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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission File Number:
DIGIMARC CORPORATION
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(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 |
||
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The
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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.
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).
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 |
☐ |
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☒ |
Smaller reporting company |
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Emerging growth company |
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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
As of November 2, 2023, there
were
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(UNAUDITED)
|
September 30, |
December 31, |
|||||||
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2023 |
2022 |
|||||||
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ASSETS |
||||||||
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Current assets: |
||||||||
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Cash and cash equivalents |
$ |
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$ |
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Marketable securities |
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Trade accounts receivable, net |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Intangibles, net |
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Goodwill |
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Lease right of use assets |
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Other assets |
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Total assets |
$ |
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$ |
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||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
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Current liabilities: |
||||||||
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Accounts payable and other accrued liabilities |
$ |
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$ |
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Deferred revenue |
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||||||
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Total current liabilities |
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Long-term lease liabilities |
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Other long-term liabilities |
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||||||
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Total liabilities |
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||||||
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Commitments and contingencies (Note 16) |
||||||||
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Shareholders’ equity: |
||||||||
|
Preferred stock (par value $ per share, authorized, shares issued and outstanding at September 30, 2023 and December 31, 2022) |
|
|
||||||
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Common stock (par value $ per share, authorized, and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively) |
|
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||||||
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Additional paid-in capital |
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|
||||||
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Accumulated deficit |
(
|
) |
(
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) | ||||
|
Accumulated other comprehensive loss |
(
|
) |
(
|
) | ||||
|
Total shareholders’ equity |
|
|
||||||
|
Total liabilities and shareholders’ equity |
$ |
|
$ |
|
||||
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 Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
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Revenue: |
||||||||||||||||
|
Subscription |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Service |
|
|
|
|
||||||||||||
|
Total revenue |
|
|
|
|
||||||||||||
|
Cost of revenue: |
||||||||||||||||
|
Subscription (1) |
|
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|
|
||||||||||||
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Service (1) |
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||||||||||||
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Amortization expense on acquired intangible assets |
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||||||||||||
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Total cost of revenue |
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||||||||||||
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Gross profit |
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||||||||||||
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Operating expenses: |
||||||||||||||||
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Sales and marketing |
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||||||||||||
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Research, development and engineering |
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||||||||||||
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General and administrative |
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||||||||||||
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Amortization expense on acquired intangible assets |
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||||||||||||
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Impairment of lease right of use assets and leasehold improvements |
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||||||||||||
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Total operating expenses |
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||||||||||||
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Operating loss |
(
|
) |
(
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) |
(
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) |
(
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) | ||||||||
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Other income, net |
|
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||||||||||||
|
Loss before income taxes |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
|
Provision for income taxes |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
|
Net loss |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Loss per share: |
||||||||||||||||
|
Loss per share — basic |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Loss per share — diluted |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Weighted average shares outstanding — basic |
|
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|
||||||||||||
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Weighted average shares outstanding — diluted |
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|
||||||||||||
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Comprehensive loss: |
||||||||||||||||
|
Unrealized gain (loss) on marketable securities, net of tax of $0 |
$ |
|
$ |
|
$ |
|
$ |
(
|
) | |||||||
|
Foreign currency translation adjustment, net of tax of $0 |
(
|
) |
(
|
) |
|
(
|
) | |||||||||
|
Other comprehensive income (loss) |
$ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | |||||
|
Net loss |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
|
Comprehensive loss |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
(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 |
|||||||||||||||||||||||||
|
Three months ended September 30, 2023: |
||||||||||||||||||||||||||||||||
|
BALANCE AT JUNE 30, 2023 |
|
$ |
|
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||||||||
|
Issuance of restricted common stock |
|
|
|
|
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||||||||||||||||||||||||
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Vesting of restricted stock units |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Forfeiture of restricted common stock |
|
|
(
|
) |
|
|
|
|
|
|||||||||||||||||||||||
|
Purchase of common stock |
|
|
(
|
) |
|
(
|
) |
|
|
(
|
) | |||||||||||||||||||||
|
Stock-based compensation |
— |
|
— |
|
|
|
|
|
||||||||||||||||||||||||
|
Unrealized loss on marketable securities |
— |
|
— |
|
|
|
|
|
||||||||||||||||||||||||
|
Foreign currency translation adjustments |
— |
|
— |
|
|
|
(
|
) |
(
|
) | ||||||||||||||||||||||
|
Net loss |
— |
|
— |
|
|
(
|
) |
|
(
|
) | ||||||||||||||||||||||
|
BALANCE AT SEPTEMBER 30, 2023 |
|
$ |
|
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||||||||
|
Three months ended September 30, 2022: |
||||||||||||||||||||||||||||||||
|
BALANCE AT JUNE 30, 2022 |
|
$ |
|
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||||||||
|
Issuance of common stock |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Issuance of restricted common stock |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Forfeiture of restricted common stock |
|
|
(
|
) |
|
|
|
|
|
|||||||||||||||||||||||
|
Purchase of common stock |
|
|
(
|
) |
|
(
|
) |
|
|
(
|
) | |||||||||||||||||||||
|
Stock-based compensation |
— |
|
— |
|
|
|
|
|
||||||||||||||||||||||||
|
Unrealized gain on marketable securities |
— |
|
— |
|
|
|
|
|
||||||||||||||||||||||||
|
Foreign currency translation adjustments |
— |
|
— |
|
|
|
(
|
) |
(
|
) | ||||||||||||||||||||||
|
Net loss |
— |
|
— |
|
|
(
|
) |
|
(
|
) | ||||||||||||||||||||||
|
BALANCE AT SEPTEMBER 30, 2022 |
|
$ |
|
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||||||||
|
Nine months ended September 30, 2023: |
||||||||||||||||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2022 |
|
$ |
|
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||||||||
|
Issuance of common stock |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Issuance of restricted common stock |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Vesting of performance stock units |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Forfeiture of restricted common stock |
|
|
(
|
) |
|
|
|
|
|
|||||||||||||||||||||||
|
Purchase of common stock |
|
|
(
|
) |
|
(
|
) |
|
|
(
|
) | |||||||||||||||||||||
|
Stock-based compensation |
— |
|
— |
|
|
|
|
|
||||||||||||||||||||||||
|
Unrealized gain on marketable securities |
— |
|
— |
|
|
|
|
|
||||||||||||||||||||||||
|
Foreign currency translation adjustments |
— |
|
— |
|
|
|
|
|
||||||||||||||||||||||||
|
Net loss |
— |
|
— |
|
|
(
|
) |
|
(
|
) | ||||||||||||||||||||||
|
BALANCE AT SEPTEMBER 30, 2023 |
|
$ |
|
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||||||||
|
Nine months ended September 30, 2022: |
||||||||||||||||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2021 |
|
$ |
|
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
|
|||||||||||||||||
|
Issuance of common stock |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Issuance of warrants for acquisition |
— |
|
— |
|
|
|
|
|
||||||||||||||||||||||||
|
Issuance of restricted common stock |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Forfeiture of restricted common stock |
|
|
(
|
) |
|
|
|
|
|
|||||||||||||||||||||||
|
Purchase of common stock |
|
|
(
|
) |
|
(
|
) |
|
|
(
|
) | |||||||||||||||||||||
|
Stock-based compensation |
— |
|
— |
|
|
|
|
|
||||||||||||||||||||||||
|
Unrealized loss on marketable securities |
— |
|
— |
|
|
|
(
|
) |
(
|
) | ||||||||||||||||||||||
|
Foreign currency translation adjustments |
— |
|
— |
|
|
|
(
|
) |
(
|
) | ||||||||||||||||||||||
|
Net loss |
— |
|
— |
|
|
(
|
) |
|
(
|
) | ||||||||||||||||||||||
|
BALANCE AT SEPTEMBER 30, 2022 |
|
$ |
|
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
|
Nine Months Ended September 30, |
||||||||
|
2023 |
2022 |
|||||||
|
Cash flows from operating activities: |
||||||||
|
Net loss |
$ |
(
|
) | $ |
(
|
) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
|
Depreciation and write-off of property and equipment |
|
|
||||||
|
Amortization of acquired intangible assets |
|
|
||||||
|
Amortization and write-off of other intangible assets |
|
|
||||||
|
Amortization of lease right of use assets under operating leases |
|
|
||||||
|
Stock-based compensation |
|
|
||||||
|
Impairment of lease right of use assets and leasehold improvements |
|
|
||||||
|
Changes in operating assets and liabilities: |
||||||||
|
Trade accounts receivable |
(
|
) |
(
|
) | ||||
|
Other current assets |
|
(
|
) | |||||
|
Other assets |
|
(
|
) | |||||
|
Accounts payable and other accrued liabilities |
|
(
|
) | |||||
|
Deferred revenue |
|
|
||||||
|
Lease liability and other long-term liabilities |
|
(
|
) | |||||
|
Net cash used in operating activities |
(
|
) |
(
|
) | ||||
|
Cash flows from investing activities: |
||||||||
|
Net cash paid for acquisition |
|
(
|
) | |||||
|
Purchase of property and equipment |
(
|
) |
(
|
) | ||||
|
Capitalized patent costs |
(
|
) |
(
|
) | ||||
|
Proceeds from maturities of marketable securities |
|
|
||||||
|
Purchases of marketable securities |
(
|
) |
(
|
) | ||||
|
Net cash provided by investing activities |
|
|
||||||
|
Cash flows from financing activities: |
||||||||
|
Issuance of common stock, net of issuance costs |
|
|
||||||
|
Purchase of common stock |
(
|
) |
(
|
) | ||||
|
Repayment of loans |
(
|
) |
(
|
) | ||||
|
Net cash (used in) provided by financing activities |
(
|
) |
|
|||||
|
Effect of exchange rate on cash |
(
|
) |
(
|
) | ||||
|
Net (decrease) increase in cash and cash equivalents |
(
|
) |
|
|||||
|
Cash and cash equivalents at beginning of period |
|
|
||||||
|
Cash and cash equivalents at end of period |
$ |
|
$ |
|
||||
|
Supplemental disclosure of cash flow information: |
||||||||
|
Cash paid for income taxes, net |
$ |
|
$ |
|
||||
|
Supplemental schedule of non-cash activities: |
||||||||
|
Property and equipment and patent costs in accounts payable |
$ |
|
$ |
(
|
) | |||
|
Stock-based compensation capitalized to software and patent costs |
$ |
|
$ |
|
||||
|
Purchase of common stock in accounts payable |
$ |
|
$ |
(
|
) | |||
|
Common stock issued for acquisition |
$ |
|
$ |
|
||||
|
Warrants issued for acquisition |
$ |
|
$ |
|
||||
|
Right of use assets obtained in exchange for lease obligations |
$ |
|
$ |
|
||||
The accompanying notes are an integral part of these consolidated financial statements.
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 and digital media identification, delivering business value across industries through unique identifiers and cloud-based solutions. Digimarc's technology highlights a product's journey to provide greater visibility into all relevant product data, allowing companies to make more intelligent business decisions.
The Digimarc Illuminate platform is a distinctive software as a service (SaaS) cloud-based platform for digitizing products and aggregating their interactions. Product digitization, the act of creating and connecting a digital twin to a physical or digital item via a digital watermark, Quick Response ("QR") code, and/or other digital carrier, enables products to connect with the web and interact with consumers and digital devices. The product's digital twin that comprises events and attributes from and about the product can be customized and automated to deliver unique experiences that benefits customers, brands, retailers, and other stakeholders across a wide variety of digital applications, while capturing a record of every interaction.
The Digimarc product suite is built on top of the Digimarc Illuminate platform to address specific business needs and power a trusted and scalable ecosystem in areas like automation, consumer trust and authenticity, and sustainability. 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 technologies provide many benefits, including:
|
• |
Digimarc Validate supports authenticity 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 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 Engage unlocks an interactive communications channel connecting brands and consumers. Digimarc's technology activates products and media through on-package QR codes or digital watermarks, enabling consumers to scan for more information. Combined with cloud-based rules, brands can deliver contextually relevant content based on time, location, and more. |
|
• |
Digimarc Recycle increases the recyclability of products and packaging. Digimarc's technology activates products and packaging with covert digital watermarks to improve accuracy and performance in recycling facilities. In addition, consumer engagement capabilities deliver a direct digital communications channel with consumers, and a cloud-based record of recycling information provides new insights. |
|
• |
Digimarc Retail Experience helps brands meet the evolving needs of retail partners and consumers. Digimarc's technology leverages covert digital watermarks and on-package QR codes to provide an easier, frictionless shopping experience and to comply with upcoming industry standards. In addition, consumer engagement capabilities deliver a direct digital 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 -K for the year ended December 31, 2022 , which was filed with the U.S. Securities and Exchange Commission ("SEC") on March 2, 2023 ( the " 2022 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 2022 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 Note 9 for information related to the EVRYTHNG acquisition.
Business Combinations
The Company allocates purchase price consideration to the tangible 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 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 customers, the cost to develop acquired technology, useful lives, discount rates, and 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.
Accounting Pronouncements Adopted
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016 - 13 , " Financial Instruments - Credit Losses (ASC 326 ): Measurement of Credit Losses on Financial Instruments ," which amends the guidance on the impairment of financial instruments. The amendments in this update 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 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 adopted this new standard on January 1, 2023. The adoption of this standard did not have a material impact on the Company's financial condition, results of operations and disclosures.
2. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments, which include cash equivalents, accounts receivable, accounts payable and other accrued liabilities, approximate their carrying values due to the short-term nature of these instruments. The Company's marketable securities are classified as 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 Company ' s fair value hierarchy for its cash equivalents and marketable securities was as follows:
|
September 30, 2023 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
|
Money market securities |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
U.S. Treasuries |
|
|
|
|
||||||||||||
|
Commercial Paper |
|
|
|
|
||||||||||||
|
Federal agency notes |
|
|
|
|
||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
December 31, 2022 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
|
Money market securities |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Commercial paper |
|
|
|
|
||||||||||||
|
Corporate notes |
|
|
|
|
||||||||||||
|
Federal agency notes |
|
|
|
|
||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
The fair value maturities of the Company's cash equivalents and marketable securities as of September 30, 2023 , 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 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
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 U.S. Treasuries, money market securities, commercial paper, and federal agency notes totaling $
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 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 to 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 month after the services are provided. |
Customer arrangements may contain multiple performance obligations such as software subscriptions, software products, software development services, and/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 Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Commercial: |
||||||||||||||||
|
Subscription |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Service |
|
|
|
|
||||||||||||
|
Total Commercial |
|
|
|
|
||||||||||||
|
Government: |
||||||||||||||||
|
Subscription |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Service |
|
|
|
|
||||||||||||
|
Total Government |
|
|
|
|
||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
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:
|
September 30, |
December 31, |
|||||||
|
2023 |
2022 |
|||||||
|
Contract acquisition costs, current |
$ |
|
$ |
|
||||
|
Contract acquisition costs, long-term |
|
|
||||||
|
Total |
$ |
|
$ |
|
||||
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:
|
September 30, |
December 31, |
|||||||
|
2023 |
2022 |
|||||||
|
Deferred revenue, current |
$ |
|
$ |
|
||||
|
Deferred revenue, long-term |
|
|
||||||
|
Total |
$ |
|
$ |
|
||||
The Company recognized $
The aggregate amount of the transaction prices from contractual obligations that are unsatisfied or partially unsati
sfied was $
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Domestic |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
International (1) |
|
|
|
|
||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
( 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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Customer A |
|
% |
|
% |
|
% |
|
% | ||||||||
|
Customer B |
|
% |
|
% |
|
% |
|
% | ||||||||
Long-Lived Assets by Geographical Area
Long-lived assets by geographic area were as follows:
|
September 30, |
December 31, |
|||||||
|
2023 |
2022 |
|||||||
|
United States |
$ |
|
$ |
|
||||
|
Europe |
|
|
||||||
|
Total |
$ |
|
$ |
|
||||
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
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 to years for employee grants and to 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 to 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, is determined based on the probability of achievement of the performance criteria as of each reporting date (measurement dates). 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 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, 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 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Stock price |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Expected volatility |
|
|
|
% |
|
% | ||||||||||
|
Risk-free interest rate |
|
|
|
% |
|
% | ||||||||||
Stock-Based Compensation
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Stock-based compensation: |
||||||||||||||||
|
Cost of revenue |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Sales and marketing |
|
|
|
|
||||||||||||
|
Research, development and engineering |
|
|
|
|
||||||||||||
|
General and administrative |
|
|
|
|
||||||||||||
|
Stock-based compensation expense |
|
|
|
|
||||||||||||
|
Capitalized to software and patent costs |
|
|
|
|
||||||||||||
|
Total stock-based compensation |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
The following table sets forth total unrecognized compensation costs related to non-vested stock-based awards granted under the Company's stock incentive plan:
|
September 30, |
December 31, |
|||||||
|
2023 |
2022 |
|||||||
|
Total unrecognized compensation costs |
$ |
|
$ |
|
||||
Total unrecognized compensation costs will be adjusted for any future forfeitures if and when they occur.
The Company expects to recognize the total unrecognized compensation costs as of September 30, 2023 , for all non-vested stock-based awards over weighted average periods through September 30, 2027 , as follows:
|
RSAs |
RSUs |
PSUs |
||||||||||
|
Weighted average period (in years) |
|
|
|
|||||||||
As of
September 30, 2023
, under the Company's stock incentive plan, an additional
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 September 30, 2023: |
Options |
Price |
Fair Value |
Value |
||||||||||||
|
Outstanding at June 30, 2023 |
|
$ |
|
$ |
|
|||||||||||
|
Granted |
|
$ |
|
$ |
|
|||||||||||
|
Exercised |
|
$ |
|
$ |
|
|||||||||||
|
Forfeited or expired |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||||||
|
Outstanding at September 30, 2023 |
|
$ |
|
$ |
|
$ |
|
|||||||||
|
Weighted |
Weighted |
|||||||||||||||
|
Average |
Average |
Aggregate |
||||||||||||||
|
Number of |
Exercise |
Grant Date |
Intrinsic |
|||||||||||||
|
Nine Months Ended September 30, 2023: |
Options |
Price |
Fair Value |
Value |
||||||||||||
|
Outstanding at December 31, 2022 |
|
$ |
|
$ |
|
|||||||||||
|
Granted |
|
$ |
|
$ |
|
|||||||||||
|
Exercised |
|
$ |
|
$ |
|
|||||||||||
|
Forfeited or expired |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||||||
|
Outstanding at September 30, 2023 |
|
$ |
|
$ |
|
$ |
|
|||||||||
|
Exercisable at September 30, 2023 |
|
$ |
|
$ | — | $ |
|
|||||||||
|
Unvested at September 30, 2023 |
|
$ | — | $ | — | $ | — | |||||||||
The aggregate intrinsic value is based on the closing price of
$
Restricted Stock Awards Activity
The following table presents the unvested RSA activity:
|
Weighted |
||||||||
|
Average |
||||||||
|
Number of |
Grant Date |
|||||||
|
Three Months Ended September 30, 2023: |
Shares |
Fair Value |
||||||
|
Unvested balance at June 30, 2023 |
|
$ |
|
|||||
|
Granted |
|
$ |
|
|||||
|
Vested |
(
|
) | $ |
(
|
) | |||
|
Forfeited |
(
|
) | $ |
(
|
) | |||
|
Unvested balance at September 30, 2023 |
|
$ |
|
|||||
|
Weighted |
||||||||
|
Average |
||||||||
|
Number of |
Grant Date |
|||||||
|
Nine Months Ended September 30, 2023: |
Shares |
Fair Value |
||||||
|
Unvested balance at December 31, 2022 |
|
$ |
|
|||||
|
Granted |
|
$ |
|
|||||
|
Vested |
(
|
) | $ |
(
|
) | |||
|
Forfeited |
(
|
) | $ |
(
|
) | |||
|
Unvested balance at September 30, 2023 |
|
$ |
|
|||||
The fair value of RSAs vested is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Fair value of RSAs vested |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
Restricted Stock Units Activity
The following table presents the unvested RSU activity:
|
Weighted |
||||||||
|
Average |
||||||||
|
Number of |
Grant Date |
|||||||
|
Three Months Ended September 30, 2023: |
Shares |
Fair Value |
||||||
|
Unvested balance at June 30, 2023 |
|
$ |
|
|||||
|
Granted |
|
$ |
|
|||||
|
Vested |
(
|
) | $ |
(
|
) | |||
|
Forfeited |
(
|
) | $ |
(
|
) | |||
|
Unvested balance at September 30, 2023 |
|
$ |
|
|||||
|
Weighted |
||||||||
|
Average |
||||||||
|
Number of |
Grant Date |
|||||||
|
Nine Months Ended September 30, 2023: |
Shares |
Fair Value |
||||||
|
Unvested balance at December 31, 2022 |
|
$ |
|
|||||
|
Granted |
|
$ |
|
|||||
|
Vested |
(
|
) | $ |
(
|
) | |||
|
Forfeited |
(
|
) | $ |
(
|
) | |||
|
Unvested balance at September 30, 2023 |
|
$ |
|
|||||
The fair value of RSU awards vested is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Fair value of RSU awards vested |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
Performance Stock Units Activity
The following table presents the unvested PSU activity:
|
Weighted |
||||||||
|
Average |
||||||||
|
Number of |
Grant Date |
|||||||
|
Three Months Ended September 30, 2023: |
Shares |
Fair Value |
||||||
|
Unvested balance at June 30, 2023 |
|
$ |
|
|||||
|
Change in units based on performance expectations |
|
$ |
|
|||||
|
Granted |
|
$ |
|
|||||
|
Vested |
|
$ |
|
|||||
|
Forfeited |
|
$ |
|
|||||
|
Unvested balance at September 30, 2023 |
|
$ |
|
|||||
|
Weighted |
||||||||
|
Average |
||||||||
|
Number of |
Grant Date |
|||||||
|
Nine Months Ended September 30, 2023: |
Shares |
Fair Value |
||||||
|
Unvested balance at December 31, 2022 |
|
$ |
|
|||||
|
Change in units based on performance expectations |
(
|
) | $ |
(
|
) | |||
|
Granted |
|
$ |
|
|||||
|
Vested |
(
|
) | $ |
(
|
) | |||
|
Forfeited |
(
|
) | $ |
(
|
) | |||
|
Unvested balance at September 30, 2023 |
|
$ |
|
|||||
The fair value of PSU awards vested is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Fair value of PSU awards vested |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
6. Shareholders ' Equity
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
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 share excludes dilution and is calculated by dividing earnings by the weighted-average number of shares outstanding for the period. Diluted earnings per share is calculated by dividing earnings by the weighted-average number of shares, as adjusted for the potentially dilutive effect of stock options and unvested RSAs, RSUs, and PSUs. The dilutive effect of stock options and unvested RSAs, RSUs, and PSUs is determined using the treasury stock method.
The following table reconciles earnings (loss) per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Basic Earnings (Loss) per Share: |
||||||||||||||||
|
Net loss — basic |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Weighted average shares outstanding — basic |
|
|
|
|
||||||||||||
|
Basic loss per share |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Diluted Earnings (Loss) per Share: |
||||||||||||||||
|
Net loss — diluted |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Weighted average shares outstanding — diluted |
|
|
|
|
||||||||||||
|
Diluted loss per share |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
The following table indicates the stock equivalents related to stock options and unvested RSAs, RSUs, and PSUs that were anti-dilutive and excluded from diluted earnings (loss) per share calculations:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Anti-dilutive shares due to: |
||||||||||||||||
|
Exercise prices higher than the average market price |
|
|
|
|
||||||||||||
|
Net loss |
|
|
|
|
||||||||||||
8. Trade Accounts Receivable
Trade Accounts Receivable
Trade accounts receivable are recorded at the contractual or invoiced amount.
|
September 30, |
December 31, |
|||||||
|
2023 |
2022 |
|||||||
|
Trade accounts receivable, current |
$ |
|
$ |
|
||||
|
Trade accounts receivable, long-term |
|
|
||||||
|
Allowance for doubtful accounts |
(
|
) |
(
|
) | ||||
|
Trade accounts receivable, net |
$ |
|
$ |
|
||||
|
Unpaid deferred revenue included in trade accounts receivable |
$ |
|
$ |
|
||||
Allowance for Doubtful Accounts
The Company's accounts receivable are subject to concentrations of credit risk. The Company maintains an allowance for its doubtful accounts receivable to reflect any estimated credit losses. This allowance is evaluated each quarter on a customer by customer basis and considers historical write-off experience with each customer, the number of days that any delinquent invoices are past due, and an evaluation of the potential risk of loss associated with any delinquent accounts. 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:
|
September 30, |
December 31, |
||||
|
2023 |
2022 |
||||
|
Company A |
|
|
% | ||
|
Company B |
|
* | |||
|
Company C |
|
* | |||
* 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 $
In
August 2022,
the Company issued
In
January 2023,
the Company issued
The Company entered into a Loan Agreement with EVRYTHNG (the "Loan Agreement") on
December 10, 2021
pursuant to the terms of the acquisition. The Loan Agreement provided a loan facility of $
The following table presents the final purchase price allocation:
|
Purchase Price |
||||
|
Allocation |
||||
|
January 3, 2022 |
||||
|
Trade accounts receivable, net |
$ |
|
||
|
Other current assets |
|
|||
|
Property and equipment, net |
|
|||
|
Lease right of use assets and other long-term assets |
|
|||
|
Intangibles |
|
|||
|
Goodwill |
|
|||
|
Accounts payable and other accrued liabilities |
(
|
) | ||
|
Deferred revenue |
(
|
) | ||
|
Loan payable to related party |
(
|
) | ||
|
Lease liability and other long-term liabilities |
(
|
) | ||
|
Total purchase price |
$ |
|
||
The Company allocated $
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 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
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, 2022, the beginning of the earliest period presented. Pro forma adjustments are primarily comprised of transaction expenses. 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 Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Revenue |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Net loss |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Loss per share: |
||||||||||||||||
|
Basic |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Diluted |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
10. 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 to years. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful life or the lease term.
|
September 30, |
December 31, |
|||||||
|
2023 |
2022 |
|||||||
|
Office furniture and fixtures |
$ |
|
$ |
|
||||
|
Software |
|
|
||||||
|
Equipment |
|
|
||||||
|
Leasehold improvements |
|
|
||||||
|
Gross property and equipment |
|
|
||||||
|
Less accumulated depreciation |
(
|
) |
(
|
) | ||||
|
Property and equipment, net |
$ |
|
$ |
|
||||
11. 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.
|
Balance at December 31, 2022 |
$ |
|
||
|
Currency translation adjustments |
|
|||
|
Balance at September 30, 2023 |
$ |
|
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.
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.
Amortization of intangible assets acquired is calculated using the straight-line method over the estimated useful lives of the assets.
|
Estimated Life |
September 30, |
December 31, |
||||||||||
|
(years) |
2023 |
2022 |
||||||||||
|
Capitalized patent costs |
$ |
|
$ |
|
||||||||
|
Intangible assets acquired: |
||||||||||||
|
Purchased intellectual property |
|
|
||||||||||
|
Developed technology |
|
|
|
|||||||||
|
Customer relationships |
|
|
|
|||||||||
|
Gross intangible assets |
|
|
||||||||||
|
Accumulated amortization |
(
|
) |
(
|
) | ||||||||
|
Intangibles, net |
$ |
|
$ |
|
||||||||
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 September 30, | Nine Months Ended September 30, | |||||||
|
2023 |
2022 |
2023 |
2022 |
|||||
|
Amortization expense |
$ |
|
$ |
|
$ |
|
$ |
|
For intangible assets recorded at September 30, 2023 , the estimated future aggregate amortization expense for the years ending December 31, 2023 through December 31, 2027 is as follows:
|
Amortization |
||
|
As of September 30, 2023 |
Expense |
|
|
Remaining in 2023 |
$ |
|
|
2024 |
$ |
|
|
2025 |
$ |
|
|
2026 |
$ |
|
|
2027 |
$ |
|
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
September 30, 2023
, totaling $
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
September 30, 2023
, totaling
$
The Company leased office space in London, England under a lease entered into by EVRYTHNG in
July 2019.
The term of the lease ended in
July 2023,
with
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:
|
September 30, |
December 31, |
|||||||
|
2023 |
2022 |
|||||||
|
Lease right of use assets |
$ |
|
$ |
|
||||
|
Lease liabilities, current |
$ |
|
$ |
|
||||
|
Lease liabilities, long-term |
$ |
|
$ |
|
||||
|
Weighted-average remaining life (in years) |
|
|
||||||
|
Weighted-average discount rate |
|
% |
|
% | ||||
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 assets
may
not
be recoverable. The Company recorded an "impairment of lease right of use assets and leasehold improvements" of $
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 tables:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Operating lease expense |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Cash paid for operating leases |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
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 September 30, 2023 :
|
Cash |
||||
|
Payment |
||||
|
As of September 30, 2023: |
Obligations |
|||
|
Remaining in 2023 |
$ |
|
||
|
2024 |
|
|||
|
2025 |
|
|||
|
2026 |
|
|||
|
2027 |
|
|||
|
Thereafter |
|
|||
|
Total lease payments |
|
|||
|
Imputed interest |
(
|
) | ||
|
Total minimum lease payments |
$ |
|
||
14. Other Income
The following table provides information about other income, net:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Interest income |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Refundable tax credit |
|
|
|
|
||||||||||||
|
Foreign currency gains (losses) |
(
|
) |
(
|
) |
|
(
|
) | |||||||||
|
Other income |
|
|
|
|
||||||||||||
|
Total other income, net |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
15. Income Taxes
The provision for income taxes reflects current taxes and deferred taxes. The effective tax rate for each of the
nine
months ended
September 30, 2023
and
2022
was
The valuation allowance against net deferred tax assets as of
September 30, 2023
, was $
An excess tax benefit of
$
Excess tax deficiencies of $
16. Commitments and Contingencies
Certain of the Company's contracts include an indemnification provision for claims from third parties relating to infringement of 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.
Item 2. Management ' s Discussion and Analysis of Financial Condition and Results of Operations
The following Management ' s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of Digimarc that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. See the discussion regarding forward-looking statements included in this Quarterly Report on Form 10-Q under the caption " Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. "
The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Readers are also urged to carefully review and consider the disclosures made in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and in the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed on March 2, 2023 (our "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 Form 10-Q to " Company, " " Digimarc, " " we, " " our " and " us " refer to Digimarc Corporation.
All dollar amounts within the tables 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 Corporation is a global leader in product digitization and digital media identification, delivering business value across industries through unique identities and cloud-based solutions. Our technology highlights a product's journey to provide greater visibility into all relevant product data, allowing companies to make more intelligent business decisions.
The Digimarc Illuminate platform is a distinctive software as a service (SaaS) cloud-based platform for digitizing products and aggregating their interactions. Product digitization, the act of creating and connecting a digital twin to a physical or digital item via a digital watermark, Quick Response ("QR") code, and/or other digital carrier, enables products to connect with the web and interact with consumers and digital devices. The product's digital twin that comprises events and attributes from and about the product can be customized and automated to deliver unique experiences that benefits customers, brands, retailers, and other stakeholders across a wide variety of digital applications, while capturing a record of every interaction.
The Digimarc product suite is built on top of the Digimarc Illuminate platform to address specific business needs and power a trusted and scalable ecosystem in areas like automation, consumer trust and authenticity, and sustainability. All of our 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, our technologies provide many benefits, including:
|
• |
Digimarc Validate supports authenticity 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. Our technology protects digital images, audio, product packaging, and other physical items by delivering 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 Engage unlocks an interactive communications channel connecting brands and consumers. Our technology activates products and media through on-package QR codes or digital watermarks, enabling consumers to scan for more information. Combined with cloud-based rules, brands can deliver contextually relevant content based on time, location, and more. |
|
• |
Digimarc Recycle increases the recyclability of products and packaging. Our technology activates products and packaging with covert digital watermarks to improve accuracy and performance in recycling facilities. In addition, consumer engagement capabilities deliver a direct digital communications channel with consumers, and a cloud-based record of recycling information provides new insights. |
| • |
Digimarc Retail Experience helps brands meet the evolving needs of retail partners and consumers. Our technology leverages covert digital watermarks and on-package QR codes to provide an easier, frictionless shopping experience and to comply with upcoming industry standards. In addition, consumer engagement capabilities deliver a direct digital communication channel with consumers. |
Digimarc has maintained a relationship with a consortium of central banks (the "Central Banks") for over 24 years, providing trusted technology to help deter digital counterfeiting of currency. The relationship was the first commercially successful large-scale use of our technologies and protects billions of banknotes in circulation globally.
To protect our inventions, we have implemented an extensive intellectual property protection program that relies on a combination of patent, copyright, trademark and trade secret laws, and nondisclosure agreements and other contracts. We seek patent protection for our inventions to differentiate our products and technologies, mitigate infringement risks, and develop opportunities for licensing. Our intellectual property contains many innovations in digital watermarking, content and object recognition, product authentication, and related fields. Our broad patent portfolio covers a wide range of methods, applications, system architectures and processes. As a result, we believe we have one of the world's most extensive patent portfolios in digital watermarking and related fields, with approximate ly 870 U.S. and foreign patents granted and applications pending as of September 30, 2023. The patents in our portfolio each have a life of approximately 20 years from the patent's effective filing date.
On January 3, 2022, we completed the acquisition of EVRYTHNG. The EVRYTHNG Product Cloud allows the combined company to offer a complete software as a service product digitization platform to existing customers and prospective customers. The aggregate consideration for the acquisition was 804 thousand shares of common stock of the Company and warrants to purchase 231 thousand shares of common stock of the Company. The warrants expired unexercised. We also paid $4.0 million of closing costs on behalf of the EVRYTHNG sellers. The financial results of EVRYTHNG are consolidated with Digimarc's financial results for the post-acquisition period.
Critical Accounting Policies and Estimates
Detailed information about our critical accounting policies and estimates is set forth in Part III, Item 15 of our 2022 Annual Report ("Exhibits and Financial Statement Schedules"), in "Note 1: Description of Business and Summary of Significant Accounting Policies," which is incorporated by reference into this Quarterly Report on Form 10-Q.
Results of Operations
The following table presents Consolidated Statements of Operations data for the periods indicated as a percentage of total revenue. The Consolidated Statements of Operations for the nine months ended September 30, 2022 reflect the operating results of EVRYTHNG from January 3, 2022, the date the acquisition closed, through September 30, 2022.
Unless stated otherwise, all references in this Management's Discussion and Analysis of Financial Condition and Results of Operations relate to the three and nine month periods ended September 30, 2023, and all changes discussed with respect to such periods reflect changes compared to the three and nine month periods ended September 30, 2022.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Percentages are percent of total revenue |
||||||||||||||||
|
Revenue: |
||||||||||||||||
|
Subscription |
53 | % | 52 | % | 52 | % | 48 | % | ||||||||
|
Service |
47 | 48 | 48 | 52 | ||||||||||||
|
Total revenue |
100 | 100 | 100 | 100 | ||||||||||||
|
Cost of revenue: |
||||||||||||||||
|
Subscription (1) |
8 | 13 | 9 | 13 | ||||||||||||
|
Service (1) |
22 | 20 | 22 | 23 | ||||||||||||
|
Amortization expense on acquired intangible assets |
13 | 13 | 13 | 15 | ||||||||||||
|
Total cost of revenue |
42 | 47 | 44 | 50 | ||||||||||||
|
Gross profit |
58 | 53 | 56 | 50 | ||||||||||||
|
Operating expenses: |
||||||||||||||||
|
Sales and marketing |
60 | 98 | 66 | 103 | ||||||||||||
|
Research, development and engineering |
70 | 97 | 79 | 86 | ||||||||||||
|
General and administrative |
49 | 53 | 52 | 65 | ||||||||||||
|
Amortization expense on acquired intangible assets |
3 | 4 | 3 | 4 | ||||||||||||
|
Impairment of lease right of use assets and leasehold improvements |
— | — | 1 | 2 | ||||||||||||
|
Total operating expenses |
182 | 252 | 202 | 261 | ||||||||||||
|
Operating loss |
(124 | ) | (199 | ) | (145 | ) | (211 | ) | ||||||||
|
Other income, net |
5 | 8 | 7 | 5 | ||||||||||||
|
Loss before income taxes |
(119 | ) | (191 | ) | (138 | ) | (206 | ) | ||||||||
|
Provision for income taxes |
(1 | ) | (— | ) | (— | ) | (— | ) | ||||||||
|
Net loss |
(119 | )% | (191 | )% | (138 | )% | (206 | )% | ||||||||
|
(1) |
Cost of revenue for Subscription and Service excludes Amortization expense on acquired intangible assets. |
Summary
Total revenue for the three month period ended September 30, 2023 , increased $1.2 million, or 15% , to $9.0 million, compared to $7.8 million for the corresponding three month period ended September 30, 2022 . The increase in revenue primarily reflects $0.7 million of higher subscription revenue from new and existing commercial contracts and $0.6 million of higher service revenue due to a larger annual budget from the Central Banks for project work in 2023 than in 2022.
Total revenue for the nine month period ended September 30, 2023 , increased $2.6 million, or 11% , to $25.6 million, compared to $23.0 million for the corresponding nine month period ended September 30, 2022 . The increase in revenue primarily reflects $3.0 million of higher subscription revenue from new and existing commercial contracts and $1.3 million of higher service revenue due to a larger annual budget from the Central Banks for project work in 2023 than in 2022, partially offset by $0.9 million of lower subscription revenue as a result of sunsetting our Piracy Intelligence product in 2022 and $0.8 million of lower service revenue from HolyGrail recycling projects.
Total operating expenses for the three month period ended September 30, 2023 , decreased $3.3 million, or 17% , to $16.4 million, compared to $19.7 million for the corresponding three month period ended September 30, 2022 . The decrease in operating expenses primarily reflects $1.4 million of lower severance costs incurred for organizational changes, $1.1 million of lower compensation costs due to lower headcount, partially offset by annual compensation adjustments, and $0.6 million of lower contractor and consulting expenses.
Total operating expenses for the nine month period ended September 30, 2023 , decreased $8.5 million, or 14% , to $51.5 million, compared to $60.0 million for the corresponding nine month period ended September 30, 2022 . The decrease in operating expenses primarily reflects $4.4 million of lower compensation costs due to lower headcount, partially offset by annual compensation adjustments, and lower expenses for contractors and consultants of $1.6 million, travel and training of $0.9 million, legal of $0.6 million, recruiting of $0.6 million, and facilities of $0.6 million, partially offset by $0.7 million of higher severance costs incurred for organizational changes.
Revenue
|
Three Months Ended September 30, |
Dollar |
Percent |
Nine Months Ended September 30, |
Dollar |
Percent |
|||||||||||||||||||||||||||
|
2023 |
2022 |
Increase/(Decrease) |
Increase/(Decrease) |
2023 |
2022 |
Increase/(Decrease) |
Increase/(Decrease) |
|||||||||||||||||||||||||
|
Revenue: |
||||||||||||||||||||||||||||||||
|
Subscription |
$ | 4,811 | $ | 4,086 | $ | 725 | 18 | % | $ | 13,374 | $ | 11,121 | $ | 2,253 | 20 | % | ||||||||||||||||
|
Service |
4,183 | 3,735 | 448 | 12 | % | 12,193 | 11,858 | 335 | 3 | % | ||||||||||||||||||||||
|
Total |
$ | 8,994 | $ | 7,821 | $ | 1,173 | 15 | % | $ | 25,567 | $ | 22,979 | $ | 2,588 | 11 | % | ||||||||||||||||
|
Revenue (as % of total revenue): |
||||||||||||||||||||||||||||||||
|
Subscription |
53 | % | 52 | % | 52 | % | 48 | % | ||||||||||||||||||||||||
|
Service |
47 | % | 48 | % | 48 | % | 52 | % | ||||||||||||||||||||||||
|
Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||
Subscription
Subscription revenue consists primarily of revenue earned from subscription fees for access to our software as a service platform and products and, to a lesser extent, licensing fees for our 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 $0.7 million increase in subscription revenu e for the three month period ended September 30, 2023 , compared to the corresponding three month period ended September 30, 2022 , primarily reflects $0.7 million of higher subscription revenue from new and existing commercial contracts.
The $2.3 million increase in subscription revenue for the nine month period ended September 30, 2023 , compared to the corresponding nine month period ended September 30, 2022 , primarily reflects $3.0 million of higher subscription revenue from new and existing commercial contracts, partially offset by $0.9 million of lower subscription revenue as a result of sunsetting our Piracy Intelligence product in 2022.
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, 2029. The contract is subject to work plans that are reviewed and agreed upon quarterly. The contract provides for predetermined billing rates, which are adjusted annually to account for cost of living variables, and provides for the reimbursement of third party costs incurred to support the work plans.
The $0.4 million increase in service revenue for the three month period ended September 30, 2023 , compared to the corresponding three month period ended September 30, 2022 , primarily reflects $0.6 million of higher service revenue from the Central Banks.
The $0.3 million increase in service revenue for the nine month period ended September 30, 2023 , compared to the corresponding nine month period ended September 30, 2022 , primarily reflects $1.3 million of higher service revenue from the Central Banks, partially offset by $0.8 million of lower service revenue from HolyGrail recycling projects.
Revenue by geography
|
Three Months Ended September 30, |
Dollar |
Percent |
Nine Months Ended September 30, |
Dollar |
Percent |
|||||||||||||||||||||||||||
|
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) |
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||
|
Revenue by geography: |
||||||||||||||||||||||||||||||||
|
Domestic |
$ | 2,921 | $ | 2,889 | $ | 32 | 1 | % | $ | 8,541 | $ | 7,259 | $ | 1,282 | 18 | % | ||||||||||||||||
|
International |
6,073 | 4,932 | 1,141 | 23 | % | 17,026 | 15,720 | 1,306 | 8 | % | ||||||||||||||||||||||
|
Total |
$ | 8,994 | $ | 7,821 | $ | 1,173 | 15 | % | $ | 25,567 | $ | 22,979 | $ | 2,588 | 11 | % | ||||||||||||||||
|
Revenue (as % of total revenue): |
||||||||||||||||||||||||||||||||
|
Domestic |
32 | % | 37 | % | 33 | % | 32 | % | ||||||||||||||||||||||||
|
International |
68 | % | 63 | % | 67 | % | 68 | % | ||||||||||||||||||||||||
|
Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||
Domestic
The $ 0.0 million increase in domestic revenue for the three month period ended September 30, 2023 , compared to the corresponding three month period ended September 30, 2022 was insignificant.
The $ 1.3 million increase in domestic revenue for the nine month period ended September 30, 2023 , compared to the corresponding nine month period ended September 30, 2022 , primarily reflects $1.9 million of higher subscription revenue from new and existing commercial contracts, partially offset by $0.6 million of lower subscription revenue as a result of sunsetting our Piracy Intelligence product in 2022.
International
The $ 1.1 million increase in international revenue for the three month period ended September 30, 2023 , compared to the corresponding three month period ended September 30, 2022 , primarily reflects $0.7 million of higher subscription revenue from new and existing commercial contracts and $0.6 million of higher service revenue from the Central Banks.
The $ 1.3 million increase in international revenue for the nine month period ended September 30, 2023 , compared to the corresponding nine month period ended September 30, 2022 , primarily reflects $1.3 million of higher service revenue from the Central Banks and $1.1 million of higher subscription revenue from new and existing commercial contracts, partially offset by $0.8 million of lower service revenue from HolyGrail recycling projects and $0.3 million of lower subscription revenue as a result of sunsetting our Piracy Intelligence product in 2022 .
Revenue by market
|
Three Months Ended September 30, |
Dollar |
Percent |
Nine Months Ended September 30, |
Dollar |
Percent |
|||||||||||||||||||||||||||
|
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) |
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||
|
Commercial: |
||||||||||||||||||||||||||||||||
|
Subscription |
$ | 4,511 | $ | 3,786 | $ | 725 | 19 | % | $ | 12,474 | $ | 10,033 | $ | 2,441 | 24 | % | ||||||||||||||||
|
Service |
213 | 389 | (176 | ) | (45 | )% | 849 | 1,851 | (1,002 | ) | (54 | )% | ||||||||||||||||||||
|
Total Commercial |
$ | 4,724 | $ | 4,175 | $ | 549 | 13 | % | $ | 13,323 | $ | 11,884 | $ | 1,439 | 12 | % | ||||||||||||||||
|
Government: |
||||||||||||||||||||||||||||||||
|
Subscription |
$ | 300 | $ | 300 | $ | — | — | % | $ | 900 | $ | 1,088 | $ | (188 | ) | (17 | )% | |||||||||||||||
|
Service |
3,970 | 3,346 | 624 | 19 | % | 11,344 | 10,007 | 1,337 | 13 | % | ||||||||||||||||||||||
|
Total Government |
$ | 4,270 | $ | 3,646 | $ | 624 | 17 | % | $ | 12,244 | $ | 11,095 | $ | 1,149 | 10 | % | ||||||||||||||||
|
Total |
$ | 8,994 | $ | 7,821 | $ | 1,173 | 15 | % | $ | 25,567 | $ | 22,979 | $ | 2,588 | 11 | % | ||||||||||||||||
Commercial
The $0.5 million increase in commercial revenue f or the three month period ended September 30, 2023 , compared to the corresponding three month period ended September 30, 2022 , primarily reflects $0.7 million of higher subscription revenue from new and existing commercial contracts, partially offset by $0.2 million of lower commercial service revenue.
The $1.4 million increase in commercial revenue for the nine month period ended September 30, 2023 , compared to the corresponding nine month period ended September 30, 2022 , primarily reflects $3.0 million of higher subscription revenue from new and existing commercial contracts, partially offset by $0.9 million of lower subscription revenue as a result of sunsetting our Piracy Intelligence product in 2022 and $0.8 million of lower service revenue from HolyGrail recycling projects.
Government
The $0.6 million increase in government revenue for the three month period ended September 30, 2023 , compared to the corresponding three month period ended September 30, 2022 , primarily reflects $0.6 million of higher service revenue from the Central Banks.
The $1.1 million increase in government revenue for the nine month period ended September 30, 2023 , compared to the corresponding nine month period ended September 30, 2022 , primarily reflects $1.3 million of higher service revenue from the Central Banks, partially offset by $0.2 million of lower government subscription revenue.
Annual Recurring Revenue ("ARR")
|
As of |
As of |
Dollar |
Percent |
|||||||||
|
September 30, |
September 30, |
Increase |
Increase |
|||||||||
|
2023 |
2022 |
(Decrease) |
(Decrease) |
|||||||||
|
ARR |
$ | 19,559 | $ | 12,682 | $ | 6,877 | 54 | % | ||||
ARR increased $6.9 million, or 54%, primarily driven by new commercial subscription contracts entered into and increased subscription fees on existing commercial contracts.
We provide an ARR performance metric to help investors better understand and assess the performance of our business because our mix of revenue generated from recurring sources has increased in recent years. ARR is calculated as the aggregation of annualized subscription fees from all of our commercial contracts as of the measurement date. ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with, or to replace, either of those items. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.
Cost of revenue
Subscription . Cost of subscription revenue primarily includes:
|
• |
internet cloud hosting costs and image search data fees to support our subscription products; and |
|
• |
amortization of capitalized patent costs and patent maintenance fees. |
Service. Cost of service revenue primarily includes:
|
• |
compensation, benefits, incentive compensation in the form of cash and stock-based compensation and related costs of our software developers, quality assurance personnel, professional services team and other personnel where we bill our customers for time and materials costs; |
|
• |
payments to outside contractors that are billed to customers; |
|
• |
charges for equipment directly used by customers; |
|
• |
depreciation for equipment and software directly used by customers; and |
|
• |
travel costs that are billed to customers. |
Amortization expense on acquired intangible assets includes:
|
• |
amortization expense recognized on the developed technology intangible asset acquired in the EVRYTHNG acquisition. |
Gross profit
|
Three Months Ended September 30, |
Dollar |
Percent |
Nine Months Ended September 30, |
Dollar |
Percent |
|||||||||||||||||||||||||||
|
2023 |
2022 |
Increase/(Decrease) |
Increase/(Decrease) |
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||
|
Gross Profit: |
||||||||||||||||||||||||||||||||
|
Subscription (1) |
$ | 4,113 | $ | 3,080 | $ | 1,033 | 34 | % | $ | 11,110 | $ | 8,187 | $ | 2,923 | 36 | % | ||||||||||||||||
|
Service (1) |
2,245 | 2,133 | 112 | 5 | % | 6,572 | 6,681 | (109 | ) | (2 | )% | |||||||||||||||||||||
|
Amortization expense on acquired intangible assets |
(1,135 | ) | (1,048 | ) | (87 | ) | (8 | )% | (3,346 | ) | (3,362 | ) | 16 | — | % | |||||||||||||||||
|
Total |
$ | 5,223 | $ | 4,165 | $ | 1,058 | 25 | % | $ | 14,336 | $ | 11,506 | $ | 2,830 | 25 | % | ||||||||||||||||
|
Gross Profit Margin: |
||||||||||||||||||||||||||||||||
|
Subscription (1) |
85 | % | 75 | % | 83 | % | 74 | % | ||||||||||||||||||||||||
|
Service (1) |
54 | % | 57 | % | 54 | % | 56 | % | ||||||||||||||||||||||||
|
Total |
58 | % | 53 | % | 56 | % | 50 | % | ||||||||||||||||||||||||
|
(1) |
Gross Profit and Gross Profit Margin for Subscription and Service excludes Amortization expense on acquired intangible assets. |
The $1.1 million increase in total gross profit for the three month period ended September 30, 2023, compared to the corresponding three month period ended September 30, 2022, was primarily due to $1.0 million of higher subscription gross profit contribution reflecting higher subscription revenue and a favorable mix of subscription revenue.
The $2.8 million increase in total gross profit for the nine month period ended September 30, 2023, compared to the corresponding nine month period ended September 30, 2022, was primarily due to $2.9 million of higher subscription gross profit contribution reflecting higher subscription revenue and a favorable mix of subscription revenue.
The increase in subscription gross profit margin, excluding amortization expense on acquired intangible assets, fo r the three month period ended September 30, 2023 , compared to the corresponding three month period ended September 30, 2022 , was primarily due to higher subscription revenue combined with a favorable mix of subscription revenue, and lower platform costs.
The increase in subscription gross profit margin, excluding amortization expense on acquired intangible assets, for the nine month period ended September 30, 2023 , compared to the corresponding nine month period ended September 30, 2022 , was primarily due to higher subscription revenue combined with a favorable mix of subscription revenue, and lower platform costs.
The decrease in service gross profit margin, excluding amortization expense on acquired intangible assets, for the three month period ended September 30, 2023 , compared to the corresponding three m onth period ended September 30, 2022, was primarily due to a more favorable mix of service revenue in 2022.
The decrease in service gross profit margin, excluding amortization expense on acquired intangible assets, for the nine month period ended September 30, 2023, compared to the corresponding nine month period ended September 30, 2022, was primarily due to a more favorable mix of service revenue in 2022.
Operating expenses
Sales and marketing
|
Three Months Ended September 30, |
Dollar |
Percent |
Nine Months Ended September 30, |
Dollar |
Percent |
|||||||||||||||||||||||||||
|
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) |
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||
|
Sales and marketing |
$ | 5,366 | $ | 7,684 | $ | (2,318 | ) | (30 | )% | $ | 16,770 | $ | 23,702 | $ | (6,932 | ) | (29 | )% | ||||||||||||||
|
Sales and marketing (as % of total revenue) |
60 | % | 98 | % | 66 | % | 103 | % | ||||||||||||||||||||||||
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 |
|
• |
the allocation of facilities and information technology costs. |
The $2.3 million decrease in sales and marketing expenses for the three month period ended September 30, 2023 , compared to the corresponding three month peri od ended September 30, 2022, was primarily due to:
|
• |
decreased severance costs of $1.0 million incurred for organizational changes; |
|
• |
decreased compensation costs of $0.7 million reflecting lower headcount, partially offset by annual compensation adjustments; |
|
• |
decreased contractor and consulting expenses of $0.5 million; and |
|
• |
decreased allocation of facilities and information technology costs of $0.2 million. |
The $6.9 million decrease in sales and marketing expenses for the nine month period ended September 30, 2023, compared to the corresponding nine month period ended September 30, 2022, was primarily due to:
|
• |
decreased compensation costs of $3.8 million reflecting lower headcount, partially offset by annual compensation adjustments; |
|
• |
decreased allocation of facilities and information technology costs of $1.3 million; |
|
• |
decreased contractor and consulting expenses of $1.1 million; |
|
• |
decreased travel and training expenses of $0.8 million; and |
|
• |
decreased severance costs of $0.2 million incurred for organizational changes. |
Research, development and engineering
|
Three Months Ended September 30, |
Dollar |
Percent |
Nine Months Ended September 30, |
Dollar |
Percent |
|||||||||||||||||||||||||||
|
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) |
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||
|
Research, development and engineering |
$ | 6,308 | $ | 7,575 | $ | (1,267 | ) | (17 | )% | $ | 20,295 | $ | 19,731 | $ | 564 | 3 | % | |||||||||||||||
|
Research, development and engineering (as % of total revenue) |
70 | % | 97 | % | 79 | % | 86 | % | ||||||||||||||||||||||||
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 developers and quality assurance personnel; |
|
• |
payments to outside contractors for software development services; |
|
• |
the purchase of materials and services for product development; and |
|
• |
the allocation of facilities and information technology costs. |
The $1.3 million decrease in research, development and engineering expenses for the three month period ended September 30, 2023 , compared to the corresponding three mo nth period ended September 30, 2022, was primarily due to:
|
• |
decreased compensation costs of $0.9 million reflecting lower headcount, partially offset by annual compensation adjustments; |
|
• |
decreased severance costs of $0.2 million incurred for organizational changes; and |
|
• |
decreased allocation of facilities and information technology costs of $0.2 million. |
The $0.6 million increase in research, development and engineering expenses for the nine month period ended September 30, 2023 , compared to the corresponding nine month period ended September 30, 2022 , was primarily due to:
|
• |
increased severance costs of $0.9 million incurred for organizational changes; |
|
• |
increased software, hardware and maintenance expenses of $0.5 million;
|
|
• |
increased contractor and consulting expenses of $0.2 million; and |
|
• |
increased compensation costs of $0.1 million reflecting annual compensation adjustments, partially offset by lower headcount; partially offset by |
|
• |
decreased allocation of facilities and information technology costs of $1.1 million; and |
|
• |
decreased recruiting expenses of $0.3 million. |
General and administrative
|
Three Months Ended September 30, |
Dollar |
Percent |
Nine Months Ended September 30, |
Dollar |
Percent |
|||||||||||||||||||||||||||
|
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) |
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||
|
General and administrative |
$ | 4,433 | $ | 4,132 | $ | 301 | 7 | % | $ | 13,412 | $ | 15,027 | $ | (1,615 | ) | (11 | )% | |||||||||||||||
|
General and administrative (as % of total revenue) |
49 | % | 53 | % | 52 | % | 65 | % | ||||||||||||||||||||||||
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 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 |
|
• |
infrastructure and centralized costs for facilities and information technology. |
The $0.3 million increase in general and administrative expenses fo r the three month period ended September 30, 2023 , compared to the corresponding three mont h period ended September 30, 2022, was primarily due to:
|
• |
increased compensation costs of $0.5 million reflecting annual compensation adjustments, partially offset by lower headcount; and |
|
• |
lower allocation of facilities and information technology costs to other departments of $0.4 million; partially offset by |
|
• |
decreased contractor and consulting expenses of $0.2 million; |
|
• |
decreased facilities expenses of $0.2 million; and |
|
• |
decreased severance costs of $0.1 million incurred for organizational changes. |
The $1.6 million decrease in general and administrative expenses for the nine month period ended September 30, 2023, compared to the corresponding nine month period ended September 30, 2022, was primarily due to:
|
• |
decreased compensation costs of $0.8 million reflecting lower headcount, partially offset by annual compensation adjustments; |
|
• |
decreased contractor and consulting expenses of $0.7 million; |
|
• |
decreased legal expenses of $0.6 million; |
|
• |
decreased facilities expenses of $0.6 million; |
|
• |
decreased software, hardware and maintenance expenses of $0.5 million; |
|
• |
decreased operating taxes of $0.3 million largely reflecting the stamp tax due for the EVRYTHNG acquisition in 2022; and |
|
• |
decreased recruiting expenses of $0.2 million; partially offset by |
|
• |
lower allocation of facilities and information technology costs to other departments of $2.4 million. |
Amortization expense on acquired intangible assets
|
Three Months Ended September 30, |
Dollar |
Percent |
Nine Months Ended September 30, |
Dollar |
Percent |
|||||||||||||||||||||||||||
|
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) |
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||
|
Amortization expense on acquired intangible assets |
$ | 272 | $ | 301 | $ | (29 | ) | (10 | )% | $ | 800 | $ | 964 | $ | (164 | ) | (17 | )% | ||||||||||||||
|
Amortization expense on acquired intangible assets (as % of total revenue) |
3 | % | 4 | % | 3 | % | 4 | % | ||||||||||||||||||||||||
Amortization expense on acquired intangible assets relates to amortization expense recognized on the customer relationships intangible asset acquired in the EVRYTHNG acquisition.
The decreases in amortization expense on acquired intangible assets primarily reflect the impact of changes in foreign currency exchange rates.
Impairment of lease right of use assets and leasehold improvements
|
Three Months Ended September 30, |
Dollar |
Percent |
Nine Months Ended September 30, |
Dollar |
Percent |
|||||||||||||||||||||||||||
|
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) |
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||
|
Impairment of lease right of use assets and leasehold improvements |
$ | — | $ | — | $ | — | — | % | $ | 250 | $ | 574 | $ | (324 | ) | (56 | )% | |||||||||||||||
|
Impairment of lease right of use assets and leasehold improvements (as % of total revenue) |
— | % | — | % | 1 | % | 2 | % | ||||||||||||||||||||||||
The changes in impairment of lease right of use assets and leasehold improvements relates to the differences in the amount of impairment charges recorded for each respective period on our former corporate headquarters in Beaverton, Oregon.
Stock-based compensation
|
Three Months Ended September 30, |
Dollar |
Percent |
Nine Months Ended September 30, |
Dollar |
Percent |
|||||||||||||||||||||||||||
|
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) |
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||
|
Cost of revenue |
$ | 310 | $ | 270 | $ | 40 | 15 | % | $ | 866 | $ | 736 | $ | 130 | 18 | % | ||||||||||||||||
|
Sales and marketing |
606 | 1,461 | (855 | ) | (59 | )% | 1,930 | 3,354 | (1,424 | ) | (42 | )% | ||||||||||||||||||||
|
Research, development and engineering |
658 | 916 | (258 | ) | (28 | )% | 2,269 | 2,066 | 203 | 10 | % | |||||||||||||||||||||
|
General and administrative |
1,118 | 921 | 197 | 21 | % | 3,081 | 3,154 | (73 | ) | (2 | )% | |||||||||||||||||||||
|
Total |
$ | 2,692 | $ | 3,568 | $ | (876 | ) | (25 | )% | $ | 8,146 | $ | 9,310 | $ | (1,164 | ) | (13 | )% | ||||||||||||||
The decrease in stock-based compensation expense for the three month period ended September 30, 2023, compared to the corresponding three month period ended September 30, 2022 , was primarily the result of a lower amount of employee equity grants made in 2023 than in 2022 and lower stock-based compensation costs incurred for organizational changes.
The decrease in stock-based compensation expense for the nine month period ended September 30, 2023 , compared to the corresponding nine month period ended September 30, 2022 , was primarily the result of a lower amount of employee equity grants made in 2023 than in 2022, partially offset by higher stock-based compensation costs incurred for organizational changes.
We anticipate incurring an additional $17.6 million in stock-based compensation expense through September 30, 2027, for stock awards outstanding as of September 30, 2023.
Other income, net
|
Three Months Ended September 30, |
Dollar |
Percent |
Nine Months Ended September 30, |
Dollar |
Percent |
|||||||||||||||||||||||||||
|
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) |
2023 |
2022 |
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||
|
Other income, net |
$ | 478 | $ | 623 | $ | (145 | ) | (23 | )% | $ | 1,870 | $ | 1,214 | $ | 656 | 54 | % | |||||||||||||||
|
Other income, net (as % of total revenue) |
5 | % | 8 | % | 7 | % | 5 | % | ||||||||||||||||||||||||
The decrease in other income, net for the three month period ended September 30, 2023 , compared to the corresponding three month period ended September 30, 2022 , was primarily due to lower refundable tax credits, partially offset by higher interest income reflecting higher interest rates on our marketable securities.
The increase in other income, net for the nine month period ended September 30, 2023 , compared to the corresponding nine month period ended September 30, 2022 , was primarily due to higher interest income reflecting higher interest rates on our marketable securities, partially offset by lower refundable tax credits.
Income Taxes
The provision for income taxes reflects current taxes and deferred taxes. The effective tax rate for each of the nine month periods ended September 30, 2023 and 2022 was 0% and 0%, respectively. Our effective tax rate is significantly lower than our statutory tax rate because we have a valuation allowance recorded against our deferred tax assets.
The valuation allowance against deferred tax assets as of September 30, 2023, was $92.9 million, an increase of $9.9 million from $83.0 million as of December 31, 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 September 30, 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 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. 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 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 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 share (diluted) for the three and nine months ended September 30, 2023 and 2022:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
GAAP gross profit |
$ | 5,223 | $ | 4,165 | $ | 14,336 | $ | 11,506 | ||||||||
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Amortization of acquired intangible assets |
1,135 | 1,048 | 3,346 | 3,362 | ||||||||||||
|
Amortization and write-off of other intangible assets |
143 | 145 | 433 | 430 | ||||||||||||
|
Stock-based compensation |
310 | 270 | 866 | 736 | ||||||||||||
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Non-GAAP gross profit |
$ | 6,811 | $ | 5,628 | $ | 18,981 | $ | 16,034 | ||||||||
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Non-GAAP gross profit margin |
76 | % | 72 | % | 74 | % | 70 | % | ||||||||
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GAAP operating expenses |
$ | 16,379 | $ | 19,692 | $ | 51,527 | $ | 59,998 | ||||||||
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Depreciation and write-off of property and equipment |
(223 | ) | (316 | ) | (911 | ) | (1,036 | ) | ||||||||
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Amortization of acquired intangible assets |
(272 | ) | (301 | ) | (800 | ) | (964 | ) | ||||||||
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Amortization and write-off of other intangible assets |
(228 | ) | (4 | ) | (276 | ) | (63 | ) | ||||||||
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Amortization of lease right of use assets under operating leases |
(94 | ) | (248 | ) | (426 | ) | (768 | ) | ||||||||
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Stock-based compensation |
(2,382 | ) | (3,298 | ) | (7,280 | ) | (8,574 | ) | ||||||||
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Impairment of lease right of use assets and leasehold improvements |
— | — | (250 | ) | (574 | ) | ||||||||||
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Acquisition-related expenses |
— | — | — | (447 | ) | |||||||||||
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Non-GAAP operating expenses |
$ | 13,180 | $ | 15,525 | $ | 41,584 | $ | 47,572 | ||||||||
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GAAP net loss |
$ | (10,723 | ) | $ | (14,930 | ) | $ | (35,386 | ) | $ | (47,350 | ) | ||||
|
Total adjustments to gross profit |
1,588 | 1,463 | 4,645 | 4,528 | ||||||||||||
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Total adjustments to operating expenses |
3,199 | 4,167 | 9,943 | 12,426 | ||||||||||||
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Non-GAAP net loss |
$ | (5,936 | ) | $ | (9,300 | ) | $ | (20,798 | ) | $ | (30,396 | ) | ||||
|
GAAP loss per share (diluted) |
$ | (0.53 | ) | $ | (0.76 | ) | $ | (1.76 | ) | $ | (2.51 | ) | ||||
|
Non-GAAP net loss |
$ | (5,936 | ) | $ | (9,300 | ) | $ | (20,798 | ) | $ | (30,396 | ) | ||||
|
Non-GAAP loss per share (diluted) |
$ | (0.29 | ) | $ | (0.47 | ) | $ | (1.03 | ) | $ | (1.61 | ) | ||||
Non-GAAP gross profit for the three months ended September 30, 2023, increased by $1.2 million compared to the three months ended September 30, 2022. The increase was primarily due to higher subscription and service revenue.
Non-GAAP gross profit for the nine months ended September 30, 2023, increased by $2.9 million compared to the nine months ended September 30, 2022. The increase was primarily due to higher subscription and service revenue.
Non-GAAP gross profit margin for the three months ended September 30, 2023, increased to 76% compared to 72% for the three months ended September 30, 2022. The increase was primarily due to higher subscription revenue combined with a favorable mix of subscription revenue and lower platform costs, partially offset by a more favorable mix of service revenue in 2022.
Non-GAAP gross profit margin for the nine months ended September 30, 2023, increased to 74% compared to 70% for the nine months ended September 30, 2022. Th e increase was primarily due to higher subscription revenue combined with a favorable mix of subscription revenue and lower platform costs, partially offset by a more favorable mix of service revenue in 2022.
Non-GAAP operating expenses for the three months ended September 30, 2023, decreased by $2.3 million compared to the three months ended September 30, 2022. The decrease was primarily due to $0.9 million of lower cash compensation costs due to lower headcount, partially offset by annual compensation adjustments, $0.8 million of lower cash severance costs incurred for organizational changes, and $0.6 million of lower contractor and consulting expenses.
Non-GAAP operating expenses for the nine months ended September 30, 2023, decreased by $6.0 million compared to the nine months ended September 30, 2022. T he decrease was primarily due to $3.3 million of lower cash compensation costs due to lower headcount, partially offset by annual compensation adjustments, and lower expenses for contractors and consultants of $1.6 million, travel and training of $0.9 million, legal of $0.6 million, and recruiting of $0.6 million, partially offset by $0.7 million of higher cash severance costs incurred for organizational changes.
Liquidity and Capital Resources
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September 30, |
December 31, |
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|
2023 |
2022 |
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Working capital |
$ | 31,429 | $ | 54,007 | ||||
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Current ratio (1) |
3.3:1 |
6.3:1 |
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Cash, cash equivalents and short-term marketable securities |
$ | 33,331 | $ | 52,542 | ||||
|
Long-term marketable securities |
— | — | ||||||
|
Total cash, cash equivalents and marketable securities |
$ | 33,331 | $ | 52,542 | ||||
|
(1) |
The current ratio is calculated by dividing total current assets by total current liabilities. |
T he $19.2 million decrease in cash, cash equivalents and marketable securities at September 30, 2023, from December 31, 2022, resulted primarily from:
|
• |
cash used in operations; |
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• |
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 U.S. Treasuries, money market securities, commercial paper, and federal agency 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:
| Nine Months Ended September 30, |
Dollar |
Percent |
||||||||||
|
2023 |
2022 |
Increase/(Decrease) |
Increase/(Decrease) |
|||||||||
|
Net loss |
$ | (35,386 | ) | $ | (47,350 | ) | $ | (11,964 | ) | (25 | )% | |
|
Non-cash items |
14,588 | 16,507 | 1,919 | 12 | % | |||||||
|
Changes in operating assets and liabilities |
4,119 | (6,045 | ) | (10,164 | ) | (168 | )% | |||||
|
Net cash used in operating activities |
$ | (16,679 | ) | $ | (36,888 | ) | $ | (20,209 | ) | (55 | )% | |
Cash flows used in operating activities for the nine month period ended September 30, 2023, decreased by $20.2 million, compared to the corresponding nine month period ended September 30, 2022 , primarily as a result of a $12.0 million lower net loss and $10.2 million from favorable changes in operating assets and liabilities, partially offset by $1.9 million of lower non-cash items included in net loss. The changes in operating assets and liabilities are largely due to the timing and amount of customer receipts. The change in non-cash items primarily reflects lower stock-based compensation expense, amortization expense, and impairment on lease right of use assets.
Cash flows provided by investing activities for the nine month period ended September 30, 2023, compared to the corresponding nine month period ended September 30, 2022, increased by $10.6 million. The increase primarily reflects higher net proceeds from maturities of marketable securities, $3.5 million of net cash paid for the acquisition of EVRYTHNG in January 2022, and lower purchases of property and equipment.
Cash flows from financing activities for the nine month period ended September 30, 2023, compared to the corresponding nine month period ended September 30, 2022, decrease d by $58.7 million. The decrease primarily reflects the impact of the $58.2 million of net proceeds we raised from our registered direct stock offering in April 2022.
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.
Registered Direct Offering
On April 5, 2022, we entered into purchase agreements with certain investors providing for the issuance and sale by us of 2.25 million common shares in a registered direct stock offering. The common shares were offered at a price of $25.90 per share, and the gross cash proceeds to us were $58.3 million. We incurred $0.1 million of legal costs related to the offering. The closing of the registered direct offering occurred on April 7, 2022.
Shelf Registration
On June 23, 2023, we filed a new shelf registration statement on Form S-3 that included $34.6 million of unsold securities from our prior shelf registration statement filed on June 5, 2020. The prior shelf registration expired on July 24, 2023. The new shelf registration statement became effective on July 19, 2023, and expires on July 19, 2026. Under the new shelf registration statement, we may sell securities in one or more offerings up to $100.0 million. As of September 30, 2023 , $100.0 million remained available under the new shelf registration statement.
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 $10.0 million, 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 nine months ended September 30, 2023 and 2022. As of September 30, 2023, $1.9 million remains available for future issuance under the Equity Distribution Agreement.
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.
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 2022 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; |
|
• |
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 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; |
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• |
anticipated expenses, costs, margins, provision for income taxes and investment activities in the foreseeable future; |
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• |
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; |
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• |
our beliefs regarding our critical accounting policies; |
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• |
our expectations regarding the impact of accounting pronouncements issued but not yet adopted; |
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• |
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; |
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• |
business opportunities that could require that we seek additional financing and our ability to do so; |
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• |
the size and growth of our markets and our assumptions and beliefs related to those markets; |
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• |
the existence of international growth opportunities and our future investment in such opportunities; |
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• |
our expected short-term and long-term liquidity positions; |
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• |
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; |
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• |
our expectations regarding our ability to meet future financial obligations as they become due within the coming fiscal year; |
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• |
the effect of computerized trading on our stock price; |
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• |
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; |
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• |
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; |
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• |
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 2022 Part I, Item 1A. "Risk Factors" of our 2022 Annual Report , among others, could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf. Investors should understand that it is not possible to predict or identify all risk factors and that there may be other factors that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements made by us or by persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of the filing of this Quarterly Report on Form 10-Q.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. These disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective.
Changes in Controls
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three month period ended September 30, 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 have integrated EVRYTHNG into our internal control over financial reporting, and management's evaluation of the effectiveness of our internal control over financial reporting.
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 2022 Annual Report. The risks and uncertainties described in our 2022 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 September 30, 2023, there have been no material changes to the risk factors previously disclosed in our 2022 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchases
We repurchase shares of common stock in satisfaction of required withholding of income tax liability in connection with the 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 September 30, 2023:
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(d) |
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(c) |
Approximate |
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Total number |
dollar value |
|||||||||||||||
|
of shares |
of shares that |
|||||||||||||||
|
(a) |
(b) |
purchased as |
may yet be |
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Total number |
Average price |
part of publicly |
purchased |
|||||||||||||
|
of shares |
paid per |
announced plans |
under the plans |
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|
Period |
purchased (1) |
share (1) |
or programs |
or programs |
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Month 1 |
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|
July 1, 2023 to July 31, 2023 |
— | $ | — | — | $ | — | ||||||||||
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Month 2 |
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|
August 1, 2023 to August 31, 2023 |
21,561 | $ | 35.12 | — | $ | — | ||||||||||
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Month 3 |
||||||||||||||||
|
September 1, 2023 to September 30, 2023 |
— | $ | — | — | $ | — | ||||||||||
|
Total |
21,561 | $ | 35.12 | — | $ | — | ||||||||||
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(1) |
Shares of common stock withheld (purchased) by us in satisfaction of required withholding of income tax liability upon vesting of restricted stock, restricted stock units and performance stock units. |
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Exhibit Number |
Exhibit Description |
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31.1 |
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
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31.2 |
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
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32.1 |
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32.2 |
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101.INS |
Inline XBRL Instance Document |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
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.
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Date: November 7, 2023 |
DIGIMARC CORPORATION |
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By: |
/s/ CHARLES BECK |
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CHARLES BECK |
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Chief Financial Officer |
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(Duly Authorized Officer and Principal Financial and Accounting Officer) |
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