10-Q 1 dmrc20240331c_10q.htm FORM 10-Q dmrc20230930_10q.htm
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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


(Mark One)

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

 

For the quarterly period ended March 31, 2024

 

OR

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

 

For the transition period from                    to                     

 

Commission File Number: 001-34108

 


DIGIMARC CORPORATION

(Exact name of registrant as specified in its charter)


 

Oregon

 

26-2828185

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

8500 SW Creekside Place, Beaverton, Oregon 97008

(Address of principal executive offices) (Zip Code)

 

(503) 469-4800

(Registrant’s telephone number, including area code)


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

 

Title of Each Class

 

Trading Symbol

 

Name of Each Exchange on Which Registered

Common Stock, $0.001 Par Value Per Share

 

DMRC

 

The NASDAQ Stock Market LLC

 

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

 

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

 

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

 

Large accelerated filer

Accelerated filer

    

Non-accelerated filer

Smaller reporting company

    

Emerging growth company

  

 

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

 

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

 

As of April 29, 2024, there were 21,373,323 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 



 

 

 
 

Table of Contents

PART I. FINANCIAL INFORMATION

     

Item 1.

Financial Statements (Unaudited):

3

 

Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023

3

 

Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2024 and 2023

4

 

Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2024 and 2023

5

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023

6

 

Notes to Consolidated Financial Statements

7

Item 2.

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

18

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

   

PART II. OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

30

Item 1A.         

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 6.

Exhibits

40

SIGNATURES

32

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.         Financial Statements.

 

DIGIMARC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(UNAUDITED)

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $36,414  $21,456 

Marketable securities

  12,511   5,726 

Trade accounts receivable, net

  5,215   5,813 

Other current assets

  3,802   4,085 

Total current assets

  57,942   37,080 

Property and equipment, net

  1,445   1,570 

Intangibles, net

  26,720   28,458 

Goodwill

  8,576   8,641 

Lease right of use assets

  3,930   4,017 

Other assets

  1,106   786 

Total assets

 $99,719  $80,552 

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable and other accrued liabilities

 $4,100  $6,672 

Deferred revenue

  5,256   5,853 

Total current liabilities

  9,356   12,525 

Long-term lease liabilities

  5,812   5,994 

Other long-term liabilities

  80   106 

Total liabilities

  15,248   18,625 

Commitments and contingencies (Note 15)

          

Shareholders’ equity:

        

Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares issued and outstanding at March 31, 2024 and December 31, 2023)

  50   50 

Common stock (par value $0.001 per share, 50,000 authorized, 21,372 and 20,379 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively)

  21   20 

Additional paid-in capital

  409,473   376,189 

Accumulated deficit

  (322,106)  (311,768)

Accumulated other comprehensive loss

  (2,967)  (2,564)

Total shareholders’ equity

  84,471   61,927 

Total liabilities and shareholders’ equity

 $99,719  $80,552 

 

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

 

 

 

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)

(UNAUDITED)

 

  

Three Months Ended March 31,

 
  

2024

  

2023

 

Revenue:

        

Subscription

 $5,762  $3,885 

Service

  4,176   3,958 

Total revenue

  9,938   7,843 

Cost of revenue:

        

Subscription (1)

  747   795 

Service (1)

  1,839   1,715 

Amortization expense on acquired intangible assets

  1,140   1,089 

Total cost of revenue

  3,726   3,599 

Gross profit

  6,212   4,244 

Operating expenses:

        

Sales and marketing

  5,536   6,298 

Research, development and engineering

  6,741   7,826 

General and administrative

  4,520   4,627 

Amortization expense on acquired intangible assets

  272   260 

Total operating expenses

  17,069   19,011 

Operating loss

  (10,857)  (14,767)

Other income, net

  528   745 

Loss before income taxes

  (10,329)  (14,022)

Provision for income taxes

  (9)  (18)

Net loss

 $(10,338) $(14,040)
         

Loss per share:

        

Loss per share — basic

 $(0.50) $(0.70)

Loss per share — diluted

 $(0.50) $(0.70)

Weighted average shares outstanding — basic

  20,730   20,093 

Weighted average shares outstanding — diluted

  20,730   20,093 
         

Comprehensive loss:

        

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

 $(31) $101 

Foreign currency translation adjustment, net of tax of $0

  (372)  775 

Other comprehensive income (loss)

 $(403) $876 

Net loss

  (10,338)  (14,040)

Comprehensive loss

 $(10,741) $(13,164)

 


(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.

 

  

 

 DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(In thousands)

(UNAUDITED)

 

                                                   

Accumulated

         
                                   

Additional

           

Other

   

Total

 
   

Preferred Stock

   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Shareholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Three Months Ended March 31, 2024

                                                               

Balance at December 31, 2023

    10     $ 50       20,379     $ 20     $ 376,189     $ (311,768 )   $ (2,564 )     61,927  

Issuance of common stock

                929       1       32,217                   32,218  

Issuance of restricted common stock

                6                                

Vesting of restricted stock units

                44                                

Vesting of performance stock units

                60                                

Forfeiture of restricted common stock

                (1 )                              

Purchase of common stock

                (45 )           (1,781 )                 (1,781 )

Stock-based compensation

                            2,848                   2,848  

Unrealized gain (loss) on marketable securities

                                        (31 )     (31 )

Foreign currency translation adjustments

                                        (372 )     (372 )

Net loss

                                  (10,338 )           (10,338 )

Balance at March 31, 2024

    10     $ 50       21,372     $ 21     $ 409,473     $ (322,106 )   $ (2,967 )   $ 84,471  
                                                                 

Three Months Ended March 31, 2023

                                                               

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 (loss) 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  

 

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

 

  

 

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Cash flows from operating activities:

               

Net loss

  $ (10,338 )   $ (14,040 )

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

               

Depreciation and write-off of property and equipment

    193       428  

Amortization of acquired intangible assets

    1,412       1,349  

Amortization and write-off of other intangible assets

    271       183  

Amortization of lease right of use assets under operating leases

    87       166  

Stock-based compensation

    2,831       2,876  

Decrease in allowance for doubtful accounts

    (17 )      

Changes in operating assets and liabilities:

               

Trade accounts receivable

    600       631  

Other current assets

    273       1,766  

Other assets

    (323 )     (191 )

Accounts payable and other accrued liabilities

    (2,624 )     (910 )

Deferred revenue

    (600 )     (925 )

Lease liability and other long-term liabilities

    (187 )     (77 )

Net cash provided by (used in) operating activities

    (8,422 )     (8,744 )

Cash flows from investing activities:

               

Purchase of property and equipment

    (106 )     (51 )

Capitalized patent costs

    (106 )     (112 )

Proceeds from maturities of marketable securities

    3,501       10,247  

Purchases of marketable securities

    (10,320 )     (1,975 )

Net cash provided by (used in) investing activities

    (7,031 )     8,109  

Cash flows from financing activities:

               

Issuance of common stock, net of issuance costs

    32,218        

Purchase of common stock

    (1,781 )     (656 )

Repayment of loans

    (15 )     (26 )

Net cash provided by (used in) financing activities

    30,422       (682 )

Effect of exchange rate on cash

    (11 )     20  

Net increase (decrease) in cash and cash equivalents

    14,958       (1,297 )

Cash and cash equivalents at beginning of period

    21,456       33,598  

Cash and cash equivalents at end of period

  $ 36,414     $ 32,301  

Supplemental disclosure of cash flow information:

               

Cash paid for income taxes, net

  $ (18 )   $ 2  

Supplemental schedule of non-cash activities:

               

Property and equipment and patent costs in accounts payable

  $ 28     $ 4  

Stock-based compensation capitalized to software and patent costs

  $ 17     $ 13  

 

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, an Oregon corporation, is a pioneer and global leader in digital watermarking technologies. For nearly 30 years, Digimarc innovations and intellectual property in digital watermarking have been deployed in solutions built upon one or both of the following two things: the identification and the authentication of physical and digital items, often at massive scale, and often where other methods of identification or authentication don’t work well or don’t work at all.

 

The Digimarc Illuminate platform is a distinctive software as a service (“SaaS”) cloud-based platform for digital connectivity that provides the tools for the application of advanced digital watermarks and dynamic Quick Response (“QR”) codes, software (digital twins) that enables various systems and devices to interact with those data carriers, and a centralized platform for capturing insights about digital interactions and automating activities based on that information.

 

The Digimarc product suite is built on top of the Digimarc Illuminate platform to power a trusted and scalable ecosystem that can address specific business needs in areas like automation, authenticity, sustainability, and customer trust and connectivity. All of the Company’s products are complementary to each other, providing exponential benefits when combined. By enabling customers to create and connect digital twins to physical and digital items, Digimarc’s products provide many benefits including:

 
 

Digimarc Validate supports authentication in the physical and digital worlds to help ensure online interactions can be trusted and that real products and digital assets are genuine and in the right place. Digimarc’s technology protects digital images, audio, product packaging, and other physical items by delivering exclusive, covert digital watermarks and/or dynamic QR codes and a cloud-based record of product authentication information. In addition, consumer engagement capabilities provide a direct, digital communications channel. 

 

 

Digimarc Engage activates products and multimedia to create and leverage an interactive, fully owned communications channel directly with consumers. Digimarc delivers dynamic QR codes and hyperlinks that provide contextual redirection capabilities for multiple consumer experiences based on a variety of factors such as time and location or previous behavior. Connecting engagements across the physical and digital worlds in a singular view results in powerful new capabilities and insights for brands. 

 

 

Digimarc Recycle increases the quality and quantity of recycled materials by digitizing products and packaging with digital watermarking technology. Coupled with consumer engagement capabilities, brands can leverage a direct, digital communications channel. Plus, a cloud-based record of never-before-seen post-consumption data provides new insights that benefit stakeholders across the value chain, including brands, facility operators, and Producer Responsibility Organizations (PROs).

 

 

Digimarc Retail Experience delivers smarter, connected packaging that supports next-generation retail checkout systems, improved inventory management, advanced consumer engagement experiences, compliance with upcoming industry standards, and the collection of powerful first-party data and consumer insights.

 

Interim Consolidated Financial Statements

 

Our significant accounting policies are detailed in “Note 1: Description of Business and Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the U.S. Securities and Exchange Commission (“SEC”) on February 29, 2024 (the “2023 Annual Report”).

 

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 2023 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.

 

Accounting Pronouncements Issued But Not Yet Adopted

 

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07 “Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures”. The ASU requires interim and annual disclosure of significant segment expenses that are regularly provided to the chief operating decision-maker (“CODM”) and included within the reported measure of a segment’s profit or loss, requires interim disclosures about a reportable segment’s profit or loss and assets that are currently required annually, requires disclosure of the position and title of the CODM, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, and contains other disclosure requirements. This authoritative guidance will be effective for the Company starting in the fiscal year ending December 31, 2024, for annual periods and in the first quarter of the fiscal year ending December 31, 2025, for interim periods, with early adoption permitted. The Company is currently evaluating the effect of this new standard on the Company’s disclosures. 

  
 
7

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

In December 2023, the FASB issued ASU No. 2023-09 “Income Taxes (Topic 740) - Improvements to Income Tax Disclosures”. The ASU requires greater disaggregation of income tax disclosures primarily on the income tax rate reconciliation and income taxes paid. This authoritative guidance will be effective for the Company starting in the fiscal year ending December 31, 2025, with early adoption permitted. The Company is currently evaluating the effect of this new standard on the Company’s disclosures.

 

 

2. Fair Value of Financial Instruments

 

The estimated fair values of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable and other accrued liabilities, approximate their carrying values due to the short-term nature of these instruments. The Company’s marketable securities are classified as available-for-sale and are 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 Statements of Operations and are derived using the specific identification method for determining the cost of marketable securities sold.

  

The Companys fair value hierarchy for its cash equivalents and marketable securities was as follows:

 

March 31, 2024

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Money market securities

  $ 5,081     $     $     $ 5,081  

Commercial Paper

          22,222             22,222  

U.S. Treasuries

          14,362             14,362  

Federal agency notes

          5,752             5,752  

Total

  $ 5,081     $ 42,336     $     $ 47,417  

 

December 31, 2023

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Money market securities

  $ 1,515     $     $     $ 1,515  

Commercial Paper

          14,622             14,622  

U.S. Treasuries

          5,953             5,953  

Federal agency notes

          998             998  

Total

  $ 1,515     $ 21,573     $     $ 23,088  

 

The fair value maturities of the Company’s cash equivalents and marketable securities as of March 31, 2024, were as follows:

 

   

Maturities by Period

 
           

Less than

   

1-5

   

5-10

   

More than

 
   

Total

   

1 year

   

years

   

years

   

10 years

 

Cash equivalents and marketable securities

  $ 47,417     $ 47,417     $     $     $  

 

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, U.S. Treasuries, federal agency notes, and money market securities totaling $34,906 and $17,362 at  March 31, 2024 and December 31, 2023, respectively. Cash equivalents are carried at either cost or fair value, depending on the type of security.

  

 

3. Revenue Recognition

 

The Company derives its revenue primarily from software subscriptions and software 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 SaaS 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 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.

 

Customer arrangements may contain multiple performance obligations such as software subscriptions, software products, and professional services. 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.

 

8

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

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

 

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

 

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Commercial:

               

Subscription

  $ 5,462     $ 3,585  

Service

    257       298  

Total Commercial

  $ 5,719     $ 3,883  

Government:

               

Subscription

  $ 300     $ 300  

Service

    3,919       3,660  

Total Government

    4,219       3,960  

Total

  $ 9,938     $ 7,843  

 

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

 

The Company has contract assets from capitalized contract acquisition costs that are classified as “other current assets” and “other assets” in the Consolidated Balance Sheets. 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:

 

   

March 31,

   

December 31,

 
   

2024

   

2023

 

Contract acquisition costs, current

  $ 168     $ 113  

Contract acquisition costs, long-term

    4       9  

Total

  $ 172     $ 122  

 

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 subscriptions and services for which the performance obligation has not been satisfied.

 

The following table provides information about contract liabilities:

 

   

March 31,

   

December 31,

 
   

2024

   

2023

 

Deferred revenue, current

  $ 5,256     $ 5,853  

Deferred revenue, long-term

    4       7  

Total

  $ 5,260     $ 5,860  

 

The Company recognized $2,881 of revenue during the three months ended March 31, 2024, that was included in the contract liability balance as of December 31, 2023.

 

The aggregate amount of the transaction prices from contractual obligations that are unsatisfied or partially unsatisfied was $30,192 and $31,798 as of March 31, 2024, and December 31, 2023, respectively.

 

9

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

4. Segment Information

 

Geographic Information

 

The Company derives its revenue from a single reporting segment: product digitization solutions. Revenue is generated in this segment primarily through software subscriptions and software 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 Months Ended March 31,

 
  

2024

  

2023

 

Domestic

 $2,874  $2,767 

International (1)

  7,064   5,076 

Total

 $9,938  $7,843 

 


(1)

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

 

Major Customers

 

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

 

  

Three Months Ended March 31,

 
  

2024

  

2023

 

Customer A

  42%  50%

Customer B

  18%  23%

Customer C

  14%  * 

 


*Less than 10%

 

 

Long-Lived Assets by Geographical Area

 

Long-lived assets by geographic area were as follows:

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 

United States

 $1,414  $1,535 

Europe

  31   35 

Total

 $1,445  $1,570 

 

 

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 awards, restricted stock units, and performance restricted stock units.

 

10

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

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 vesting period of the award.

 

There were no stock options granted during the three months ended  March 31, 2024 and 2023.

 

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 restricted stock unit (“PRSU”) awards that vest upon meeting a service condition and a performance condition, such as the Company exceeding a future annual recurring revenue target, 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 amount of expense to be recognized. The Company recognizes the fair value of the award, after adjusting for any changes in the probability of achievement, on a straight-line basis over the service period of the award, which is generally three years for employee grants.

 

The fair value of performance restricted stock units 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, 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,

 
   

2024

   

2023

 

Stock price

  $ 39.49     $ 22.37  

Expected volatility

    66.3 %     74.7 %

Risk-free interest rate

    4.3 %     4.3 %

  

11

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

Stock-Based Compensation

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Stock-based compensation:

               

Cost of revenue

  $ 253     $ 238  

Sales and marketing

    712       761  

Research, development and engineering

    618       936  

General and administrative

    1,248       941  

Stock-based compensation expense

    2,831       2,876  

Capitalized to software and patent costs

    17       13  

Total stock-based compensation

  $ 2,848     $ 2,889  

 

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

 

   

March 31,

   

December 31,

 
   

2024

   

2023

 

Total unrecognized compensation costs

  $ 21,772     $ 15,370  

 

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 March 31, 2024, for all non-vested stock-based awards over weighted average periods through  March 31, 2028, as follows:

 

                         
   

RSAs

   

RSUs

   

PRSUs

 

Weighted average period (in years)

    0.68       1.56       2.00  

 

As of March 31, 2024, under the Company’s stock incentive plan, an additional 1,258 shares remained available for future grants. The Company issues new shares upon exercises of stock options, grants of RSAs and vesting of RSU and PRSU awards.

 

Stock Option Activity

 

The following table presents the outstanding stock option activity:

 

           

Weighted

   

Weighted

         
           

Average

   

Average

   

Aggregate

 
   

Number of

   

Exercise

   

Grant Date

   

Intrinsic

 
   

Options

   

Price

   

Fair Value

   

Value

 

Options outstanding, December 31, 2023

    1     $ 22.15     $          

Granted

        $     $          

Exercised

        $     $          

Forfeited or expired

        $     $          

Options outstanding, March 31, 2024

    1     $ 22.15     $     $ 6  

Options exercisable, March 31, 2024

    1     $ 22.15     $     $ 6  

Options unvested, March 31, 2024

        $     $     $  

 

12

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

The aggregate intrinsic value is based on the closing price of $27.18 per share of Digimarc common stock on March 31, 2024, which would have been received by the optionees had all of the options with exercise prices less than $27.18 per share been exercised on that date.

 

Restricted Stock Awards Activity

 

The following table presents the unvested RSA activity:

 

           

Weighted

 
           

Average

 
   

Number of

   

Grant Date

 
   

Shares

   

Fair Value

 

Unvested balance, December 31, 2023

    105     $ 29.89  

Granted

    6     $ 35.82  

Vested

    (14 )   $ 33.56  

Forfeited

    (1 )   $ 28.06  

Unvested balance, March 31, 2024

    96     $ 29.76  

 

The fair value of RSAs vested is as follows:

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Fair value of RSAs vested

  $ 551     $ 1,019  

 

Restricted Stock Units Activity

 

The following table presents the unvested RSU activity:

 

           

Weighted

 
           

Average

 
   

Number of

   

Grant Date

 
   

Units

   

Fair Value

 

Unvested balance, December 31, 2023

    442     $ 23.77  

Granted

    154     $ 39.46  

Vested

    (44 )   $ 24.93  

Forfeited

    (14 )   $ 22.38  

Unvested balance, March 31, 2024

    538     $ 28.20  

 

The fair value of RSU awards vested is as follows:

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Fair value of RSU awards vested

  $ 1,729     $ 624  

 

Performance Stock Units Activity

 

The following table presents the unvested PRSU activity:

 

           

Weighted

 
           

Average

 
   

Number of

   

Grant Date

 
   

Units

   

Fair Value

 

Unvested balance, December 31, 2023

    192     $ 29.01  

Change in units based on performance expectations

    30     $ 22.37  

Granted

    59     $ 39.49  

Vested

    (60 )   $ 22.37  

Forfeited

        $  

Unvested balance, March 31, 2024

    221     $ 32.70  

 

13

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

The fair value of PRSU awards vested is as follows:

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Fair value of PRSU awards vested

  $ 2,370     $ 54  

 

 

6. Shareholders’ Equity

 

Registered Direct Offering

 

On February 24, 2024, the Company entered into purchase agreements with certain investors providing for the issuance and sale by the Company of 929 shares of common stock in a registered direct stock offering. The common shares were offered at a price of $35.00 per share, and the gross cash proceeds to the Company were $32,500. We incurred $282 of legal costs related to the offering. The closing of the registered direct offering occurred on February 27, 2024.

 

 

7. Earnings Per Share

 

The Company calculates basic and diluted earnings per share in accordance with ASC 260, “Earnings Per Share,” using the treasury stock method. 

 

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, and unvested RSUs and PRSUs. RSAs are included in shares outstanding on the date of grant.

 

The following table reconciles earnings (loss) per share:

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Basic Earnings (Loss) per Share:

               

Net loss — basic

  $ (10,338 )   $ (14,040 )

Weighted average shares outstanding — basic

    20,730       20,093  

Basic loss per share

  $ (0.50 )   $ (0.70 )
                 

Diluted Earnings (Loss) per Share:

               

Net loss — diluted

  $ (10,338 )   $ (14,040 )

Weighted average shares outstanding — diluted

    20,730       20,093  

Diluted loss per share

  $ (0.50 )   $ (0.70 )

 

The following table indicates the stock equivalents related to stock options and unvested RSUs and PRSUs that were anti-dilutive and excluded from diluted earnings (loss) per share calculations:

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Anti-dilutive shares due to:

               

Exercise prices higher than the average market price

          51  

Net loss

    206       59  

 

 

8. Trade Accounts Receivable

 

Trade Accounts Receivable

 

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

 

   

March 31,

   

December 31,

 
   

2024

   

2023

 

Trade accounts receivable, current

  $ 5,332     $ 5,947  

Trade accounts receivable, long-term

    7       9  

Allowance for doubtful accounts

    (117 )     (134 )

Trade accounts receivable, net

  $ 5,222     $ 5,822  

Unpaid deferred revenue included in trade accounts receivable

  $ 1,042     $ 2,073  

  

14

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

Allowance for Doubtful Accounts

 

The Company’s accounts receivables are subject to concentrations of credit risk. The Company maintains an allowance for its doubtful accounts receivable to reflect any estimated credit losses. The allowance is established in accordance with the current expected credit loss model, which requires the estimation of expected credit losses over the contractual life of financial assets. The allowance is calculated using a forward-looking probability-weighted approach based on historical loss experience, current economic conditions, and reasonable and supportable forecasts. The Company records the allowance in “general and administrative” expense in the Consolidated Statements of Operations, up to the amount of revenue recognized to date for each account. Any incremental allowance is recorded as an offset to “deferred revenue” in the Consolidated Balance Sheets. Account receivables are written off and charged against the recorded allowance when the Company has exhausted collection efforts without success.

 

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,

 
   

2024

   

2023

 

Company A

    48 %     56 %

Company B

    *       13 %

 


* Less than 10%

 

 

 

9. Property and Equipment

 

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

 

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

 

   

March 31,

   

December 31,

 
   

2024

   

2023

 

Office furniture and fixtures

  $ 1,434     $ 1,435  

Software

    5,433       5,497  

Equipment

    2,522       2,472  

Leasehold improvements

    1,861       1,861  

Gross property and equipment

    11,250       11,265  

Less accumulated depreciation

    (9,805 )     (9,695 )

Property and equipment, net

  $ 1,445     $ 1,570  

 

 

10. Goodwill

 

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. No impairment charges were recorded for the three months ended March 31, 2024 and 2023.

 

Balance at December 31, 2023

 $8,641 

Currency translation adjustments

  (65)

Balance at March 31, 2024

 $8,576 

 

 

11. Intangibles

 

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment charges were recorded for the three months ended March 31, 2024 and 2023.

 

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 approximates seventeen years.

 

15

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

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

 

  

Estimated Life

  

March 31,

  

December 31,

 
  

(years)

  

2024

  

2023

 

Capitalized patent costs

 

~17

  $9,116  $9,231 
             

Intangible assets acquired:

            

Purchased intellectual property

  10   250   250 

Developed technology

  5   22,638   22,836 

Customer relationships

  10   10,818   10,913 

Gross intangible assets

      42,822   43,230 

Accumulated amortization

      (16,102)  (14,772)

Intangibles, net

     $26,720  $28,458 

 

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 “operating expenses” in the Consolidated Statements of Operations.

 

Amortization expense on intangible assets was as follows:

 

  

Three Months Ended March 31,

 
  

2024

  

2023

 

Amortization expense

 $1,550  $1,493 

 

For intangible assets recorded at March 31, 2024, the estimated future aggregate amortization expense for the years ending December 31, 2024 through December 31, 2028 is as follows:

 

  

Amortization

 

As of March 31, 2024

 

Expense

 

Remaining in 2024

 $4,610 

2025

  6,130 

2026

  6,097 

2027

  1,538 

2028

  1,527 

 

 

12. Leases

 

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

 

The Company entered into a sublease agreement and lease extension agreement for office space 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 March 31, 2024, totaling $8,756 plus operating expenses, payable in monthly installments. The first 26 months of rent payments and operating expenses were abated to cover the remaining lease term on the Company’s former corporate headquarters.

 

The lease term of the Company’s former corporate headquarters in Beaverton, Oregon ended in March 2024, with no remaining rent payments as of  March 31, 2024. The Company stopped using this office space as its corporate headquarters in March 2022.

    

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

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 

Lease right of use assets

 $3,930  $4,017 

Lease liabilities, current

 $700  $582 

Lease liabilities, long-term

 $5,812  $5,994 
         

Weighted-average remaining life (in years)

  6.5   6.5 

Weighted-average discount rate

  9%  9%

 

16

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

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, 2024 and 2023.

 

Operating lease expense is included in “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 Months Ended March 31,

 
  

2024

  

2023

 

Operating lease expense

 $429  $373 

Cash paid for operating leases

 $268  $412 

 

The table below reconciles the aggregate cash payment obligations for the next five years and total of the remaining years for the operating lease liability recorded in the Consolidated Balance Sheet as of March 31, 2024:

 

  

Cash

 
  

Payment

 

As of March 31, 2024

 

Obligations

 

Remaining in 2024

 $966 

2025

  1,317 

2026

  1,356 

2027

  1,397 

2028

  1,296 

Thereafter

  2,455 

Total lease payments

  8,787 

Imputed interest

  (2,275)

Total minimum lease payments

 $6,512 

       

 

  

 

13. Other Income

 

The following table provides activity in other income, net:

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Interest income

  $ 374     $ 421  

Refundable tax credit

    125       255  

Foreign currency gains (losses)

    29       67  

Other income (loss)

          2  

Total other income, net

  $ 528     $ 745  

 

 

14. Income Taxes

 

The provision for income taxes reflects current taxes and deferred taxes. The effective tax rate for each of the three months ended March 31, 2024 and 2023 was 0%.

 

The valuation allowance against net deferred tax assets as of March 31, 2024, was $98,143, an increase of $2,886 from $95,256 as of December 31, 2023. The Company continues to provide for a 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.

 

An excess tax benefit of $1,730 and an excess tax deficiency of $544 were recognized in the provision for income taxes for the three months ended March 31, 2024 and 2023, respectively, which were offset by $1,730 and $544 of valuation allowance, respectively. 

 

 

15. Commitments and Contingencies

 

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

 

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

 

 

  

 

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

 

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

 

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Readers are also urged to carefully review and consider the disclosures made in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and in the audited consolidated financial statements and related notes included in our 2023 Annual Report, and other reports and filings we have made with the SEC.

 

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

 

All dollar amounts within the tables below are in thousands. 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 (EVRYTHNG), a wholly owned subsidiary of Digimarc. 

 

Overview

 

Digimarc, an Oregon corporation, is a pioneer and global leader in digital watermarking technologies. For nearly 30 years, Digimarc innovations and intellectual property in digital watermarking have been deployed in solutions built upon one or both of the following two things: the identification and the authentication of physical and digital items, often at massive scale, and often where other methods of identification or authentication don’t work well or don’t work at all.

 

The Digimarc Illuminate platform is a distinctive SaaS cloud-based platform for digital connectivity that provides the tools for the application of advanced digital watermarks and dynamic QR codes, software (digital twins) that enables various systems and devices to interact with those data carriers, and a centralized platform for capturing insights about digital interactions and automating activities based on that information.

 

The Digimarc product suite is built on top of the Digimarc Illuminate platform to power a trusted and scalable ecosystem that can address specific business needs in areas like automation, authenticity, sustainability, and customer trust and connectivity. All of the Company’s products are complementary to each other, providing exponential benefits when combined. By enabling customers to create and connect digital twins to physical and digital items, Digimarc’s products provide many benefits including:

 

 

Digimarc Validate supports authentication in the physical and digital worlds to help ensure online interactions can be trusted and that real products and digital assets are genuine and in the right place. Digimarc’s technology protects digital images, audio, product packaging, and other physical items by delivering exclusive, covert digital watermarks and/or dynamic QR codes and a cloud-based record of product authentication information. In addition, consumer engagement capabilities provide a direct, digital communications channel.

 

 

Digimarc Engage activates products and multimedia to create and leverage an interactive, fully owned communications channel directly with consumers. Digimarc delivers dynamic QR codes and hyperlinks that provide contextual redirection capabilities for multiple consumer experiences based on a variety of factors such as time and location or previous behavior. Connecting engagements across the physical and digital worlds in a singular view results in powerful new capabilities and insights for brands.