 

 

58

%

 

 

60

%

 

 

54

%

 

 

58

%

Subscription

 

 

42

 

 

 

40

 

 

 

46

 

 

 

42

 

Total revenue

 

 

100

 

 

 

100

 

 

 

100

 

 

 

100

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service (1)

 

 

23

 

 

 

24

 

 

 

24

 

 

 

24

 

Subscription (1)

 

 

11

 

 

 

9

 

 

 

13

 

 

 

10

 

Amortization expense on acquired intangible assets

 

 

14

 

 

 

 

 

 

15

 

 

 

 

Total cost of revenue

 

 

48

 

 

 

33

 

 

 

52

 

 

 

34

 

Gross profit

 

 

52

 

 

 

67

 

 

 

48

 

 

 

66

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

104

 

 

 

100

 

 

 

106

 

 

 

86

 

Research, development and engineering

 

 

78

 

 

 

67

 

 

 

80

 

 

 

64

 

General and administrative

 

 

58

 

 

 

146

 

 

 

72

 

 

 

98

 

Amortization expense on acquired intangible assets

 

 

4

 

 

 

 

 

 

4

 

 

 

 

Impairment of lease right of use assets and leasehold improvements

 

 

 

 

 

 

 

 

4

 

 

 

 

Total operating expenses

 

 

245

 

 

 

313

 

 

 

266

 

 

 

248

 

Operating loss

 

 

(193

)

 

 

(246

)

 

 

(217

)

 

 

(182

)

Other income, net

 

 

1

 

 

 

 

 

1

 

 

 

Loss before income taxes

 

 

(192

)

 

 

(246

)

 

 

(217

)

 

 

(182

)

Benefit (provision) for income taxes

 

 

3

 

 

(—)

 

 

 

3

 

 

(—)

 

Net loss

 

 

(189

%)

 

 

(246

%)

 

 

(214

%)

 

 

(182

%)

(1) Cost of revenue for Service and Subscription excludes amortization expense on acquired intangible assets.

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Percentages are percent of total revenue

        

Revenue:

        

Subscription

  50%  51%

Service

  50   49 

Total revenue

  100   100 

Cost of revenue:

        

Subscription (1)

  10   14 

Service (1)

  22   25 

Amortization expense on acquired intangible assets

  14   16 

Total cost of revenue

  46   55 

Gross profit

  54   45 

Operating expenses:

        

Sales and marketing

  80   107 

Research, development and engineering

  100   82 

General and administrative

  59   86 

Amortization expense on acquired intangible assets

  3   5 

Impairment of lease right of use assets and leasehold improvements

     8 

Total operating expenses

  242   288 

Operating loss

  (188)  (243)

Other income (loss), net

  9   (0)

Loss before income taxes

  (179)  (243)

(Provision) benefit for income taxes

  (0)  3 

Net loss

  (179%)  (240)%

(1)

Cost of revenue for Subscription and Service excludes amortization expense on acquired intangible assets.

 

Summary

Total revenue for the three month period ended June 30, 2022,March 31, 2023, increased $1.5$0.4 million, or 23%6%, to $7.7$7.8 million, compared to $7.4 million in the corresponding three month period ended June 30, 2021.March 31, 2022. The increase in revenue primarily reflects the contribution$1.0 million of higher subscription revenue from new commercial contracts and service revenue post acquisition from the EVRYTHNG Product Cloud and $0.6$0.4 million of higher service revenue due to a larger annual budget from HolyGrail 2.0 recycling projects,the Central Banks for project work in 2023 than 2022, reflecting both higher billing rates and project hours, partially offset by $0.3$0.6 million lessof lower subscription revenue as a result of sunsetting our Piracy Intelligence product. Changesproduct in foreign currency exchange rates also negatively impacted2022.

Total operating expenses for the three month period ended March 31, 2023, decreased $2.3 million, or 11%, to $19.0 million, compared to $21.4 million in the corresponding three month period ended March 31, 2022. The decrease in operating expenses primarily reflects $1.3 million of lower compensation costs due to lower headcount partially offset by annual compensation adjustments, $0.8 million of lower legal, accounting and tax costs incurred for the EVRYTHNG acquisition and financing activities last year, the impact of the $0.6 million impairment charge to write-down our lease right of use assets last year, $0.6 million of lower travel and conference costs, $0.6 million of lower consulting costs, and $0.4 million of lower recruiting costs, partially offset by $2.1 million of one-time severance costs incurred for organizational changes made in February 2023.

Revenue

  

Three Months Ended March 31,

  

Dollar

  

Percent

 
  

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

Revenue:

                

Subscription

 $3,885  $3,791  $94   2%

Service

  3,958   3,620   338   9%

Total

 $7,843  $7,411  $432   6%

Revenue (as % of total revenue):

                

Subscription

  50%  51%        

Service

  50%  49%        

Total

  100%  100%        

Subscription. Subscription revenue consists primarily of revenue earned from subscription fees for access to our software as a service platform and products and, to a lesser extent, licensing fees for software products. 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 $0.1 million increase in subscription revenue for the three month period ended June 30, 2022.

Total revenue for the six month period ended June 30, 2022, increased $2.2 million, or 17% to $15.2 million,March 31, 2023, compared to the corresponding sixthree month period ended June 30, 2021. The increase in revenueMarch 31, 2022, primarily reflects the contribution of subscription and service revenue post acquisition from the EVRYTHNG Product Cloud and $0.5$1.0 million of higher servicesubscription revenue from HolyGrail 2.0 recycling projects,new commercial contracts, partially offset by $0.5$0.6 million of upfront subscription revenue on a two-year contract signed in March 2021, $0.4 million lower service revenue due to timing of program work with the Central Banks, and $0.3 million less subscription revenue as a result of sunsetting our Piracy Intelligence product. Changesproduct in foreign currency exchange rates also negatively impacted revenue for the six month period ended June 30, 2022.


Total operating expenses for the three month period ended June 30, 2022, decreased $0.7 million, or 4%, to $18.9 million, compared to the corresponding three month period ended June 30, 2021. The decrease primarily reflects $7.5 million of costs recognized in the three month period ended June 30, 2021 associated with the Separation Agreement we entered into with our former chief executive officer in April 2021 and severance costs incurred with organizational changes we made in June 2021, partially offset by $4.2 million of EVRYTHNG operating expenses post acquisition and $2.5 million of higher compensation costs due to higher headcount and annual compensation adjustments.

Total operating expenses for the six month period ended June 30, 2022, increased $8.1 million, or 25%, to $40.3 million, compared to the corresponding six month period ended June 30, 2021. The increase primarily reflects $8.8 million of EVRYTHNG operating expenses post acquisition, $3.6 million of higher compensation costs due to higher headcount and annual compensation adjustments, a $0.6 million non-cash impairment charge to write-down our lease right of use assets and leasehold improvements, $0.6 million of increased facilities expense, $0.5 million of higher travel and conference costs, $0.5 million of higher legal, accounting and tax costs primarily related to the EVRYTHNG acquisition and financing activities, $0.4 million of higher consulting costs for acquisition integration and other corporate initiatives and $0.4 million of higher other general administrative costs, partially offset by $7.5 million of costs recognized in the six month period ended June 30, 2021 associated with the Separation Agreement we entered into with our former chief executive officer in April 2021 and severance costs incurred with organizational changes we made in June 2021.

Revenue

 

 

 

Three

 

 

Three

 

 

 

 

 

 

 

 

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

 

$

4,503

 

 

$

3,791

 

 

$

712

 

 

 

19

%

 

$

8,123

 

 

$

7,575

 

 

$

548

 

 

 

7

%

Subscription

 

 

3,244

 

 

 

2,487

 

 

 

757

 

 

 

30

%

 

 

7,035

 

 

 

5,403

 

 

 

1,632

 

 

 

30

%

Total

 

$

7,747

 

 

$

6,278

 

 

$

1,469

 

 

 

23

%

 

$

15,158

 

 

$

12,978

 

 

$

2,180

 

 

 

17

%

Revenue (as % of total revenue):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

 

 

58

%

 

 

60

%

 

 

 

 

 

 

 

 

 

 

54

%

 

 

58

%

 

 

 

 

 

 

 

 

Subscription

 

 

42

%

 

 

40

%

 

 

 

 

 

 

 

 

 

 

46

%

 

 

42

%

 

 

 

 

 

 

 

 

Total

 

 

100

%

 

 

100

%

 

 

 

 

 

 

 

 

 

 

100

%

 

 

100

%

 

 

 

 

 

 

 

 

Service. Service revenue consists primarily of revenue earned from the performance of software development services and, to a lesser extent, professional services. The majority of software development 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 our 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.2029. 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 $0.7$0.3 million increase in service revenue for the three month period ended June 30, 2022,March 31, 2023, compared to the corresponding three month period ended June 30, 2021,March 31, 2022, primarily reflects $0.6 millionthe impact of a larger annual budget from the Central Banks for project work in 2023 than 2022, which includes both higher service revenue from HolyGrail 2.0 recycling projectsbilling rates and the contribution of professional services revenue post acquisition related to the EVRYTHNG Product Cloud.project hours. 

Revenue by geography

  

Three Months Ended March 31,

  

Dollar

  

Percent

 
  

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

Revenue by geography:

                

Domestic

 $2,767  $2,363  $404   17%

International

  5,076   5,048   28   1%

Total

 $7,843  $7,411  $432   6%

Revenue (as % of total revenue):

                

Domestic

  35%  32%        

International

  65%  68%        

Total

  100%  100%        

Domestic. The $0.5 million increase in service revenue for the six month period ended June 30, 2022, compared to the corresponding six month period ended June 30, 2021, primarily reflects $0.5 million of higher service revenue from HolyGrail 2.0 recycling projects and the contribution of professional services revenue post acquisition related to the EVRYTHNG Product Cloud, partially offset by $0.4 million lower service revenue due to timing of program work with the Central Banks.

Subscription. Subscription revenue consists primarily of revenue earned from the licensing of software products and, to a lesser extent, the licensing and sale 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 $0.8 million increase in subscriptiondomestic revenue for the three month period ended June 30, 2022,March 31, 2023, compared to the corresponding three month period ended June 30, 2021,March 31, 2022, primarily reflects the contribution ofhigher subscription revenue post acquisition from the EVRYTHNG Product Cloud,new commercial contracts, partially offset by $0.3 million lesslower subscription revenue as a result of sunsetting our Piracy Intelligence product.product in 2022. 

The $1.6 million

International. There was no significant increase in subscriptioninternational revenue for the sixthree month period ended June 30, 2022,March 31, 2023, compared to the corresponding sixthree month period ended June 30, 2021, primarily reflects the contribution of subscriptionMarch 31, 2022, as higher service revenue post acquisition from the EVRYTHNG Product Cloud, partiallyCentral Banks was largely offset by $0.5 million of upfront subscription revenue on a two-year contract signed in March 2021 and $0.3 million lesslower subscription revenue as a result of sunsetting our Piracy Intelligence product.

Revenue by geographyproduct in 2022.

 

 

 

Three

 

 

Three

 

 

 

 

 

 

 

 

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

Revenue by geography:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

2,007

 

 

$

1,640

 

 

$

367

 

 

 

22

%

 

$

4,370

 

 

$

3,362

 

 

$

1,008

 

 

 

30

%

International

 

 

5,740

 

 

 

4,638

 

 

 

1,102

 

 

 

24

%

 

 

10,788

 

 

 

9,616

 

 

 

1,172

 

 

 

12

%

Total

 

$

7,747

 

 

$

6,278

 

 

$

1,469

 

 

 

23

%

 

$

15,158

 

 

$

12,978

 

 

$

2,180

 

 

 

17

%

Revenue (as % of total revenue):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

26

%

 

 

26

%

 

 

 

 

 

 

 

 

 

 

29

%

 

 

26

%

 

 

 

 

 

 

 

 

International

 

 

74

%

 

 

74

%

 

 

 

 

 

 

 

 

 

 

71

%

 

 

74

%

 

 

 

 

 

 

 

 

Total

 

 

100

%

 

 

100

%

 

 

 

 

 

 

 

 

 

 

100

%

 

 

100

%

 

 

 

 

 

 

 

 

Domestic. The $0.4 million increase in domestic revenue for the three month period ended June 30, 2022, compared to the corresponding three month period ended June 30, 2021, primarily reflects the contribution of domestic revenue post acquisition from the EVRYTHNG Product Cloud.

The $1.0 million increase in domestic revenue for the six month period ended June 30, 2022, compared to the corresponding six month period ended June 30, 2021, primarily reflects the contribution of domestic revenue post acquisition from the EVRYTHNG Product Cloud.

International. The $1.1 million increase in international revenue for the three month period ended June 30, 2022, compared to the corresponding three month period ended June 30, 2021, primarily reflects $0.6 million of higher service revenue from HolyGrail 2.0 recycling projects and the contribution of international revenue post acquisition from the EVRYTHNG Product Cloud.

The $1.2 million increase in international revenue for the six month period ended June 30, 2022, compared to the corresponding six month period ended June 30, 2021, primarily reflects $0.5 million of higher service revenue from HolyGrail 2.0 recycling projects and the contribution of international revenue post acquisition from the EVRYTHNG Product Cloud, partially offset by $0.5 million of upfront subscription revenue on a two-year contract signed in March 2021 with an international customer and $0.4 million lower service revenue due to timing of program work with the Central Banks.



Revenue by market

 

 

Three

 

 

Three

 

 

 

 

 

 

 

 

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

Government:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

 

$

3,389

 

 

$

3,522

 

 

$

(133

)

 

 

(4

)%

 

$

6,661

 

 

$

7,107

 

 

$

(446

)

 

 

(6

)%

Subscription

 

 

488

 

 

 

300

 

 

 

188

 

 

 

63

%

 

 

788

 

 

 

600

 

 

 

188

 

 

 

31

%

Total Government

 

$

3,877

 

 

$

3,822

 

 

$

55

 

 

 

1

%

 

$

7,449

 

 

$

7,707

 

 

$

(258

)

 

 

(3

)%

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

 

$

1,114

 

 

$

269

 

 

$

845

 

 

 

314

%

 

$

1,462

 

 

$

468

 

 

$

994

 

 

 

212

%

Subscription

 

 

2,756

 

 

 

2,187

 

 

 

569

 

 

 

26

%

 

 

6,247

 

 

 

4,803

 

 

 

1,444

 

 

 

30

%

Total Commercial

 

$

3,870

 

 

$

2,456

 

 

$

1,414

 

 

 

58

%

 

$

7,709

 

 

$

5,271

 

 

$

2,438

 

 

 

46

%

Total

 

$

7,747

 

 

$

6,278

 

 

$

1,469

 

 

 

23

%

 

$

15,158

 

 

$

12,978

 

 

$

2,180

 

 

 

17

%

Government

  

Three Months Ended March 31,

  

Dollar

  

Percent

 
  

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

Commercial:

                

Subscription

 $3,585  $3,491  $94   3%

Service

  298   348   (50)  (14)%

Total Commercial

 $3,883  $3,839  $44   1%
                 

Government:

                

Subscription

 $300  $300  $   %

Service

  3,660   3,272   388   12%

Total Government

 $3,960  $3,572  $388   11%

Total

 $7,843  $7,411  $432   6%

Commercial. The changes in government revenue for the three and six month periods ended June 30, 2022, compared to the corresponding three and six month periods ended June 30, 2021, reflects the timing of service revenue from program work with the Central Banks and $0.2 million of subscription revenue from a one-time license fee payment from a government supplier in May 2022.

Commercial. The $1.4 million increasechange in commercial revenue for the three month period ended June 30, 2022,March 31, 2023, compared to the corresponding three month period ended June 30, 2021, primarilyMarch 31, 2022, reflects the contribution$1.0 million of higher subscription and service revenue post acquisition from the EVRYTHNG Product Cloud andnew commercial contracts, partially offset by $0.6 million of higher service revenue from HolyGrail 2.0 recycling projects, partially offset by $0.3 lesslower subscription revenue as a result of sunsetting our Piracy Intelligence product.product in 2022.

Government. The $2.4$0.4 million increase in commercialgovernment revenue for the sixthree month period ended June 30, 2022,March 31, 2023, compared to the corresponding sixthree month period ended June 30, 2021,March 31, 2022, primarily reflects the contributionimpact of subscription and service revenue post acquisitiona larger annual budget from the EVRYTHNG Product CloudCentral Banks for project work in 2023 than 2022, which includes both higher billing rates and $0.5 million of higher service revenue from HolyGrail 2.0 recycling projects, partially offset by $0.5 million of upfront subscription revenue on a two-year contract signed in March 2021 and $0.3 less subscription revenue as a result of sunsetting our Piracy Intelligence product.project hours. 

Cost of revenue

Service. Cost of service revenue primarily includes:

compensation, benefits, incentive compensation in the form of cash and stock-based compensation and related costs of our software developers, quality assurance personnel, professional services team 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 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 cloud hosting costs and image search data fees to support our subscription products;

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

license fees paid to technology solution providers when we sell a combined solution; and

amortization of capitalized patent costs and patent maintenance fees.

Amortization expense on acquired intangible assets. Includes:

amortization expense recognized on the developed technology intangible asset acquired in the EVRYTHNG acquisition.

 

Gross profit

 

 

Three

 

 

Three

 

 

 

 

 

 

 

 

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

Three Months Ended March 31,

  

Dollar

  

Percent

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription (1)

 $3,090  $2,749  $341  12%

Service (1)

 

$

2,759

 

 

$

2,276

 

 

$

483

 

 

 

21

%

 

$

4,548

 

 

$

4,490

 

 

$

58

 

 

 

1

%

  2,243   1,789   454  25%

Subscription (1)

 

 

2,358

 

 

 

1,953

 

 

 

405

 

 

 

21

%

 

 

5,107

 

 

 

4,078

 

 

 

1,029

 

 

 

25

%

Amortization expense on acquired intangible assets

 

 

(1,120

)

 

 

 

 

 

(1,120

)

 

>( 100)%

 

 

 

(2,314

)

 

 

 

 

 

(2,314

)

 

>( 100)%

 

  (1,089)  (1,194)  105  (9)%

Total

 

$

3,997

 

 

$

4,229

 

 

$

(232

)

 

 

(5

)%

 

$

7,341

 

 

$

8,568

 

 

$

(1,227

)

 

 

(14

)%

 $4,244  $3,344  $900  27%

Gross Profit Margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription (1)

 80% 73%     

Service (1)

 57% 49%     

Total

 

 

52

%

 

 

67

%

 

 

 

 

 

 

 

 

 

 

48

%

 

 

66

%

 

 

 

 

 

 

 

 

 54% 45%     

Service (1)

 

 

61

%

 

 

60

%

 

 

 

 

 

 

 

 

 

 

56

%

 

 

59

%

 

 

 

 

 

 

 

 

Subscription (1)

 

 

73

%

 

 

79

%

 

 

 

 

 

 

 

 

 

 

73

%

 

 

75

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Gross Profit and Gross Profit Margin for Subscription and Service excludes amortization expense on acquired intangible assets.

 

(1)Gross Profit and Gross Profit Margin for Service and Subscription excludes amortization expense on acquired intangible assets.

The decreaseincrease of $0.2$0.9 million in total gross profit for the three month period ended June 30, 2022,March 31, 2023, compared to the corresponding three month period ended June 30, 2021,March 31, 2022, was primarily due to $1.1$0.5 million of higher service gross profit contribution reflecting higher service revenue and lower professional services costs, $0.3 million of higher subscription gross profit contribution reflecting higher subscription revenue, a favorable mix of subscription revenue, and lower platform costs, and $0.1 million of lower amortization expense recognized on the developed technologyacquired intangible asset acquiredassets due to changes in the EVRYTHNG acquisition, partially offset by higher subscription and service revenue.foreign currency exchange rates. 

The decrease of $1.2 millionincrease in totalsubscription gross profit margin, excluding amortization expense on acquired intangible assets, for the sixthree month period ended June 30, 2022,March 31, 2023, compared to the corresponding sixthree month period ended June 30, 2021,March 31, 2022, was primarily due to $2.3 millionthe increase in subscription revenue combined with a favorable mix of amortization expense recognized on the developed technology intangible asset acquired in the EVRYTHNG acquisition, partially offset by higher subscription revenue, and service revenue.lower platform costs.

The changesincrease in service gross profit margin, excluding amortization expense on acquired intangible assets, for the three and six month periodsperiod ended June 30, 2022,March 31, 2023, compared to the corresponding three and six month periodsperiod ended June 30, 2021,March 31, 2022, was primarily due to higher service revenue combined with lower professional services hours being incurred above or below the hours billable under service contracts.costs.

The decreases in subscription gross profit margin, excluding amortization expense on acquired intangible assets, for the three and six month periods ended June 30, 2022, compared to the corresponding three and six month periods ended June 30, 2021, were primarily due to the mix of subscription revenue as some subscription products have higher margins than others.

Operating expenses

Sales and marketing

 

  

Three Months Ended March 31,

  

Dollar

  

Percent

 
  

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

Sales and marketing

 $6,298  $7,945  $(1,647)  (21)%

Sales and marketing (as % of total revenue)

  80%  107%        

 

 

Three

 

 

Three

 

 

 

 

 

 

 

 

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

Sales and marketing

 

$

8,073

 

 

$

6,277

 

 

$

1,796

 

 

 

29

%

 

$

16,018

 

 

$

11,218

 

 

$

4,800

 

 

 

43

%

Sales and marketing

   (as % of total revenue)

 

 

104

%

 

 

100

%

 

 

 

 

 

 

 

 

 

 

106

%

 

 

86

%

 

 

 

 

 

 

 

 

28

 

Sales and marketing expenses consist primarily of:

compensation, benefits, incentive compensation in the form of cash and stock-based compensation and related costs of our sales, marketing, product, operations and customer support personnel;

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

professional services, consulting and outside contractor costs for sales and marketing and product initiatives; and

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


 

The increasedecrease in sales and marketing expenses for the three month period ended June 30, 2022,March 31, 2023, compared to the corresponding three month period ended June 30, 2021,March 31, 2022, was primarily due to:

EVRYTHNG sales and marketing expenses of $2.3 million post acquisition;

increaseddecreased compensation costs of $0.7$1.1 million reflecting higherlower headcount, andinclusive of transfers to other departments, partially offset by annual compensation adjustments;adjustments;

increaseddecreased infrastructure and centralized costs of facilities and information technology of $0.2$0.6 million; partially offset by

severance costs of $1.3 million related to organizational changes we made in June 2021.

The increase in sales and marketing expenses for the six month period ended June 30, 2022, compared to the corresponding six month period ended June 30, 2021, was primarily due to:

EVRYTHNG sales and marketing expenses of $4.6 million post acquisition;

increased compensation costs of $0.7 million reflecting higher headcount and annual compensation adjustments;

increaseddecreased travel and conference expenses of $0.5 million; and

increased infrastructure and centralizedlower recruiting costs of facilities and information technology of $0.5$0.2 million; partially offset by

one-time severance costs of $1.3$0.8 million related toincurred for organizational changes we made in June 2021.February 2023.

Research, development and engineering

 

 

 

Three

 

 

Three

 

 

 

 

 

 

 

 

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

Research, development and

   engineering

 

$

6,065

 

 

$

4,213

 

 

$

1,852

 

 

 

44

%

 

$

12,156

 

 

$

8,344

 

 

$

3,812

 

 

 

46

%

Research, development and

   engineering (as % of total revenue)

 

 

78

%

 

 

67

%

 

 

 

 

 

 

 

 

 

 

80

%

 

 

64

%

 

 

 

 

 

 

 

 

  

Three Months Ended March 31,

  

Dollar

  

Percent

 
  

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

Research, development and engineering

 $7,826  $6,091  $1,735   28%

Research, development and engineering (as % of total revenue)

  100%  82%        

Research, development and engineering expenses consist primarily of:

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

payments to outside contractors;contractors for software development services;

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 June 30, 2022,March 31, 2023, compared to the corresponding three month period ended June 30, 2021,March 31, 2022, was primarily due to:

one-time severance costs of $1.1 million incurred for organizational changes we made in February 2023; and

EVRYTHNG research, development and engineering expenses of $0.9 million post acquisition;

increased compensation costs of $0.9$0.8 million reflecting higher headcount, inclusive of transfers from other departments, and annual compensation adjustments; andpartially offset by

increaseddecreased infrastructure and centralized costs of facilities and information technology of $0.2$0.5 million.

The increase in research, development and engineering expenses for the six month period ended June 30, 2022, compared to the corresponding six month period ended June 30, 2021, was primarily due to:

increased compensation costs of $1.8 million reflecting higher headcount and annual compensation adjustments;

EVRYTHNG research, development and engineering expenses of $1.6 million post acquisition; and

increased infrastructure and centralized costs of facilities and information technology of $0.6 million.


 

General and administrative

 

  

Three Months Ended March 31,

  

Dollar

  

Percent

 
  

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

General and administrative

 $4,627  $6,408  $(1,781)  (28)%

General and administrative (as % of total revenue)

  59%  86%        

 

 

Three

 

 

Three

 

 

 

 

 

 

 

 

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

General and administrative

 

$

4,487

 

 

$

9,175

 

 

$

(4,688

)

 

 

(51

)%

 

$

10,895

 

 

$

12,668

 

 

$

(1,773

)

 

 

(14

)%

General and administrative

   (as % of total revenue)

 

 

58

%

 

 

146

%

 

 

 

 

 

 

 

 

 

 

72

%

 

 

98

%

 

 

 

 

 

 

 

 

29

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 sales and marketing and research, development and engineering.

General and administrative expenses consist primarily of:

compensation, benefits and incentive compensation in the form of cash and stock-based compensation and related costs of our 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 outside legal fees and translation costs, related to the filing and maintenance of our intellectual property; and

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 decrease in general and administrative expenses for the three month period ended June 30, 2022,March 31, 2023, compared to the corresponding three month period ended June 30, 2021,March 31, 2022, was primarily due to:

decreased compensation costs of $1.0 million reflecting lower headcount, inclusive of transfers to other departments, partially offset by annual compensation adjustments;

,

$6.2decreased legal, accounting and tax costs of $0.8 million due to costs incurred for the EVRYTHNG acquisition and financing activities in the first quarter of costs associated with the Separation Agreement we entered into with our former chief executive officer in April 2021 upon his retirement;2022;

$0.6 million impairment charge to write-down our lease right of use assets and leasehold improvements in the first quarter of 2022; and

decreased consulting costs of $0.5 million largely relate to the EVRYTHNG acquisition and integration; partially offset by

increased infrastructure and centralized costs of facilities and information technology of $0.5$0.8 million; partially offset byand

increased compensation cost of $1.0 million reflecting higher headcount and annual compensation adjustments;

EVRYTHNG general and administrative expenses of $0.7 million post acquisition; and

increased facilitiesone-time severance costs of $0.2 million reflecting non-cash rent expense on new corporate headquarters and office moving costs.

The decrease in general and administrative expenses for the six month period ended June 30, 2022, compared to the corresponding six month period ended June 30, 2021, was primarily due to:

incurred for organizational changes we made in February 2023.

$6.2 million of costs associated with the Separation Agreement we entered into with our former chief executive officer in April 2021 upon his retirement;

decreased infrastructure and centralized costs of facilities and information technology of $1.0 million; partially offset by

EVRYTHNG general and administrative expenses of $1.9 million post acquisition;

increased compensation cost of $1.2 million reflecting higher headcount and annual compensation adjustments;

increased facilities costs of $0.6 million reflecting non-cash rent expense on new corporate headquarters and office moving costs;

increased legal, accounting and tax costs of $0.5 million primarily related to the EVRYTHNG acquisition and financing activities;

increased consulting costs of $0.4 million related to acquisition integration and other corporate initiatives;

 


 

increased other general administrative costs of $0.4 million; and

increased operating taxes of $0.2 million reflecting the stamp tax due in the United Kingdom for the EVRYTHNG acquisition.

Amortization expense on acquired intangible assets

 

 

Three

 

 

Three

 

 

 

 

 

 

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

Three Months Ended March 31,

 

Dollar

 

Percent

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

Amortization expense on acquired intangible assets

 

$

321

 

 

$

 

 

$

321

 

 

> 100%

 

$

663

 

 

$

 

 

$

663

 

 

> 100%

 $260  $342  $(82) (24)%

Amortization expense on acquired intangible assets

(as % of total revenue)

 

 

4

%

 

—%

 

 

 

 

 

 

 

 

 

4

%

 

—%

 

 

 

 

 

 

 

 3% 5%     

Amortization expense on acquired intangible assets relates to amortization expense recognized on the customer relationships intangible asset acquired in the EVRYTHNG acquisition.

The decrease in amortization expense on acquired intangible assets primarily reflects the impact of changes in foreign currency exchange rates. 

Impairment of lease right of use assets and leasehold improvements

 

 

Three

 

 

Three

 

 

 

 

 

 

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

Three Months Ended March 31,

 

Dollar

 

Percent

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

Impairment of lease right of use assets and leasehold improvements

 

$

 

 

$

 

 

$

 

 

—%

 

$

574

 

 

$

 

 

$

574

 

 

> 100%

 $  $574  $(574) > (100)% 

Impairment of lease right of use assets and leasehold improvements

(as % of total revenue)

 

—%

 

 

—%

 

 

 

 

 

 

 

 

 

4

%

 

—%

 

 

 

 

 

 

 

 0% 8%     

The decrease in impairment of lease right of use assets and leasehold improvements relates to the impairment recorded on our prior corporate headquarters andthat was triggered upon moving to our new corporate headquarters in March 2022.

Stock-based compensation

 

 

Three

 

 

Three

 

 

 

 

 

 

 

 

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

Three Months Ended March 31,

 

Dollar

 

Percent

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

Cost of revenue

 

$

265

 

 

$

178

 

 

$

87

 

 

 

49

%

 

$

466

 

 

$

351

 

 

$

115

 

 

 

33

%

 $238  $201  $37  18%

Sales and marketing

 

 

1,149

 

 

 

1,550

 

 

 

(401

)

 

 

(26

)%

 

 

1,893

 

 

 

1,990

 

 

 

(97

)

 

 

(5

)%

 761  744  17  2%

Research, development and engineering

 

 

643

 

 

 

405

 

 

 

238

 

 

 

59

%

 

 

1,150

 

 

 

801

 

 

 

349

 

 

 

44

%

 936  507  429  85%

General and administrative

 

 

1,217

 

 

 

4,604

 

 

 

(3,387

)

 

 

(74

)%

 

 

2,233

 

 

 

5,605

 

 

 

(3,372

)

 

 

(60

)%

  941   1,016   (75) (7)%

Total

 

$

3,274

 

 

$

6,737

 

 

$

(3,463

)

 

 

(51

)%

 

$

5,742

 

 

$

8,747

 

 

$

(3,005

)

 

 

(34

)%

 $2,876  $2,468  $408  17%

The decreasesincrease in stock-based compensation expense for the three and six month periodsperiod ended June 30, 2022,March 31, 2023, compared to the corresponding three and six month periodsperiod ended June 30, 2021, wereMarch 31, 2022, was primarily due to $5.0the result of one-time stock compensation costs of $0.6 million of non-cash stock-based compensation expense from the acceleration of stock awards associated with the Separation Agreement we entered into with our former chief executive officer in April 2021, and withincurred for the organizational changes we made in June 2021, partially offset by stock awards granted to new employees, including employees from EVRYTHNG, and annual stock award grants to existing employees.February 2023. 

We anticipate incurring an additional $22,060$21,576 in stock-based compensation expense through June 30, 2026,March 31, 2027, for awards outstanding as of June 30, 2022.March 31, 2023.


Other income, net

 

 

Three

 

 

Three

 

 

 

 

 

 

 

 

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

Other income, net

 

$

93

 

 

$

18

 

 

$

75

 

 

 

417

%

 

$

89

 

 

$

28

 

 

$

61

 

 

 

218

%

Other income, net (as % of total revenue)

 

 

1

%

 

—%

 

 

 

 

 

 

 

 

 

 

 

1

%

 

—%

 

 

 

 

 

 

 

 

 

  

Three Months Ended March 31,

  

Dollar

  

Percent

 
  

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

Other income (loss), net

 $745  $(4) $749   18,725%

Other income (loss), net (as % of total revenue)

  9%  (0)%        

The increasesincrease in other income (loss), net for the three and six month periodsperiod ended June 30, 2022,March 31, 2023, compared to the corresponding three and six month periodsperiod ended June 30, 2021, wereMarch 31, 2022, was primarily due to higher interest income due to higher interest rates on investments.our cash equivalents and marketable securities and the impact of refundable tax credits.

Income Taxes

The provision(provision) benefit for income taxes reflects current taxes, deferred taxes, and withholding taxes. The effective tax rate for the sixthree month periods ended June 30,March 31, 2023 and 2022 was 0% and 2021 was 1% and 0%, respectively. Our effective tax rate is significantly lower than our statutory tax rate because we have a full valuation allowance recorded against our deferred tax assets. The tax benefit for the six month period ended June 30, 2022 reflects an estimated refundable tax credit to be filed for in the United Kingdom for the 2022 tax year.

The valuation allowance against deferred tax assets as of June 30, 2022,March 31, 2023, was $69,834,$86,804, an increase of $5,561$3,804 from $64,273$83,000 as of December 31, 2021.2022.

We continually assess the applicability of a valuation allowance against our deferred tax assets. Based upon the positive and negative evidence available as of June 30, 2022,March 31, 2023, 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.

Non-GAAP Financial Measures

The following discussion and analysis includes both financial measures in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) as well as non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that exclude amounts that are not normally excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to, GAAP financial measures. Non-GAAP financial measures may not be indicative of the historical operating results of the Company nor are they intended to be predictive of potential future results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP. Our management uses and relies on Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per common share (diluted), which are all non-GAAP financial measures. We believe that both management and shareholders benefit from referring to the following non-GAAP financial measures in planning, forecasting and analyzing future periods.

Our management uses these non-GAAP financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparisons. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the described excluded items.

We define Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per common share (diluted) excluding the adjustments in the table below. These non-GAAP financial measures are an important measure of our operating performance because they allow management, investors and analysts to evaluate and assess our core operating results from period-to-period after removing non-cash and non-recurring activities that can affect comparability.

We have included a reconciliation of our financial measures calculated in accordance with GAAP to the most comparable non-GAAP financial measures. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between us and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measures and the corresponding GAAP measures provided by each company under applicable SEC rules.

The following table presents a reconciliation of Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per common share (diluted) for the three months ended March 31, 2023 and six month periods ended June 30, 2022:

 

 

Three

 

 

Three

 

 

Six

 

 

Six

 

 

 

Months

 

 

Months

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

GAAP gross profit

 

$

3,997

 

 

$

4,229

 

 

$

7,341

 

 

$

8,568

 

Amortization of acquired intangible assets

 

 

1,120

 

 

 

 

 

 

2,314

 

 

 

 

Amortization and write-off of other intangible assets

 

 

144

 

 

 

144

 

 

 

285

 

 

 

286

 

Stock-based compensation

 

 

265

 

 

 

178

 

 

 

466

 

 

 

351

 

Non-GAAP gross profit

 

$

5,526

 

 

$

4,551

 

 

$

10,406

 

 

$

9,205

 

Non-GAAP gross profit margin

 

 

71

%

 

 

72

%

 

 

69

%

 

 

71

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP operating expenses

 

$

18,946

 

 

$

19,665

 

 

$

40,306

 

 

$

32,230

 

Depreciation and write-off of property and equipment

 

 

(330

)

 

 

(354

)

 

 

(720

)

 

 

(717

)

Amortization of acquired intangible assets

 

 

(321

)

 

 

 

 

 

(663

)

 

 

 

Amortization and write-off of other intangible assets

 

 

(29

)

 

 

(24

)

 

 

(59

)

 

 

(59

)

Amortization of lease right of use assets under operating leases

 

 

(249

)

 

 

(122

)

 

 

(520

)

 

 

(240

)

Stock-based compensation

 

 

(3,009

)

 

 

(6,559

)

 

 

(5,276

)

 

 

(8,396

)

Impairment of lease right of use assets and leasehold improvements

 

 

 

 

 

 

 

 

(574

)

 

 

 

Acquisition-related expenses

 

 

(3

)

 

 

 

 

 

(447

)

 

 

 

Non-GAAP operating expenses

 

$

15,005

 

 

$

12,606

 

 

$

32,047

 

 

$

22,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP net loss

 

$

(14,639

)

 

$

(15,422

)

 

$

(32,420

)

 

$

(23,644

)

Total adjustments to gross profit

 

 

1,529

 

 

 

322

 

 

 

3,065

 

 

 

637

 

Total adjustments to operating expenses

 

 

3,941

 

 

 

7,059

 

 

 

8,259

 

 

 

9,412

 

Non-GAAP net loss

 

$

(9,169

)

 

$

(8,041

)

 

$

(21,096

)

 

$

(13,595

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP loss per common share (diluted)

 

$

(0.75

)

 

$

(0.94

)

 

$

(1.76

)

 

$

(1.44

)

Non-GAAP net loss

 

$

(9,169

)

 

$

(8,041

)

 

$

(21,096

)

 

$

(13,595

)

Non-GAAP loss per common share (diluted)

 

$

(0.47

)

 

$

(0.49

)

 

$

(1.14

)

 

$

(0.83

)

  

Three Months Ended March 31,

 
  

2023

  

2022

 

GAAP gross profit

 $4,244  $3,344 

Amortization of acquired intangible assets

  1,089   1,194 

Amortization and write-off of other intangible assets

  144   141 

Stock-based compensation

  238   201 

Non-GAAP gross profit

 $5,715  $4,880 

Non-GAAP gross profit margin

  73%  66%
         

GAAP operating expenses

 $19,011  $21,360 

Depreciation and write-off of property and equipment

  (428)  (390)

Amortization of acquired intangible assets

  (260)  (342)

Amortization and write-off of other intangible assets

  (39)  (30)

Amortization of lease right of use assets under operating leases

  (166)  (271)

Stock-based compensation

  (2,638)  (2,267)

Impairment of lease right of use assets and leasehold improvements

     (574)

Acquisition-related expenses

     (444)

Non-GAAP operating expenses

 $15,480  $17,042 
         

GAAP net loss

 $(14,040) $(17,781)

Total adjustments to gross profit

  1,471   1,536 

Total adjustments to operating expenses

  3,531   4,318 

Non-GAAP net loss

 $(9,038) $(11,927)
         

GAAP loss per common share (diluted)

 $(0.70) $(1.03)

Non-GAAP net loss

 $(9,038) $(11,927)

Non-GAAP loss per common share (diluted)

 $(0.45) $(0.69)

Non-GAAP gross profit for the three month periodmonths ended June 30, 2022,March 31, 2023, increased by $1.0$0.8 million compared to the three month periodmonths ended June 30, 2021.March 31, 2022. The increase was primarily due to higher subscription and service revenue.revenue and lower platform and professional services costs. 

Non-GAAP gross profit margin for the six month periodthree months ended June 30, 2022,March 31, 2023, increased by $1.2 millionto 73% compared to 66% for the corresponding six month periodthree months ended June 30, 2021.March 31, 2022. The increase was primarily due to higher subscription and service revenue.

Non-GAAP gross profit margin for the three and six month periods ended June 30, 2022, compared to the three and six month periods ended June 30, 2021, decreased primarily due to therevenue combined with a favorable mix of subscription revenue as some subscription products haveand lower platform costs and higher margins than others.service revenue combined with lower professional services costs. 

Non-GAAP operating expenses for the three month periodmonths ended June 30, 2022, increasedMarch 31, 2023, decreased by $2.4$1.6 million compared to the three month periodmonths ended June 30, 2021.March 31, 2022. The increase includes $3.3decrease was primarily due to $1.0 million of EVRYTHNG Non-GAAP operating expenses post acquisition, after excluding the EVRYTHNG portion of thelower compensation costs due to lower headcount partially offset by annual compensation adjustments, above for amortization expense on acquired intangible assets of $0.3 million and stock-based compensation of $0.5 million. Excluding the impact of EVRYTHNG, Non-GAAP operating expenses decreased $0.9 million primarily reflecting $2.5$0.6 million of cashlower travel and conference costs, associated with the Separation Agreement we entered into with our former chief executive officer in April 2021$0.6 million of lower consulting costs, $0.4 million of lower recruiting costs, and $0.4 million of lower non-acquisition related legal and accounting costs, partially offset by $1.5 million of one-time cash severance costs incurred withpayments for organizational changes we made in June 2021, partially offset by $1.4 millionFebruary 2023. 

33

expenses post acquisition, after excluding the EVRYTHNG portion of the adjustments above for amortization expense on acquired intangible assets of $0.7 million and stock-based compensation of $0.8 million. Excluding the impact of EVRYTHNG, Non-GAAP operating expenses increased $2.0 million primarily reflecting $2.4 million of higher cash compensation costs due to higher headcount and annual compensation adjustments, $0.5 million of higher travel and conference costs, $0.4 million of higher consulting costs for acquisition integration and other corporate initiatives, $0.4 million of other general administrative costs and $0.3 million of higher legal, accounting and tax costs for financing and other activities, partially offset by $2.5 million of cash costs associated with the Separation Agreement we entered into with our former chief executive officer in April 2021 and cash severance costs incurred with organizational changes we made in June 2021.

Liquidity and Capital Resources

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Working capital

 

$

67,785

 

 

$

36,295

 

Current ratio (1)

 

7.1:1

 

 

5.7:1

 

Cash, cash equivalents and short-term

   marketable securities

 

$

68,390

 

 

$

33,326

 

Long-term marketable securities

 

$

 

 

$

8,292

 

Total cash, cash equivalents and

   marketable securities

 

$

68,390

 

 

$

41,618

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 

Working capital

 $43,985  $54,007 

Current ratio (1)

  

6.3:1

   

6.3:1

 
         

Cash, cash equivalents and short-term marketable securities

 $43,025  $52,542 

Long-term marketable securities

      

Total cash, cash equivalents and marketable securities

 $43,025  $52,542 

(1)

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

The $26.8$9.5 million increasedecrease in cash, cash equivalents and marketable securities at June 30, 2022,March 31, 2023, from December 31, 2021,2022, resulted primarily from:

net proceeds from the issuance of common stock; partially offset by

cash used in operations;

��

net cash paid for the acquisition of EVRYTHNG;

purchases of common stock related to tax withholding in connection with the vesting of restricted stock, restricted stock units, and performance stock units; 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 our marketable securities with major financial institutions. At times deposits may exceed insured limits. Marketable securities primarily include commercial paper, federal agency notes, and corporate notes, and pre-refunded municipals.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, 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, cash equivalents, and marketable securities, or $15,000, whichever is greater, to be invested in any one industry category (e.g., financial, energy, etc.) at the time of purchase. As a result, we believe our credit risk associated with cash, cash equivalents, and marketable securities to be minimal.


Operating Cash Flow

The components of cash flows used in operating activities were:

 

 

Six

 

 

Six

 

 

 

 

 

 

 

 

 

 

Months

 

 

Months

 

 

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

Dollar

 

 

Percent

 

 

June 30,

 

 

June 30,

 

 

Increase

 

 

Increase

 

 

Three Months Ended March 31,

 

Dollar

 

Percent

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

 

2023

  

2022

  

Increase/(Decrease)

  

Increase/(Decrease)

 

Net loss

 

$

(32,420

)

 

$

(23,644

)

 

$

8,776

 

 

 

37

%

 $(14,040) $(17,781) $(3,741) (21)%

Non-cash items

 

 

10,877

 

 

 

9,551

 

 

 

(1,326

)

 

 

(14

)%

 5,002  5,436  434  8%

Changes in operating assets and liabilities

 

 

(4,124

)

 

 

1,607

 

 

 

5,731

 

 

 

357

%

  294  489  195  40%

Net cash used in operating activities

 

$

(25,667

)

 

$

(12,486

)

 

$

13,181

 

 

 

106

%

 $(8,744) $(11,856) $(3,112) (26)%

 

Cash flows used in operating activities for the sixthree month period ended June 30, 2022, increasedMarch 31, 2023, decreased by $13,181,$3,112, compared to the corresponding sixthree month period ended June 30, 2021,March 31, 2022, primarily as a result of a larger$3,741 lower net loss, andpartially offset by changes in non-cash items and operating assets and liabilities, partially offset by an increaseliabilities. The change in non-cash items included in net loss. Changes in operating assets and liabilities primarily reflects changes in the timing and amounts of accounts receivable and accounts payable. Non-cash items increased reflecting higher amortization of acquired intangible assets, thelower impairment on lease right of use assets and leasehold improvements,amortization of acquired intangible assets, partially offset by lowerhigher stock-based compensation. The changes in operating assets and liabilities are largely due to the timing and amount of customer receipts and vendor payments. 

Cash flows provided by investing activities for the sixthree month period ended June 30, 2022,March 31, 2023, compared to the corresponding sixthree month period ended June 30, 2021, decreasedMarch 31, 2022, increased by $16,181,$6,217. The increase reflects higher net proceeds from $17,922 to $1,741, primarily as a result of lower net maturities of marketable securities, and $3,512 of net cash paid for the acquisition of EVRYTHNG. in January 2022, and lower purchases of property and equipment. 

Cash flows fromused in financing activities for the sixthree month period ended June 30, 2022,March 31, 2023, compared to the corresponding sixthree month period ended June 30, 2021, improvedMarch 31, 2022, increased by $61,003, from $3,774 of cash used to $57,229 of cash provided, primarily as a result of the net proceeds of $58,220 from the registered direct offering in April 2022 and lower repurchases$84. The increase reflects higher purchases of shares of common stock for tax withholding in satisfactionconnection with the vesting of required withholding tax liability on employee stock awards.

Future Cash Expectations

We believe that our current cash, cash equivalents, and 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.

Registered Direct Offering

On April 5, 2022, we entered into purchase agreements with certain investors providing for the issuance and sale by us of 2,250 common shares in a registered direct offering. The common shares were offered at a price of $25.90 per share, and the gross cash proceeds to us were $58,275. We incurred $55 of legal costs related to the offering. The closing of the registered direct offering occurred on April 7, 2022.

Shelf Registration

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 expired on June 9, 2020. Under the new shelf registration statement, we may sell securities in one or more offerings up to $100,000. As of March 31, 2023, $34,633 remains available under the shelf registration. The new shelf registration statement will expire on July 24, 2023.

Equity Distribution Agreement

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. We did not sell any shares under this Equity Distribution Agreement during the sixthree months ended June 30, 2022March 31, 2023 and 2021. 2022. As of June 30, 2022, $6,932March 31, 2023, $1,948 remains available for future issuance under the Equity Distribution Agreement.

Shelf Registration

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 expired in June 2020. Under the new shelf registration statement, we may sell securities in one or more offerings up to $100,000. As of June 30, 2022, $39,617 remains available under the shelf registration. The new shelf registration statement will expire in July 2023.

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 negatively impacted our share price. These factors may inhibit our near-term ability to obtain financing.

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 20212022 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 expectations regarding the acquisition of EVRYTHNG and its impact on our business, including our expectations regarding no additional shares being issued in connection with the acquisition except any holdback shares;acquisition;

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;

our forgiven PPP loan;

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

the concentration of most of our revenue among few customers;

and the trends and sources of future revenue;

anticipated successful advocacy of our technology by our partners;

our belief regarding the global deployment of our products;

our beliefs regarding potential outcomes of participating in the HolyGrail 2.0 initiative and the utility of our products in the recycling industry;

our ESG projects and ESG Impact Report;

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;

anticipated effect of our adoption of accounting pronouncements;

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, judgments and assumptions related to impairment testing;

variability of contracted arrangements in response to changes in circumstances underlying the original contractual 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;

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;

our expectations regarding our ability to meet future financial obligations as they become due within the coming fiscal year;

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 strength of our competitive position and 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 and the effect of increasing diversity within our workforce;

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 2021 Part��2022 Part I, Item 1A. “Risk Factors” of our 20212022 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.

Item4.Controls and Procedures.

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 June 30, 2022,March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We completed our acquisition of EVRYTHNG on January 3, 2022. We are working to integratehave integrated EVRYTHNG into our internal control over financial reporting, and management’s evaluation of the effectiveness of our internal control over financial reporting.

PART II. OTHER INFORMATION.

 

Item1.Legal Proceedings.

Item 1.

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.

Item1A.Risk Factors

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 20212022 Annual Report. The risks and uncertainties described in our 20212022 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. As of June 30, 2022,March 31, 2023, there have been no material changes to the risk factors previously disclosed in our 20212022 Annual Report.

Item 2.

Item2.Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities and Use of Proceeds.

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchases

We repurchase shares of common stock in satisfaction of required withholding tax liability in connection with the exercise of stock options and vesting of restricted stock, restricted stock units and performance stock units.

The following table sets forth information regarding purchases of our equity securities during the three month period ended June 30, 2022:March 31, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 1, 2022 to April 30, 2022

 

 

1,867

 

 

$

27.67

 

 

 

 

 

$

 

Month 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 1, 2022 to May 31, 2022

 

 

18,939

 

 

$

18.30

 

 

 

 

 

$

 

Month 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 1, 2022 to June 30, 2022

 

 

 

 

$

 

 

 

 

 

$

 

Total

 

 

20,806

 

 

$

19.14

 

 

 

 

 

$

 

              

(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

                

January 1, 2023 to January 31, 2023

    $     $ 

Month 2

                

February 1, 2023 to February 28, 2023

  29,369  $22.31     $ 

Month 3

                

March 1, 2023 to March 31, 2023

    $     $ 

Total

  29,369  $22.31     $ 

(1)

Stock option shares and fully vested shares of common stock withheld (purchased) by us in satisfaction of required withholding tax liability upon stock option exercises and vesting of restricted stock, restricted stock restrictedunits and performance stock units and performance stock units.


 

Item 6.

Item6.Exhibits.

Exhibits.

 

Exhibit

Number 

Exhibit Description

10.1Equity Compensation Program for Non-Employee Directors Under the Digimarc 2018 Incentive Plan
10.2Grant-Back License Agreement, dated as of October 4, 2010, between Digimarc Corporation and IV Digital Multimedia Inventories, LLC+

  10.131.1

Form of Common Stock Purchase Agreement, dated April 5, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on April 6, 2022)

  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)

+Certain identified portions of this exhibit have been omitted in accordance with Item 601(b)(10)(iv) of Regulation S-K.

 

SIGNATURES

 


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: August 4, 2022May 11, 2023

DIGIMARC CORPORATION

By: 

/s/ CHARLES BECK

CHARLES BECK

Chief Financial Officer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

 

41

40