Al
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 |
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For the quarterly period ended June 30, 2022March 31, 2023
OR
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|
☐ 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’sRegistrant’s 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.
Item 1. | ||
Consolidated Balance Sheets as of | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 6. |
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CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(UNAUDITED)
|
| June 30, |
|
| December 31, |
| March 31, | December 31, | ||||||||
|
| 2022 |
|
| 2021 |
| 2023 | 2022 | ||||||||
ASSETS |
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|
|
|
|
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| ||||||||
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 |
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|
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|
|
|
|
| ||||||||
Current liabilities: |
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|
|
|
|
|
|
| ||||||||
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) |
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|
|
|
|
|
|
| ||||||||
Commitments and contingencies (Note 16) | ||||||||||||||||
Shareholders’ equity: |
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|
|
|
|
|
|
| ||||||||
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.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(UNAUDITED)
|
| Three |
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| Three |
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| Six |
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| Six |
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| Months |
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| Months |
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| Months |
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| Months |
| ||||||||||||
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| Ended |
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| Ended |
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| Ended |
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| Ended |
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| June 30, |
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| June 30, |
|
| June 30, |
|
| June 30, |
| Three Months Ended March 31, | |||||||||||
|
| 2022 |
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| 2021 |
|
| 2022 |
|
| 2021 |
| 2023 | 2022 | ||||||||||
Revenue: |
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|
|
|
|
|
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|
|
|
|
|
|
|
|
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Subscription | $ | 3,885 | $ | 3,791 | ||||||||||||||||||||
Service |
| $ | 4,503 |
|
| $ | 3,791 |
|
| $ | 8,123 |
|
| $ | 7,575 |
| 3,958 | 3,620 | ||||||
Subscription |
|
| 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 | 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.
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.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYCASH FLOWS
(In thousands)
(UNAUDITED)
|
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|
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|
| Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
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|
|
| 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: |
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|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
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|
|
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|
|
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.
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. |
• |
|
• | 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 |
• | Digimarc Retail Experience helps brands meet the evolving needs of retail partners and consumers. Digimarc's technology leverages covert digital watermarks to provide an |
communication channel with consumers. |
|
|
|
|
|
|
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
(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
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 |
|
|
|
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.
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.
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 | ||||
| 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.
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 | % | ||||
(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:
| ||||||
|
|
| ||||
|
|
|
|
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 | — | $ | — | $ | — | |||||||||||
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 |
|
15
(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.
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 |
|
|
|
|
|
|
|
|
|
|
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.
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
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.
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.”
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 |
|
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’sManagement’s Discussion and Analysis ofof Financial Condition and Results of Operations
The following Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of Digimarc that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. See the discussion regarding forward-looking statements included in this Quarterly Report on Form10-Q under the caption “Safe“Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.”
The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Readers are also urged to carefully review and consider the disclosures made in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and in the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 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:
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|
|
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. |
• |
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• |
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|
Digimarc has
On January 3, 2022, we completed the acquisition of EVRYTHNG. The EVRYTHNG
Critical Accounting Policies and Estimates Detailed information about our critical accounting policies and estimates is set forth in Part III, Item 15 of our 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 Unless stated otherwise, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to the three
Summary Total revenue for the three month period ended 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
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
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, The Revenue by geography
Domestic. The
International. There was no significant increase in
Revenue by market
Commercial. The
Government. The Cost of revenue Service. Cost of service revenue primarily includes:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
• |
| 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:
• |
|
|
| 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 |
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| Six |
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| Six |
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| ||||||||||||||||||||
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| Months |
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| Months |
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| Months |
|
| Months |
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|
|
| ||||||||||||||||||||
|
| 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: |
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|
|
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| ||||||||||||||||
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: |
|
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|
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| ||||||||||||||||
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 | % |
|
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| ||||||||||||||||
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| ||||||||||||||||
(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 | % | ||||||||||||
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| Ended |
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| Ended |
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| Dollar |
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| 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 | % |
|
|
|
|
|
|
|
|
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:
• |
|
|
|
|
• |
|
|
• |
|
|
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:
|
|
|
|
|
|
• |
|
|
• |
| one-time severance costs of |
Research, development and engineering
|
| Three |
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| Three |
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| 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 |
• |
| 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 |
• |
|
| increased compensation costs of |
• |
|
|
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:
|
|
|
|
|
|
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 | % | ||||||||||||
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| Ended |
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| Ended |
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| Dollar |
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| 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 | % |
|
|
|
|
|
|
|
|
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 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; |
,
• |
|
• | $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 |
• |
|
|
|
|
|
|
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. |
|
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Amortization expense on acquired intangible assets
|
| Three |
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| Three |
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| Six |
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| Six |
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| Months |
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| Months |
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| Months |
|
| Months |
|
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|
|
| ||||||||||||||||||||
|
| 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 |
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| Three |
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| Six |
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| Months |
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| Months |
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| Months |
|
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| ||||||||||||||||||||
|
| 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 |
|
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|
| Six |
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| Six |
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| ||||||||||||||||||||
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| Months |
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| Months |
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| Months |
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| Months |
|
|
|
|
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|
|
| ||||||||||||||||||||
|
| 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 |
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| Three |
|
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| Six |
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| Six |
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| ||||
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| Months |
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| Months |
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| Months |
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| Months |
|
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| ||||
|
| 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:
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| Three |
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| Three |
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| Six |
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| Six |
| ||||
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| Months |
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| Months |
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| Months |
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| Months |
| ||||
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| Ended |
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| Ended |
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| Ended |
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| 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 | % |
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| 71 | % |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | ) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 |
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:
• |
|
|
| cash used in operations; |
• |
|
|
| 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:
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| Six |
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| Six |
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| ||||||||||||||||||
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| Months |
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| Months |
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| ||||||||||||||||||
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| Ended |
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| Ended |
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| Dollar |
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| Percent |
| ||||||||||||||||||||
|
| June 30, |
|
| June 30, |
|
| Increase |
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| 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 |
• |
|
|
|
|
|
|
|
|
| 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.
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.
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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.
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.
Item2.Unregistered Sales of Equity Securities and Use of Proceeds. |
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(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:
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| (d) |
| |
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| (c) |
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| Approximate |
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| Total number |
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| dollar value |
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|
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|
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| of shares |
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| of shares that |
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| (a) |
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| (b) |
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| purchased as |
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| may yet be |
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| Total number |
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| Average price |
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| part of publicly |
|
| purchased |
| ||||
|
| of shares |
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| paid per |
|
| announced plans |
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| under the plans |
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Period |
| purchased (1) |
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| share (1) |
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| or programs |
|
| or programs |
| ||||
Month 1 |
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|
|
|
|
|
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|
|
|
|
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|
|
|
April 1, 2022 to April 30, 2022 |
|
| 1,867 |
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| $ | 27.67 |
|
|
| — |
|
| $ | — |
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Month 2 |
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|
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|
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May 1, 2022 to May 31, 2022 |
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| 18,939 |
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| $ | 18.30 |
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|
| — |
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| $ | — |
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Month 3 |
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June 1, 2022 to June 30, 2022 |
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| — |
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| $ | — |
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| — |
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| $ | — |
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Total |
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| 20,806 |
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| $ | 19.14 |
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|
| — |
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| $ | — |
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(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 |
Exhibit Number | Exhibit Description | |
| 10.1 | Equity Compensation Program for Non-Employee Directors Under the Digimarc 2018 Incentive Plan | |
| 10.2 | Grant-Back License Agreement, dated as of October 4, 2010, between Digimarc Corporation and IV Digital Multimedia Inventories, LLC+ | |
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| 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 | ||
32.2 | ||
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
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: | DIGIMARC CORPORATION | ||||
By: | /s/ CHARLES BECK | ||||
CHARLES BECK | |||||
Chief Financial Officer | |||||
(Duly Authorized Officer and Principal Financial and Accounting Officer) | |||||
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