BEAVERTON, Ore.--(BUSINESS WIRE)--Digimarc Corporation (NASDAQ: DMRC), the pioneer and global leader in digital watermarking technologies, today announced Digimarc Engage, a product for direct-to-consumer digital communication, is transforming the way businesses, brands, and consumers interact through new and incredibly advanced consumer engagement capabilities. Digimarc Engage is the industry’s first consumer engagement offering to deliver contextual and differentiated experiences across both physical item ...

Digimarc Corporation (NASDAQ:DMRC) Q4 2023 Earnings Conference Call February 28, 2024 5:00 PM ET Company Participants Joel Meyer - Executive Vice President, Chief Legal Officer and Corporate Secretary Riley McCormack - President and Chief Executive Officer Charles Beck - Executive Vice President, Chief Financial Officer and Treasurer Conference Call Participants Robin Knipp - Janney Montgomery Scott Jeff Bernstein - Silverberg Matt Collard - PCB Advisory Operator Greetings, and welcome to the Digimarc Corpo ...

BEAVERTON, Ore.--(BUSINESS WIRE)--Digimarc Corporation (NASDAQ: DMRC), the pioneer and global leader in digital watermarking technologies, today announced that it has raised an aggregate of $32.5 million of gross proceeds through the sale of 928,571 shares of common stock in concurrent but independent transactions to new and existing investors. Altai Capital, Digimarc’s second largest shareholder, participated in the offering and acted as the registered investment advisor to certain of the other investors i ...

PART I [ITEM 1: BUSINESS](index=4&type=section&id=ITEM%201%3A%20BUSINESS) Digimarc is a global leader in digital watermarking, providing the Illuminate platform and product suite for identification, authentication, and digital connectivity, with recent acquisitions and contract extensions - **Digimarc is a pioneer and global leader in digital watermarking technologies**, focusing on the identification and authentication of physical and digital items[18](index=18&type=chunk) - The **Digimarc Illuminate platform** is a **SaaS cloud-based platform** providing tools for advanced digital watermarks, dynamic QR codes, digital twins, and insights for digital interactions[19](index=19&type=chunk) - The product suite includes **Digimarc Validate** (authentication), **Digimarc Engage** (consumer connectivity), **Digimarc Recycle** (sustainability), and **Digimarc Retail Experience** (retail optimization)[20](index=20&type=chunk) - Key business developments include the **acquisition of EVRYTHNG** (January 2022), an **expanded multi-year agreement with Walmart** (December 2022), and a **five-year extension of the Central Banks contract** through December 31, 2029 (December 2022)[17](index=17&type=chunk)[23](index=23&type=chunk)[25](index=25&type=chunk) - In May 2023, Digimarc secured a **5-year contract worth over $32 million** to protect precious metals, building materials, and a national recycling system; in September 2023, **Digimarc Validate expanded to protect digital asset copyright**, crucial for generative AI[26](index=26&type=chunk)[27](index=27&type=chunk) - Revenue is generated from two primary markets: **commercial** (retailers, brands) and **government** (Central Banks), primarily through **software subscriptions** and **software development services**[28](index=28&type=chunk)[29](index=29&type=chunk) - As of December 31, 2023, Digimarc held **approximately 850 U.S. and foreign patents** granted and applications pending in digital watermarking and related fields[31](index=31&type=chunk) Anticipated Future Revenue from Current Contracts | Metric | Amount (in millions) | | :-------------------------------- | :------------------- | | Minimum future revenue (Dec 31, 2023) | $43.7 | | Expected revenue in 2024 | $27.1 | Employee Headcount (December 31, 2023) | Department | Number of Employees | | :-------------------------------- | :------------------ | | Sales, Marketing, Product, Operations, Customer Support | 86 | | Research, Development and Engineering | 123 | | Finance, Administration, IT, IP, Legal | 39 | | **Total Full-Time Employees** | **248** | - Voluntary employee turnover was **4%** for the year ended December 31, 2023[40](index=40&type=chunk) [ITEM 1A: RISK FACTORS](index=12&type=section&id=ITEM%201A%3A%20RISK%20FACTORS) Digimarc faces substantial risks from slow market adoption, customer dependence, intense competition, operating losses, and challenges in international operations, talent, acquisitions, cybersecurity, and IP - The commercial market for Digimarc's disruptive technology is in early stages; **slow adoption could negatively affect revenue** and lead to continued operating losses[62](index=62&type=chunk)[63](index=63&type=chunk) - Future growth is materially dependent on the successful advocacy and implementation of Digimarc's technology by its **business partners**[66](index=66&type=chunk) - A small number of customers account for a **substantial portion of revenue (78% from five customers in 2023)**, making the loss of any large contract a material business disruption[73](index=73&type=chunk)[74](index=74&type=chunk)[75](index=75&type=chunk) - The market is highly competitive, with **alternative technologies** (e.g., generative AI, traditional anti-counterfeiting, object recognition, RFID, digital fingerprints, object sorting) and larger competitors posing a threat to market share and profitability[76](index=76&type=chunk)[77](index=77&type=chunk)[79](index=79&type=chunk) - International operations expose the company to risks such as staffing difficulties, regulatory changes, intellectual property protection challenges, currency fluctuations, and political instability[81](index=81&type=chunk)[82](index=82&type=chunk) - Dependence on key employees for future success; inability to retain, hire, or integrate them could hamper growth and product delivery[83](index=83&type=chunk) - Acquisitions, such as EVRYTHNG, carry inherent risks including integration challenges, potential dilution, increased expenses, and disruption to operations[86](index=86&type=chunk)[87](index=87&type=chunk) - An unfavorable assessment of digital watermarking technology by initiatives like HolyGrail 2.0 or the perceived superiority of competing technologies (chemical tracers, AI) could discourage adoption of Digimarc Recycle[90](index=90&type=chunk)[92](index=92&type=chunk) - Security systems may be circumvented, leading to disclosure of sensitive information, business interruptions, and reputational damage; **data breaches and cyber-attacks pose risks** to intellectual property and financial stability[95](index=95&type=chunk)[98](index=98&type=chunk)[99](index=99&type=chunk) - The company was **not profitable in 2023 or 2022** and may not achieve profitability in the future, which could lead to asset impairment charges or valuation allowances against deferred tax assets[104](index=104&type=chunk)[106](index=106&type=chunk)[107](index=107&type=chunk) - Inability to adequately secure or enforce patent protection, or facing infringement claims, could adversely affect the business and lead to costly litigation[109](index=109&type=chunk)[114](index=114&type=chunk) [ITEM 1B: UNRESOLVED STAFF COMMENTS](index=27&type=section&id=ITEM%201B%3A%20UNRESOLVED%20STAFF%20COMMENTS) The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported[124](index=124&type=chunk) [ITEM 1C: CYBERSECURITY](index=27&type=section&id=ITEM%201C%3A%20CYBERSECURITY) Digimarc maintains a robust cybersecurity program, overseen by the Audit Committee, achieving SOC 2 Type II certification in 2023 with no material threats - Digimarc has implemented robust information security processes for assessing, identifying, and managing cybersecurity risks, led by the Senior Director of Information Security[125](index=125&type=chunk) - The cybersecurity program includes regular risk assessments, third-party penetration testing, continuous enterprise-wide monitoring, and incident response plans[126](index=126&type=chunk) - In 2023, the Company achieved **SOC 2 Type II certification** for its product digitization platform, confirming effective information security controls[127](index=127&type=chunk) - The Board of Directors, through its Audit Committee, provides vital oversight of the cybersecurity risk management program[128](index=128&type=chunk) - No cybersecurity threats were identified in 2023 that materially affected or are reasonably likely to materially affect the company's business strategy, results of operations, or financial condition[130](index=130&type=chunk) [ITEM 2: PROPERTIES](index=27&type=section&id=ITEM%202%3A%20PROPERTIES) Digimarc relocated its headquarters to a new 65,500 sq ft facility in Beaverton, Oregon, with the former 47,000 sq ft lease expiring soon - New corporate headquarters in Beaverton, Oregon, is approximately **65,500 square feet**, with a lease term through September 2030[131](index=131&type=chunk) - The former corporate headquarters, also in Beaverton, is approximately **47,000 square feet**, with its lease expiring in March 2024[132](index=132&type=chunk) - Management believes the existing office space is suitable and adequate for current and foreseeable future needs[133](index=133&type=chunk) [ITEM 3: LEGAL PROCEEDINGS](index=28&type=section&id=ITEM%203%3A%20LEGAL%20PROCEEDINGS) Digimarc is involved in ordinary course legal proceedings, not anticipating a material adverse effect on its financial position or operations - The company is subject to legal proceedings and claims in the ordinary course of business[134](index=134&type=chunk) - Management does not believe that the resolution of any current matters will have a material adverse effect on its financial position, results of operations, or cash flows[134](index=134&type=chunk) [ITEM 4: MINE SAFETY DISCLOSURES](index=28&type=section&id=ITEM%204%3A%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to Digimarc Corporation - Not applicable[135](index=135&type=chunk) PART II [ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=29&type=section&id=ITEM%205%3A%20MARKET%20FOR%20REGISTRANT%27S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) Digimarc's common stock trades on Nasdaq (DMRC), with 20.4 million shares outstanding and recent repurchases for tax withholding - Digimarc's common stock trades on the Nasdaq Stock Market LLC under the symbol "**DMRC**"[138](index=138&type=chunk) - As of February 22, 2024, there were **20,443,596 shares of common stock outstanding** and 263 shareholders of record[8](index=8&type=chunk)[138](index=138&type=chunk) Issuer Purchases of Equity Securities (Q4 2023) | Period | Total number of shares purchased | Average price paid per share | | :--------------------------------- | :------------------------------- | :--------------------------- | | November 1, 2023 to November 30, 2023 | 20,422 | $33.73 | | **Total** | **20,422** | **$33.73** | - These purchases were fully vested shares withheld by the company to satisfy required tax withholding liability upon the vesting of restricted stock awards, restricted stock units, and performance restricted stock units[139](index=139&type=chunk) [ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=30&type=section&id=ITEM%207%3A%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Digimarc's 2023 revenue grew 15% to $34.9 million, operating loss reduced 22% to $(48.2) million due to lower expenses, and liquidity is deemed sufficient for 12 months - Total revenue increased by **$4.7 million, or 15%, to $34.9 million** in 2023[160](index=160&type=chunk) - Total operating expenses decreased by **$8.8 million, or 11%, to $68.4 million** in 2023[161](index=161&type=chunk) Key Financial Highlights (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Change | | :---------------- | :----------- | :----------- | :------- | | Total Revenue | $34,851 | $30,197 | $4,654 | | Gross Profit | $20,165 | $15,323 | $4,842 | | Operating Loss | $(48,207) | $(61,809) | $13,602 | | Net Loss | $(45,959) | $(59,798) | $13,839 | [Overview](index=30&type=section&id=Overview) Digimarc leads in digital watermarking, using its Illuminate SaaS platform and product suite for identification, authentication, and digital connectivity, bolstered by patents and the EVRYTHNG acquisition - Digimarc is a pioneer and global leader in digital watermarking technologies, focused on identification and authentication of physical and digital items[143](index=143&type=chunk) - The **Digimarc Illuminate platform** is a distinctive **SaaS cloud-based platform** for digital connectivity, enabling advanced digital watermarks, dynamic QR codes, and digital twins[144](index=144&type=chunk) - The product suite includes Digimarc Validate, Engage, Recycle, and Retail Experience, addressing business needs in automation, authenticity, sustainability, and customer trust[145](index=145&type=chunk)[148](index=148&type=chunk) - Digimarc has a **25+ year relationship with Central Banks**, providing technology to deter digital counterfeiting of currency[146](index=146&type=chunk) - As of December 31, 2023, the company held approximately **850 U.S. and foreign patents** in digital watermarking and related fields[147](index=147&type=chunk) - The acquisition of EVRYTHNG in January 2022 allowed Digimarc to offer a complete SaaS product digitization platform[149](index=149&type=chunk) [Critical Accounting Policies and Estimates](index=32&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Financial statements require significant estimates for revenue recognition, goodwill, income taxes, and intangible assets, with revenue recognized via a five-step model - Financial statement preparation requires significant estimates and judgments, including those related to bad debts, contingencies, goodwill, income taxes, intangible assets, marketable securities, property and equipment, and revenue recognition[150](index=150&type=chunk) - Revenue recognition follows **ASC 606**, involving five steps: identifying contracts, performance obligations, transaction price, allocation, and recognition upon satisfaction of obligations[152](index=152&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk)[155](index=155&type=chunk)[156](index=156&type=chunk) - Subscription revenue is primarily from SaaS platform access and licensing fees, recognized over the typical one-to-three-year contract term; service revenue is mainly from software development services, recognized as performed[157](index=157&type=chunk) [Results of Operations—the Years Ended December 31, 2023 and December 31, 2022](index=33&type=section&id=Results%20of%20Operations%E2%80%94the%20Years%20Ended%20December%2031%2C%202023%20and%20December%2031%2C%202022) Digimarc's 2023 total revenue increased 15% to $34.9 million, gross profit rose 32% to $20.2 million, and operating loss improved 22% to $(48.2) million due to 11% lower operating expenses Consolidated Statements of Operations Data (in thousands, except per share data) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :---------------------------------------- | :---------------------- | :---------------------- | | Revenue: | | | | Subscription | $18,973 | $15,219 | | Service | $15,878 | $14,978 | | **Total revenue** | **$34,851** | **$30,197** | | Cost of revenue: | | | | Subscription (1) | $2,975 | $3,878 | | Service (1) | $7,252 | $6,557 | | Amortization expense on acquired intangible assets | $4,459 | $4,439 | | **Total cost of revenue** | **$14,686** | **$14,874** | | **Gross profit** | **$20,165** | **$15,323** | | Operating expenses: | | | | Sales and marketing | $22,409 | $29,718 | | Research, development and engineering | $26,577 | $26,490 | | General and administrative | $18,071 | $18,945 | | Amortization expense on acquired intangible assets | $1,065 | $1,064 | | Impairment of lease right of use assets and leasehold improvements | $250 | $915 | | **Total operating expenses** | **$68,372** | **$77,132** | | **Operating loss** | **$(48,207)** | **$(61,809)** | | Other income, net | $2,452 | $2,108 | | Loss before income taxes | $(45,755) | $(59,701) | | Provision for income taxes | $(204) | $(97) | | **Net loss** | **$(45,959)** | **$(59,798)** | | Loss per share — basic | $(2.26) | $(3.12) | | Loss per share — diluted | $(2.26) | $(3.12) | | Weighted average shares outstanding — basic | 20,322 | 19,140 | | Weighted average shares outstanding — diluted | 20,322 | 19,140 | Consolidated Statements of Operations Data (Percentages of Total Revenue) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :---------------------------------------- | :---------------------- | :---------------------- | | Revenue: | | | | Subscription | 54% | 50% | | Service | 46% | 50% | | **Total revenue** | **100%** | **100%** | | Cost of revenue: | | | | Subscription (1) | 9% | 13% | | Service (1) | 21% | 22% | | Amortization expense on acquired intangible assets | 13% | 15% | | **Total cost of revenue** | **42%** | **49%** | | **Gross profit** | **58%** | **51%** | | Operating expenses: | | | | Sales and marketing | 64% | 98% | | Research, development and engineering | 76% | 88% | | General and administrative | 52% | 63% | | Amortization expense on acquired intangible assets | 3% | 4% | | Impairment of lease right of use assets and leasehold improvements | 1% | 3% | | **Total operating expenses** | **196%** | **255%** | | **Operating loss** | **(138)%** | **(205)%** | | Other income, net | 7% | 7% | | Loss before income taxes | (131)% | (198)% | | Provision for income taxes | (1)% | —% | | **Net loss** | **(132)%** | **(198)%** | [Revenue](index=34&type=section&id=Revenue) Total revenue increased 15% to $34.9 million in 2023, driven by 25% subscription growth and 6% service revenue growth, with international revenue at 67% and ARR up 71% to $22.3 million Revenue by Type (2023 vs. 2022, in thousands) | Revenue Type | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Subscription | $18,973 | $15,219 | $3,754 | 25% | | Service | $15,878 | $14,978 | $900 | 6% | | **Total** | **$34,851** | **$30,197** | **$4,654** | **15%** | - Subscription revenue increased primarily due to **$4.9 million from new and existing commercial contracts**, partially offset by $0.9 million lower revenue from sunsetting the Piracy Intelligence product in 2022[163](index=163&type=chunk) - Service revenue increased primarily due to **$1.9 million from the Central Banks**, reflecting a larger annual budget for program work, partially offset by $0.8 million lower revenue from the timing of HolyGrail 2.0 recycling projects[165](index=165&type=chunk) Revenue by Geography (2023 vs. 2022, in thousands) | Geography | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Domestic | $11,380 | $10,029 | $1,351 | 13% | | International | $23,471 | $20,168 | $3,303 | 16% | | **Total** | **$34,851** | **$30,197** | **$4,654** | **15%** | - International revenue accounted for **67% of total revenue** in both 2023 and 2022[166](index=166&type=chunk) Revenue by Market (2023 vs. 2022, in thousands) | Market | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :--------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Commercial: | | | | | | Subscription | $17,773 | $13,832 | $3,941 | 28% | | Service | $1,042 | $2,056 | $(1,014) | (49)% | | **Total Commercial** | **$18,815** | **$15,888** | **$2,927** | **18%** | | Government: | | | | | | Subscription | $1,200 | $1,387 | $(187) | (13)% | | Service | $14,836 | $12,922 | $1,914 | 15% | | **Total Government** | **$16,036** | **$14,309** | **$1,727** | **12%** | | **Total** | **$34,851** | **$30,197** | **$4,654** | **15%** | Annual Recurring Revenue (ARR) (in thousands) | Metric | As of Dec 31, 2023 | As of Dec 31, 2022 | Dollar Increase | Percent Increase | | :---- | :----------------- | :----------------- | :-------------- | :--------------- | | ARR | $22,251 | $13,013 | $9,238 | 71% | - ARR increase was primarily driven by **new commercial subscription contracts** and, to a lesser extent, increased subscription fees on existing commercial contracts[171](index=171&type=chunk) [Cost of revenue](index=36&type=section&id=Cost%20of%20revenue) Total cost of revenue slightly decreased by 1% to $14.7 million in 2023, with subscription costs down 23% and service costs up 11%, while amortization remained stable Cost of Revenue (2023 vs. 2022, in thousands) | Cost Type | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Subscription (1) | $2,975 | $3,878 | $(903) | (23)% | | Service (1) | $7,252 | $6,557 | $695 | 11% | | Amortization expense on acquired intangible assets | $4,459 | $4,439 | $20 | —% | | **Total cost of revenue** | **$14,686** | **$14,874** | **$(188)** | **(1)%** | - Cost of subscription revenue primarily includes internet cloud hosting costs, image search data fees, and amortization of capitalized patent costs[173](index=173&type=chunk) - Cost of service revenue primarily includes compensation, benefits, incentive compensation for software developers, quality assurance, professional services, payments to outside contractors, and travel costs[173](index=173&type=chunk) - Amortization expense on acquired intangible assets relates to the developed technology intangible asset acquired in the EVRYTHNG acquisition[175](index=175&type=chunk) [Gross profit](index=38&type=section&id=Gross%20profit) Gross profit increased 32% to $20.2 million in 2023, improving the margin to 58%, primarily driven by higher subscription revenue and a favorable revenue mix Gross Profit (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Subscription Gross Profit (1) | $15,998 | $11,341 | $4,657 | 41% | | Service Gross Profit (1) | $8,626 | $8,421 | $205 | 2% | | Amortization expense on acquired intangible assets | $(4,459) | $(4,439) | $(20) | —% | | **Total Gross Profit** | **$20,165** | **$15,323** | **$4,842** | **32%** | Gross Profit Margin (2023 vs. 2022) | Metric | 2023 | 2022 | | :---------------------------------------- | :--- | :--- | | Subscription Gross Profit Margin (1) | 84% | 75% | | Service Gross Profit Margin (1) | 54% | 56% | | **Total Gross Profit Margin** | **58%** | **51%** | - The **9 percentage point increase in subscription gross profit margin** (excluding amortization) was primarily due to higher subscription revenue combined with a more favorable mix of subscription revenue in 2023[178](index=178&type=chunk) [Operating expenses](index=38&type=section&id=Operating%20expenses) Total operating expenses decreased 11% to $68.4 million in 2023, driven by lower sales and marketing (down 25%) and general and administrative (down 5%) expenses, while R&D remained flat Operating Expenses (2023 vs. 2022, in thousands) | Expense Type | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Sales and marketing | $22,409 | $29,718 | $(7,309) | (25)% | | Research, development and engineering | $26,577 | $26,490 | $87 | —% | | General and administrative | $18,071 | $18,945 | $(874) | (5)% | | Amortization expense on acquired intangible assets | $1,065 | $1,064 | $1 | —% | | Impairment of lease right of use assets and leasehold improvements | $250 | $915 | $(665) | (73)% | | **Total operating expenses** | **$68,372** | **$77,132** | **$(8,760)** | **(11)%** | [Sales and marketing](index=38&type=section&id=Sales%20and%20marketing) Sales and marketing expenses decreased 25% to $22.4 million in 2023, primarily due to lower compensation, facility, IT, contractor, consulting, travel, and training costs Sales and Marketing Expenses (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :------------------------ | :----------- | :----------- | :----------------------- | :-------------------------- | | Sales and marketing | $22,409 | $29,718 | $(7,309) | (25)% | | Sales and marketing (as % of total revenue) | 64% | 98% | | | - The decrease was primarily due to **$3.9 million lower compensation costs** (reflecting lower headcount), **$1.5 million lower allocation of facility and information technology costs**, $1.3 million lower contractor and consulting costs, and $0.9 million lower travel and training costs[182](index=182&type=chunk) [Research, development and engineering](index=39&type=section&id=Research%2C%20development%20and%20engineering) Research, development, and engineering expenses remained flat at $26.6 million in 2023, with increases in severance and contractor costs offset by lower facility, IT, and compensation expenses Research, Development and Engineering Expenses (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Research, development and engineering | $26,577 | $26,490 | $87 | —% | | Research, development and engineering (as % of total revenue) | 76% | 88% | | | - The increase was primarily due to **$0.9 million increased severance costs**, $0.6 million increased contractor and consulting costs, and $0.5 million increased hardware, software and maintenance costs[183](index=183&type=chunk) - These increases were partially offset by **$1.3 million decreased allocation of facility and information technology costs** and $0.6 million decreased compensation costs[183](index=183&type=chunk) [General and administrative](index=39&type=section&id=General%20and%20administrative) General and administrative expenses decreased 5% to $18.1 million in 2023, driven by lower legal, contractor, consulting, and operating tax costs, partially offset by increased facility and IT allocations General and Administrative Expenses (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | General and administrative | $18,071 | $18,945 | $(874) | (5)% | | General and administrative (as % of total revenue) | 52% | 63% | | | - The decrease was primarily due to **$0.9 million lower legal costs**, $0.8 million lower contractor and consulting costs, $0.6 million lower hardware, software and maintenance costs, and $0.3 million lower operating taxes (largely reflecting the U.K. stamp tax owed on the EVRYTHNG acquisition in 2022)[190](index=190&type=chunk) - These decreases were partially offset by **$2.8 million increased allocation of facility and information technology costs** (offset by $0.8 million of lower facilities costs) and $0.2 million increased compensation costs[190](index=190&type=chunk) [Amortization expense on acquired intangible assets](index=41&type=section&id=Amortization%20expense%20on%20acquired%20intangible%20assets) Amortization expense on acquired intangible assets remained stable at $1.1 million in 2023, primarily from the EVRYTHNG acquisition's customer relationships, with a slight increase due to foreign currency rates Amortization Expense on Acquired Intangible Assets (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Amortization expense on acquired intangible assets | $1,065 | $1,064 | $1 | —% | | Amortization expense on acquired intangible assets (as % of total revenue) | 3% | 4% | | | - This expense relates to the amortization of the customer relationships intangible asset acquired in the EVRYTHNG acquisition[186](index=186&type=chunk) - The increase was primarily due to the impact of changes in foreign currency exchange rates[187](index=187&type=chunk) [Impairment of lease right of use assets and leasehold improvements](index=41&type=section&id=Impairment%20of%20lease%20right%20of%20use%20assets%20and%20leasehold%20improvements) Impairment expense for lease right of use assets and leasehold improvements decreased 73% to $0.250 million in 2023, reflecting lower charges for the former corporate headquarters Impairment of Lease Right of Use Assets and Leasehold Improvements (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Impairment of lease right of use assets and leasehold improvements | $250 | $915 | $(665) | (73)% | | Impairment of lease right of use assets and leasehold improvements (as % of total revenue) | 1% | 3% | | | - The decrease was primarily due to the differences in the amount of impairment charges recorded for each respective year on the former corporate headquarters[188](index=188&type=chunk) [Stock-based compensation](index=41&type=section&id=Stock-based%20compensation) Total stock-based compensation expense decreased 1% to $11.2 million in 2023 due to fewer employee equity grants, with $15.4 million anticipated through 2027 for outstanding awards Stock-Based Compensation Expense (2023 vs. 2022, in thousands) | Expense Category | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Cost of revenue | $1,126 | $913 | $213 | 23% | | Sales and marketing | $2,640 | $3,842 | $(1,202) | (31)% | | Research, development and engineering | $2,962 | $2,646 | $316 | 12% | | General and administrative | $4,430 | $3,888 | $542 | 14% | | **Total stock-based compensation** | **$11,158** | **$11,289** | **$(131)** | **(1)%** | - The decrease in stock-based compensation expense was primarily due to a **lower amount of employee equity grants** made in 2023 than in 2022[191](index=191&type=chunk) - The company anticipates incurring an additional **$15.4 million in stock-based compensation expense** through December 31, 2027, for awards outstanding as of December 31, 2023[192](index=192&type=chunk) [Leases](index=43&type=section&id=Leases) Digimarc's new headquarters lease in Beaverton, Oregon, extends through September 2030 with $8.8 million remaining, while the former headquarters lease expires March 2024 with $0.2 million remaining - The new corporate headquarters lease in Beaverton, Oregon, runs through September 2030, with remaining rent payments of **$8.8 million** as of December 31, 2023[193](index=193&type=chunk) - The lease for the former corporate headquarters in Beaverton, Oregon, expires in March 2024, with remaining rent payments of **$0.2 million** as of December 31, 2023[194](index=194&type=chunk) Impairment of Lease Right of Use Assets and Leasehold Improvements (in thousands) | Year Ended December 31, | Amount | | :---------------------- | :----- | | 2023 | $250 | | 2022 | $915 | [Other income, net](index=43&type=section&id=Other%20income%2C%20net) Other income, net, increased 16% to $2.5 million in 2023, driven by higher interest income from marketable securities, partially offset by lower U.K. R&D tax credits Other Income, Net (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :------------------------ | :----------- | :----------- | :----------------------- | :-------------------------- | | Other income, net | $2,452 | $2,108 | $344 | 16% | | Other income, net (as % of total revenue) | 7% | 7% | | | - The increase was primarily due to **$0.9 million of higher interest income** from higher interest rates on marketable securities[195](index=195&type=chunk) - This was partially offset by **$0.6 million of lower estimated refundable research and development tax credits** in the U.K. due to recent changes in tax laws[195](index=195&type=chunk) [Provision for income taxes](index=43&type=section&id=Provision%20for%20income%20taxes) Digimarc's effective tax rate was 0% in 2023 and 2022 due to a full valuation allowance against deferred tax assets, which increased to $95.3 million due to cumulative losses - The effective tax rate was **0% for both 2023 and 2022**, due to a valuation allowance against deferred tax assets[197](index=197&type=chunk)[198](index=198&type=chunk) - The valuation allowance against deferred tax assets increased by **$12.256 million to $95.256 million** as of December 31, 2023[197](index=197&type=chunk) - The valuation allowance is maintained largely due to the **cumulative loss incurred over the previous three years**, which is significant negative evidence for assessing deferred tax asset realizability[197](index=197&type=chunk) [Non-GAAP Financial Measures](index=43&type=section&id=Non-GAAP%20Financial%20Measures) Digimarc uses non-GAAP measures to assess core performance, with 2023 non-GAAP gross profit up 24% to $26.3 million, operating expenses down 11% to $55.0 million, and a non-GAAP net loss of $(26.4) million - Non-GAAP financial measures are used to evaluate core operating results by removing non-cash and non-recurring activities that affect comparability[202](index=202&type=chunk) Non-GAAP Financial Performance (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Change | Percent Change | | :-------------------------- | :----------- | :----------- | :------------ | :------------- | | Non-GAAP Gross Profit | $26,323 | $21,251 | $5,072 | 24% | | Non-GAAP Gross Profit Margin | 76% | 70% | 6 ppts | - | | Non-GAAP Operating Expenses | $54,994 | $61,830 | $(6,836) | (11)% | | Non-GAAP Net Loss | $(26,423) | $(38,568) | $12,145 | (31)% | | Non-GAAP Loss Per Share (Diluted) | $(1.30) | $(2.02) | $0.72 | (36)% | - Non-GAAP gross profit increased primarily due to **higher gross profit contribution from higher subscription revenue** and a more favorable mix of subscription revenue in 2023[204](index=204&type=chunk) - Non-GAAP operating expenses decreased primarily due to **$4.1 million lower cash compensation costs** (lower headcount), $1.5 million lower contractor and consulting costs, $1.1 million lower travel and training costs, and $0.9 million lower legal costs[206](index=206&type=chunk) [Liquidity and Capital Resources](index=45&type=section&id=Liquidity%20and%20Capital%20Resources) Digimarc's cash and marketable securities decreased by $25.4 million to $27.2 million in 2023, driven by operations and stock purchases, but management expects current liquidity to cover needs for the next 12 months Liquidity and Capital Resources (in thousands) | Metric | December 31, 2023 | December 31, 2022 | | :---------------------------------------- | :------------------ | :------------------ | | Working capital | $24,555 | $54,007 | | Current ratio | 3:1 | 6.3:1 | | Cash, cash equivalents and short-term marketable securities | $27,182 | $52,542 | | **Total cash, cash equivalents and marketable securities** | **$27,182** | **$52,542** | - The **$25.4 million decrease in cash, cash equivalents, and marketable securities** was primarily due to cash used in operations, purchases of common stock for tax withholding, and purchases of property and equipment and capitalized patent costs[208](index=208&type=chunk) - The company's investment policy limits credit exposure to any one financial institution or type of financial instrument, with exceptions for U.S. government securities[211](index=211&type=chunk) Cash Flows from Operating Activities (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Net cash used in operating activities | $(21,995) | $(44,408) | $22,413 | (50)% | Cash Flows from Investing Activities (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Net cash provided by investing activities | $12,561 | $3,757 | $8,804 | 234% | Cash Flows from Financing Activities (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Net cash (used in) provided by financing activities | $(2,760) | $60,499 | $(63,259) | (105)% | - The decrease in cash from financing activities was primarily due to **$62.9 million net proceeds from the issuance of common stock in 2022**[215](index=215&type=chunk) - Management believes currently available cash and marketable securities will satisfy projected working capital and capital expenditure requirements for at least the next 12 months[216](index=216&type=chunk) [Registered Direct Offering](index=47&type=section&id=Registered%20Direct%20Offering) On February 24, 2024, Digimarc completed a registered direct stock offering of 929,000 shares at $35.00, generating $32.5 million, following a similar $58.3 million offering in April 2022 - On February 24, 2024, the company entered into purchase agreements for a registered direct stock offering of **929,000 common shares at $35.00 per share**, generating **$32.5 million in gross cash proceeds**[217](index=217&type=chunk)[218](index=218&type=chunk) - On April 5, 2022, the company issued **2.25 million common shares** in a registered direct stock offering at $25.90 per share, resulting in **$58.3 million in gross cash proceeds**[219](index=219&type=chunk) [Equity Distribution Agreement](index=48&type=section&id=Equity%20Distribution%20Agreement) Digimarc's Equity Distribution Agreement, allowing up to $30.0 million in stock sales, saw $5.0 million sold in 2022, no sales in 2023, and was terminated effective March 1, 2024 - An Equity Distribution Agreement, dated May 16, 2019, allowed the company to sell up to **$30.0 million of common stock**[220](index=220&type=chunk) - During 2022, **222,000 shares were sold at an average price of $22.42 per share, totaling $5.0 million** in cash proceeds[220](index=220&type=chunk) - No shares were sold under this agreement during the year ended December 31, 2023[220](index=220&type=chunk) - The company provided notice to terminate the Equity Distribution Agreement effective March 1, 2024[220](index=220&type=chunk) [Shelf Registration](index=49&type=section&id=Shelf%20Registration) Digimarc's new S-3 shelf registration, effective July 19, 2023, allows for up to $100.0 million in securities sales, with $67.5 million remaining after a recent $32.5 million offering - A new shelf registration statement on Form S-3 was filed on June 23, 2023, becoming effective on July 19, 2023, and expiring on July 19, 2026[222](index=222&type=chunk) - Under this new shelf registration statement, the company may sell securities in one or more offerings up to **$100.0 million**[222](index=222&type=chunk) - After the **$32.5 million registered direct stock offering** closed on February 27, 2024, **$67.5 million remained available** under the new shelf registration statement[222](index=222&type=chunk) [Forward-Looking Statements](index=49&type=section&id=Forward-Looking%20Statements) This Annual Report contains forward-looking statements subject to significant uncertainties, and investors are cautioned not to place undue reliance on them, as the company undertakes no obligation to update them - This Annual Report on Form 10-K includes "**forward-looking statements**" subject to uncertainties and factors that are difficult to predict and beyond the company's control[224](index=224&type=chunk) - Actual results could differ materially from those anticipated in these forward-looking statements, and **investors are cautioned not to place undue reliance on them**[224](index=224&type=chunk) - The company does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information, or circumstances[227](index=227&type=chunk) [ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=51&type=section&id=ITEM%207A%3A%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This item is not applicable to Digimarc Corporation - Not applicable[228](index=228&type=chunk) [ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=52&type=section&id=ITEM%208%3A%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This item refers to the Consolidated Financial Statements and Notes, filed as part of this Annual Report on Form 10-K and listed under Part III, Item 15 - The Consolidated Financial Statements and accompanying Notes are filed as part of this Annual Report on Form 10-K[229](index=229&type=chunk) - These documents are listed under Part III, Item 15, Exhibits and Financial Statement Schedules[229](index=229&type=chunk) [ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE](index=52&type=section&id=ITEM%209%3A%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) The company reported no changes in or disagreements with accountants on accounting and financial disclosure - No unresolved staff comments were reported[230](index=230&type=chunk) [ITEM 9A: CONTROLS AND PROCEDURES](index=52&type=section&id=ITEM%209A%3A%20CONTROLS%20AND%20PROCEDURES) Management concluded that Digimarc's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes in Q4 2023 - Management, under the supervision of the CEO and CFO, concluded that **disclosure controls and procedures were effective** as of December 31, 2023[230](index=230&type=chunk)[231](index=231&type=chunk) - Management concluded that **internal control over financial reporting was effective** as of December 31, 2023, based on the COSO framework[234](index=234&type=chunk) - There was **no change in internal control over financial reporting** during the quarter ended December 31, 2023, that materially affected or is reasonably likely to materially affect it[235](index=235&type=chunk) [ITEM 9B: OTHER INFORMATION](index=52&type=section&id=ITEM%209B%3A%20OTHER%20INFORMATION) No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q4 2023 - No director or officer adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended December 31, 2023[236](index=236&type=chunk) [ITEM 9C: DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS](index=52&type=section&id=ITEM%209C%3A%20DISCLOSURE%20REGARDING%20FOREIGN%20JURISDICTIONS%20THAT%20PREVENT%20INSPECTIONS) This item is not applicable to Digimarc Corporation - Not applicable[237](index=237&type=chunk) PART III [ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE](index=53&type=section&id=ITEM%2010%3A%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) This item incorporates information on directors, executive officers, and corporate governance by reference from Digimarc's 2024 Proxy Statement, including adopted Codes of Conduct and Ethics - Information required by this item is incorporated by reference from the Proxy Statement for the 2024 annual meeting of shareholders[239](index=239&type=chunk)[241](index=241&type=chunk) - Digimarc has adopted a **Code of Business Conduct** and a **Code of Ethics for Financial Professionals**[240](index=240&type=chunk) [ITEM 11: EXECUTIVE COMPENSATION](index=53&type=section&id=ITEM%2011%3A%20EXECUTIVE%20COMPENSATION) This item incorporates executive compensation information by reference from Digimarc's 2024 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2024 annual meeting of shareholders[242](index=242&type=chunk) [ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS](index=53&type=section&id=ITEM%2012%3A%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) This item incorporates information on security ownership of beneficial owners and management, and related stockholder matters, by reference from Digimarc's 2024 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2024 annual meeting of shareholders[242](index=242&type=chunk) [ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE](index=53&type=section&id=ITEM%2013%3A%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) This item incorporates information on certain relationships, related transactions, and director independence by reference from Digimarc's 2024 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2024 annual meeting of shareholders[243](index=243&type=chunk) [ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES](index=53&type=section&id=ITEM%2014%3A%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) This item incorporates information on principal accountant fees and services by reference from Digimarc's 2024 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2024 annual meeting of shareholders[243](index=243&type=chunk) [ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES](index=54&type=section&id=ITEM%2015%3A%20EXHIBITS%20AND%20FINANCIAL%20STATEMENT%20SCHEDULES) This item lists financial statements, confirms omission of schedules, and provides a comprehensive exhibit index detailing various agreements and corporate documents, noting that representations are for party benefit - The following documents are filed as part of this Annual Report on Form 10-K: Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Loss, Consolidated Statements of Shareholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[244](index=244&type=chunk) - All financial statement schedules have been omitted as they are not required or applicable, or the information is shown in the consolidated financial statements or related notes[244](index=244&type=chunk) - A detailed Exhibit Index is provided, listing various agreements and corporate documents[245](index=245&type=chunk)[249](index=249&type=chunk)[250](index=250&type=chunk)[251](index=251&type=chunk)[254](index=254&type=chunk) - Agreements included as exhibits may contain representations and warranties made solely for the benefit of the parties, not intended as categorical statements of fact, and may apply different standards of materiality[246](index=246&type=chunk)[248](index=248&type=chunk) SIGNATURES [SIGNATURES](index=59&type=section&id=SIGNATURES) The Annual Report on Form 10-K was signed by Charles Beck (CFO) and Riley McCormack (CEO and Director), along with other directors, on February 29, 2024 - The report was signed on behalf of Digimarc Corporation by Charles Beck (Chief Financial Officer) and Riley McCormack (President, Chief Executive Officer and Director) on February 29, 2024[258](index=258&type=chunk) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS [INDEX TO CONSOLIDATED FINANCIAL STATEMENTS](index=60&type=section&id=INDEX%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section provides an index to the consolidated financial statements, including the Independent Auditor's Report, Balance Sheets, Statements of Operations, Shareholders' Equity, Cash Flows, and accompanying Notes Index to Consolidated Financial Statements | Document | Page | | :---------------------------------------- | :--- | | Report of Independent Registered Public Accounting Firm | F-2 | | Consolidated Balance Sheets | F-4 | | Consolidated Statements of Operations and Comprehensive Loss | F-5 | | Consolidated Statements of Shareholders' Equity | F-6 | | Consolidated Statements of Cash Flows | F-7 | | Notes to Consolidated Financial Statements | F-8 | [Report of Independent Registered Public Accounting Firm](index=61&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) KPMG LLP issued an unqualified opinion on Digimarc's 2023 and 2022 consolidated financial statements, affirming fair presentation in conformity with U.S. GAAP, with revenue recognition for new contracts identified as a critical audit matter - KPMG LLP issued an **unqualified opinion** on Digimarc's consolidated financial statements for December 31, 2023, and 2022[263](index=263&type=chunk) - The consolidated financial statements present fairly, in all material respects, the financial position and results of operations in conformity with U.S. generally accepted accounting principles[263](index=263&type=chunk) - The critical audit matter identified was the **evaluation of the Company's revenue recognition related to new contracts** due to the unique nature of new revenue contracts within each software and service offering[269](index=269&type=chunk)[270](index=270&type=chunk) [Consolidated Balance Sheets](index=63&type=section&id=Consolidated%20Balance%20Sheets) As of December 31, 2023, total assets decreased to $80.6 million from $113.8 million, liabilities increased to $18.6 million, and shareholders' equity decreased to $61.9 million, primarily due to reduced cash and net loss Consolidated Balance Sheets (in thousands) | Metric | December 31, 2023 | December 31, 2022 | | :---------------------------------------- | :------------------ | :------------------ | | **ASSETS** | | | | Cash and cash equivalents | $21,456 | $33,598 | | Marketable securities | $5,726 | $18,944 | | Trade accounts receivable, net | $5,813 | $5,427 | | Other current assets | $4,085 | $6,172 | | **Total current assets** | **$37,080** | **$64,141** | | Property and equipment, net | $1,570 | $2,390 | | Intangibles, net | $28,458 | $33,170 | | Goodwill | $8,641 | $8,229 | | Lease right of use assets | $4,017 | $4,720 | | Other assets | $786 | $1,127 | | **Total assets** | **$80,552** | **$113,777** | | **LIABILITIES AND SHAREHOLDERS' EQUITY** | | | | Accounts payable and other accrued liabilities | $6,672 | $5,989 | | Deferred revenue | $5,853 | $4,145 | | **Total current liabilities** | **$12,525** | **$10,134** | | Long-term lease liabilities | $5,994 | $5,977 | | Other long-term liabilities | $106 | $76 | | **Total liabilities** | **$18,625** | **$16,187** | | Shareholders' equity: | | | | Preferred stock | $50 | $50 | | Common stock | $20 | $20 | | Additional paid-in capital | $376,189 | $367,692 | | Accumulated deficit | $(311,768) | $(265,809) | | Accumulated other comprehensive loss | $(2,564) | $(4,363) | | **Total shareholders' equity** | **$61,927** | **$97,590** | | **Total liabilities and shareholders' equity** | **$80,552** | **$113,777** | [Consolidated Statements of Operations and Comprehensive Loss](index=64&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) For 2023, total revenue increased 15% to $34.9 million, gross profit grew 32% to $20.2 million, and net loss improved to $(46.0) million, reflecting reduced operating expenses and positive foreign currency adjustments Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share data) | Metric | Year Ended December 31, 2023 | Year Ended December 31, 2022 | | :---------------------------------------- | :--------------------------- | :--------------------------- | | Revenue: | | | | Subscription | $18,973 | $15,219 | | Service | $15,878 | $14,978 | | **Total revenue** | **$34,851** | **$30,197** | | Cost of revenue: | | | | Subscription (1) | $2,975 | $3,878 | | Service (1) | $7,252 | $6,557 | | Amortization expense on acquired intangible assets | $4,459 | $4,439 | | **Total cost of revenue** | **$14,686** | **$14,874** | | **Gross profit** | **$20,165** | **$15,323** | | Operating expenses: | | | | Sales and marketing | $22,409 | $29,718 | | Research, development and engineering | $26,577 | $26,490 | | General and administrative | $18,071 | $18,945 | | Amortization expense on acquired intangible assets | $1,065 | $1,064 | | Impairment of lease right of use assets and leasehold improvements | $250 | $915 | | **Total operating expenses** | **$68,372** | **$77,132** | | **Operating loss** | **$(48,207)** | **$(61,809)** | | Other income, net | $2,452 | $2,108 | | Loss before income taxes | $(45,755) | $(59,701) | | Provision for income taxes | $(204) | $(97) | | **Net loss** | **$(45,959)** | **$(59,798)** | | Loss per share — basic | $(2.26) | $(3.12) | | Loss per share — diluted | $(2.26) | $(3.12) | | Weighted average shares outstanding — basic | 20,322 | 19,140 | | Weighted average shares outstanding — diluted | 20,322 | 19,140 | | Comprehensive loss: | | | | Unrealized gain (loss) on marketable securities, net of tax of $0 | $138 | $(144) | | Foreign currency translation adjustment, net of tax of $0 | $1,661 | $(4,219) | | Other comprehensive income (loss) | $1,799 | $(4,363) | | Net loss | $(45,959) | $(59,798) | | **Comprehensive loss** | **$(44,160)** | **$(64,161)** | [Consolidated Statements of Shareholders' Equity](index=65&type=section&id=Consolidated%20Statements%20of%20Shareholders%27%20Equity) As of December 31, 2023, total shareholders' equity decreased to $61.9 million from $97.6 million, primarily due to a net loss of $(46.0) million and stock repurchases, partially offset by stock-based compensation Consolidated Statements of Shareholders' Equity (in thousands) | Metric | December 31, 2023 | December 31, 2022 | | :---------------------------------------- | :------------------ | :------------------ | | Preferred Stock | $50 | $50 | | Common Stock | $20 | $20 | | Additional Paid-in Capital | $376,189 | $367,692 | | Accumulated Deficit | $(311,768) | $(265,809) | | Accumulated Other Comprehensive Loss | $(2,564) | $(4,363) | | **Total Shareholders' Equity** | **$61,927** | **$97,590** | - The decrease in total shareholders' equity was primarily due to a **net loss of $(45,959) thousand**[279](index=279&type=chunk) - Stock-based compensation contributed **$11,221 thousand to additional paid-in capital** in 2023[279](index=279&type=chunk) - The company purchased **$2,724 thousand of common stock** in 2023, primarily for tax withholding[279](index=279&type=chunk) [Consolidated Statements of Cash Flows](index=66&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) In 2023, net cash used in operating activities decreased 50% to $(22.0) million, investing activities provided $12.6 million, and financing activities shifted to a $(2.8) million use, primarily due to the absence of large stock issuances Consolidated Statements of Cash Flows (in thousands) | Metric | Year Ended December 31, 2023 | Year Ended December 31, 2022 | | :---------------------------------------- | :--------------------------- | :--------------------------- | | **Cash flows from operating activities:** | | | | Net cash used in operating activities | $(21,995) | $(44,408) | | **Cash flows from investing activities:** | | | | Net cash provided by investing activities | $12,561 | $3,757 | | **Cash flows from financing activities:** | | | | Net cash (used in) provided by financing activities | $(2,760) | $60,499 | | Effect of exchange rate on cash | $52 | $(39) | | Net (decrease) increase in cash and cash equivalents | $(12,142) | $19,809 | | Cash and cash equivalents at beginning of period | $33,598 | $13,789 | | **Cash and cash equivalents at end of period** | **$21,456** | **$33,598** | - Net cash used in operating activities decreased by **$22.4 million**, primarily due to a $13.8 million lower net loss and favorable changes in operating assets and liabilities[213](index=213&type=chunk) - Net cash provided by investing activities increased by **$8.8 million**, mainly from $4.6 million higher net maturities of marketable securities, $3.5 million net cash paid for the EVRYTHNG acquisition in 2022 (not in 2023), and $0.6 million lower purchases of property and equipment[214](index=214&type=chunk) - Net cash from financing activities decreased by **$63.3 million**, primarily due to $62.9 million net proceeds from the issuance of common stock in 2022[215](index=215&type=chunk) [Notes to Consolidated Financial Statements](index=67&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The Notes detail Digimarc's business, accounting policies, and financial performance, covering digital watermarking, the EVRYTHNG acquisition, revenue recognition, stock-based compensation, income taxes, liquidity, and subsequent events - Digimarc is a pioneer and global leader in digital watermarking technologies, offering the Illuminate SaaS platform and product suite for identification and authentication[283](index=283&type=chunk)[284](index=284&type=chunk)[285](index=285&type=chunk)[288](index=288&type=chunk) - Critical accounting policies include revenue recognition (ASC 606), stock-based compensation (ASC 718), income taxes (ASC 740), and business combinations (EVRYTHNG acquisition)[287](index=287&type=chunk)[305](index=305&type=chunk)[306](index=306&type=chunk)[308](index=308&type=chunk)[311](index=311&type=chunk) - The company adopted ASU No. 2016-13 (CECL model) on January 1, 2023, with no material impact, and is evaluating ASU No. 2023-07 (Segment Reporting) and ASU No. 2023-09 (Income Tax Disclosures)[314](index=314&type=chunk)[316](index=316&type=chunk)[317](index=317&type=chunk) Disaggregated Revenue by Major Target Market (in thousands) | Market | Year Ended December 31, 2023 | Year Ended December 31, 2022 | | :--------------- | :--------------------------- | :--------------------------- | | Commercial: | | | | Subscription | $17,773 | $13,832 | | Service | $1,042 | $2,056 | | **Total Commercial** | **$18,815** | **$15,888** | | Government: | | | | Subscription | $1,200 | $1,387 | | Service | $14,836 | $12,922 | | **Total Government** | **$16,036** | **$14,309** | | **Total** | **$34,851** | **$30,197** | Major Customers (Percentage of Revenue) | Customer | Year Ended December 31, 2023 | Year Ended December 31, 2022 | | :--------- | :--------------------------- | :--------------------------- | | Customer A | 46% | 46% | | Customer B | 21% | 17% | - The EVRYTHNG acquisition on January 3, 2022, had an aggregate preliminary purchase price of **$36,634 thousand**, with $35,720 thousand allocated to intangible assets (developed technology and customer relationships) and $7,970 thousand to goodwill[361](index=361&type=chunk)[364](index=364&type=chunk) - Total stock-based compensation expense was **$11,158 thousand in 2023**, with **$15,370 thousand in unrecognized compensation costs** remaining as of December 31, 2023, to be recognized through December 31, 2027[343](index=343&type=chunk)[344](index=344&type=chunk) - The effective tax rate was **0% for 2023 and 2022** due to a full valuation allowance of **$95,256 thousand** against deferred tax assets, primarily driven by cumulative losses[399](index=399&type=chunk)[403](index=403&type=chunk) - Subsequent to year-end, on February 24, 2024, the company completed a registered direct stock offering of **929,000 common shares at $35.00 per share**, generating **$32,500 thousand in gross cash proceeds**[409](index=409&type=chunk)

Total revenue for the fourth quarter of 2023 increased to $9.3 million compared to $7.2 million for the fourth quarter of 2022. Digimarc Reports Fourth Quarter and Fiscal Year 2023 Financial Results Annual Recurring Revenue(1) Increases 71% Beaverton, Ore. – February 28, 2024 – Digimarc Corporation (NASDAQ: DMRC) reported financial results for the fourth quarter and fiscal year ended December 31, 2023. "Q4 was another strong quarter for Digimarc. On a year-over-year basis, we accelerated our ARR growth to 7 ...

BEAVERTON, Ore.--(BUSINESS WIRE)--Digimarc Corporation (NASDAQ: DMRC), the pioneer and global leader in digital watermarking, today announced it has joined more than 200 of the nation’s leading artificial intelligence (AI) stakeholders to participate in a Department of Commerce initiative to support the development and deployment of trustworthy and safe AI. Established by the Department of Commerce’s National Institute of Standards and Technology (NIST), the U.S. Artificial Intelligence Safety Institute Con ...

Digimarc, the pioneer and global leader in digital watermarking technologies, released its next-generation digital watermarks featuring more advanced security and greater access control. Digimarc's next-generation digital watermarks represent a step change in state-of-the-art digital watermarking, which is critical to the identification and authentication of physical and digital items. (Graphic: Business Wire)Digimarc, the pioneer and global leader in digital watermarking technologies, released its next-gen ...

Digimarc Corporation (NASDAQ:DMRC) Q3 2023 Results Conference Call November 6, 2023 5:00 PM ET Company Participants Joel Meyer - Chief Legal Officer Riley McCormack - CEO Charles Beck - CFO Conference Call Participants James Ricchiuti - Needham & Company Jeff Van Rhee - Craig-Hallum Capital Operator Greetings, and welcome to the Digimarc Corporation Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your h ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) The company's unaudited consolidated financial statements for Q3 2023 show increased revenue, reduced net loss, and a decrease in total assets [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The unaudited consolidated financial statements for the period ended September 30, 2023, show a year-over-year increase in revenue and a reduction in net loss [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) As of September 30, 2023, total assets decreased to **$88.8 million** from **$113.8 million**, primarily due to reduced marketable securities Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | **Total Current Assets** | $44,951 | $64,141 | | **Total Assets** | **$88,842** | **$113,777** | | **Total Current Liabilities** | $13,522 | $10,134 | | **Total Liabilities** | $19,959 | $16,187 | | **Total Shareholders' Equity** | **$68,883** | **$97,590** | [Consolidated Statements of Operations and Comprehensive Loss](index=4&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) For Q3 2023, revenue increased to **$9.0 million**, and the net loss narrowed to **$(10.7) million**, reflecting improved financial performance Q3 2023 vs Q3 2022 Financial Performance (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | **Total Revenue** | $8,994 | $7,821 | | Subscription Revenue | $4,811 | $4,086 | | Service Revenue | $4,183 | $3,735 | | Gross Profit | $5,223 | $4,165 | | Operating Loss | $(11,156) | $(15,527) | | **Net Loss** | **$(10,723)** | **$(14,930)** | | Loss Per Share (basic) | $(0.53) | $(0.76) | Nine Months 2023 vs 2022 Financial Performance (in thousands, except per share data) | Metric | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | | **Total Revenue** | $25,567 | $22,979 | | Subscription Revenue | $13,374 | $11,121 | | Service Revenue | $12,193 | $11,858 | | Gross Profit | $14,336 | $11,506 | | Operating Loss | $(37,191) | $(48,492) | | **Net Loss** | **$(35,386)** | **$(47,350)** | | Loss Per Share (basic) | $(1.76) | $(2.51) | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities significantly improved to **$(16.7) million** for the nine months ended September 30, 2023 Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(16,679) | $(36,888) | | Net Cash Provided by Investing Activities | $17,529 | $6,926 | | Net Cash (Used in) Provided by Financing Activities | $(2,069) | $56,628 | | **Net (Decrease) Increase in Cash** | **$(1,263)** | **$26,566** | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail the company's SaaS platform, revenue disaggregation, significant customer concentration, and other financial disclosures - The company's business is centered on its Digimarc Illuminate SaaS platform, which digitizes products using identifiers like digital watermarks and QR codes to create a 'digital twin' for each item[21](index=21&type=chunk)[22](index=22&type=chunk) Revenue by Major Market (Nine Months Ended Sep 30, in thousands) | Market | 2023 | 2022 | | :--- | :--- | :--- | | Commercial | $13,323 | $11,884 | | Government | $12,244 | $11,095 | | **Total** | **$25,567** | **$22,979** | - The company has significant customer concentration, with Customer A accounting for **48%** of revenue and Customer B for **21%** for the nine months ended Sep 30, 2023[47](index=47&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes Q3 2023 revenue growth to increased subscription and service revenue, alongside reduced operating expenses, while maintaining sufficient liquidity [Results of Operations](index=26&type=section&id=Results%20of%20Operations) Q3 2023 revenue increased by **$1.2 million** (15%) year-over-year, driven by higher subscription and service revenue, while operating expenses decreased by 17% - Q3 revenue growth was driven by higher subscription revenue from new and existing commercial contracts and a larger annual budget from the Central Banks for project work[129](index=129&type=chunk) - Q3 operating expenses decreased by **17%** year-over-year, mainly due to lower severance costs (**$1.4 million**), reduced compensation from lower headcount (**$1.1 million**), and lower contractor expenses (**$0.6 million**)[131](index=131&type=chunk) Annual Recurring Revenue (ARR) Growth (in thousands) | Metric | As of Sep 30, 2023 | As of Sep 30, 2022 | % Increase | | :--- | :--- | :--- | :--- | | ARR | $19,559 | $12,682 | 54% | [Non-GAAP Financial Measures](index=35&type=section&id=Non-GAAP%20Financial%20Measures) Non-GAAP net loss for Q3 2023 improved to **$(5.9) million**, with gross profit margin increasing to **76%** due to favorable revenue mix and lower costs GAAP vs. Non-GAAP Net Loss (in thousands) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | GAAP Net Loss | $(10,723) | $(14,930) | | **Non-GAAP Net Loss** | **$(5,936)** | **$(9,300)** | - The increase in Non-GAAP gross profit margin to **76%** in Q3 2023 from **72%** in Q3 2022 was primarily due to higher subscription revenue with a favorable mix and lower platform costs[186](index=186&type=chunk) [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) Total cash, cash equivalents, and marketable securities decreased to **$33.3 million**, but management believes current liquidity is sufficient for the next 12 months Liquidity Position (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Working Capital | $31,429 | $54,007 | | Total cash, cash equivalents and marketable securities | $33,331 | $52,542 | - Net cash used in operating activities for the first nine months of 2023 improved significantly to **$(16.7) million** from **$(36.9) million** in the prior year period, mainly due to a lower net loss and favorable changes in working capital[194](index=194&type=chunk) - The company believes its current cash and marketable securities will be sufficient to satisfy projected working capital and capital expenditure requirements for at least the next 12 months[197](index=197&type=chunk) [Item 4. Controls and Procedures](index=40&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal controls - The CEO and CFO have concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[208](index=208&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[209](index=209&type=chunk) [PART II. OTHER INFORMATION](index=41&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, and required exhibits [Item 1. Legal Proceedings](index=41&type=section&id=Item%201.%20Legal%20Proceedings) The company is subject to ordinary course legal proceedings but expects no material adverse effect on its financial position - There are no ongoing legal proceedings expected to have a material adverse effect on the company's financial statements[211](index=211&type=chunk) [Item 1A. Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) No material changes have occurred to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - As of September 30, 2023, no material changes have been made to the risk factors disclosed in the 2022 Annual Report[212](index=212&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=41&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q3 2023, the company repurchased **21,561 shares** at **$35.12 per share** to satisfy tax withholding obligations for restricted stock awards Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2023 | — | — | | August 2023 | 21,561 | $35.12 | | September 2023 | — | — | | **Total** | **21,561** | **$35.12** | - The share purchases were conducted to satisfy required income tax withholding upon the vesting of employee restricted stock, not as part of a publicly announced buyback program[213](index=213&type=chunk)[214](index=214&type=chunk) [Item 6. Exhibits](index=42&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and Inline XBRL financial data files - The report includes standard exhibits such as CEO/CFO certifications and interactive data files (Inline XBRL)[216](index=216&type=chunk)

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents Digimarc's unaudited consolidated financial statements and detailed notes for periods ended June 30, 2023, and December 31, 2022 [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets%20as%20of%20June%2030%2C%202023%20and%20December%2031%2C%202022) Total assets and shareholders' equity decreased from December 31, 2022, to June 30, 2023, primarily due to reduced cash and marketable securities, while deferred revenue significantly increased Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | :------- | | Cash and cash equivalents | $26,825 | $33,598 | $(6,773) | -20.16% | | Marketable securities | $7,717 | $18,944 | $(11,227) | -59.26% | | Trade accounts receivable, net | $11,981 | $5,427 | $6,554 | 120.78% | | Total current assets | $50,968 | $64,141 | $(13,173) | -20.54% | | Total assets | $98,322 | $113,777 | $(15,455) | -13.58% | | Deferred revenue | $8,101 | $4,145 | $3,956 | 95.44% | | Total current liabilities | $13,263 | $10,134 | $3,129 | 30.88% | | Total liabilities | $19,684 | $16,187 | $3,497 | 21.60% | | Total shareholders' equity | $78,638 | $97,590 | $(18,952) | -19.42% | [Consolidated Statements of Operations and Comprehensive Loss](index=4&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss%20for%20the%20three%20and%20six%20months%20ended%20June%2030%2C%202023%20and%202022) Digimarc reported increased total revenue and gross profit for both periods ended June 30, 2023, driven by subscription growth, with net losses decreasing year-over-year due to reduced operating expenses Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | YoY Change (3 Months) | % YoY Change (3 Months) | | :-------------------- | :--------------------------- | :--------------------------- | :-------------------- | :---------------------- | | Subscription Revenue | $4,678 | $3,244 | $1,434 | 44.20% | | Service Revenue | $4,052 | $4,503 | $(451) | -10.02% | | Total Revenue | $8,730 | $7,747 | $983 | 12.69% | | Gross Profit | $4,869 | $3,997 | $872 | 21.82% | | Operating Loss | $(11,268) | $(14,949) | $3,681 | -24.62% | | Net Loss | $(10,623) | $(14,639) | $4,016 | -27.43% | | Loss per share - basic| $(0.53) | $(0.75) | $0.22 | -29.33% | | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | YoY Change (6 Months) | % YoY Change (6 Months) | | :-------------------- | :--------------------------- | :--------------------------- | :-------------------- | :---------------------- | | Subscription Revenue | $8,563 | $7,035 | $1,528 | 21.72% | | Service Revenue | $8,010 | $8,123 | $(113) | -1.39% | | Total Revenue | $16,573 | $15,158 | $1,415 | 9.34% | | Gross Profit | $9,113 | $7,341 | $1,772 | 24.14% | | Operating Loss | $(26,035) | $(32,965) | $6,930 | -21.02% | | Net Loss | $(24,663) | $(32,420) | $7,757 | -23.93% | | Loss per share - basic| $(1.23) | $(1.76) | $0.53 | -30.11% | [Consolidated Statements of Shareholders' Equity](index=5&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity%20for%20the%20three%20and%20six%20months%20ended%20June%2030%2C%202023%20and%202022) Shareholders' equity decreased from December 31, 2022, to June 30, 2023, primarily due to the net loss incurred, partially offset by stock-based compensation and foreign currency translation adjustments Consolidated Statements of Shareholders' Equity (in thousands) | Metric (in thousands) | Balance at Dec 31, 2022 | 6 Months Ended June 30, 2023 | Balance at June 30, 2023 | | :-------------------- | :---------------------- | :--------------------------- | :----------------------- | | Additional paid-in capital | $367,692 | $5,481 (Stock-based comp) | $371,893 | | Accumulated deficit | $(265,809) | $(24,663) (Net loss) | $(290,472) | | Accumulated other comprehensive loss | $(4,363) | $1,510 (Other comp. income) | $(2,853) | | Total shareholders' equity | $97,590 | $(18,952) | $78,638 | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20six%20months%20ended%20June%2030%2C%202023%20and%202022) Operating cash outflow decreased, investing cash flow became positive, and financing activities shifted to a net outflow for the six months ended June 30, 2023 Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | YoY Change | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | | Net cash used in operating activities | $(16,490) | $(25,667) | $9,177 | | Net cash provided by investing activities | $11,001 | $1,741 | $9,260 | | Net cash (used in) provided by financing activities | $(1,296) | $57,229 | $(58,525) | | Net (decrease) increase in cash and cash equivalents | $(6,773) | $33,262 | $(40,035) | | Cash and cash equivalents at end of period | $26,825 | $47,051 | $(20,226) | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Detailed notes explain Digimarc's business, accounting policies, revenue, segments, stock compensation, and other financial details [Note 1. Description of Business and Significant Accounting Policies](index=8&type=section&id=Note%201.%20Description%20of%20Business%20and%20Significant%20Accounting%20Policies) Digimarc is a global leader in product digitization, offering cloud-based solutions through its Illuminate Platform, and adopted ASU No. 2016-13 with no material impact - Digimarc is a global leader in product digitization and digital media identification, providing business value across industries through unique identifiers and cloud-based solutions[23](index=23&type=chunk) - The Digimarc Illuminate Platform combines digital watermarks and/or QR codes with product cloud technologies to digitize products, enabling interaction with consumers and digital devices[24](index=24&type=chunk) - The company adopted ASU No. 2016-13, 'Financial Instruments - Credit Losses (ASC 326),' on January 1, 2023, which did not have a material impact on its financial condition, results of operations, and disclosures[34](index=34&type=chunk) [Note 2. Fair Value of Financial Instruments](index=9&type=section&id=Note%202.%20Fair%20Value%20of%20Financial%20Instruments) Financial instruments approximate carrying values due to short-term nature, while marketable securities are available-for-sale and reported at fair value - The estimated fair values of cash equivalents, accounts receivable, accounts payable, and other accrued liabilities approximate their carrying values due to their short-term nature[35](index=35&type=chunk) - Marketable securities are classified as available-for-sale and reported at fair value, with unrealized holding gains and losses excluded from earnings and reported in 'accumulated other comprehensive income (loss)'[35](index=35&type=chunk) Fair Value of Financial Instruments (in thousands) | Category | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------- | :----------------------------- | :------------------------------- | | Money market securities | $3,715 | $2,073 | | Commercial paper | $15,904 | $35,468 | | U.S. treasuries | $7,747 | — | | Federal agency notes | $5,964 | $4,423 | | Corporate notes | — | $8,432 | | Total | $33,330 | $50,396 | [Note 3. Revenue Recognition](index=10&type=section&id=Note%203.%20Revenue%20Recognition) Digimarc generates revenue from software subscriptions and development services, recognized over contract terms or as performed, disaggregated by Commercial and Government markets - Subscription revenue is primarily from software as a service platform and products, recognized over the typical one to three-year subscription term[38](index=38&type=chunk) - Service revenue is mainly from software development and professional services, generally recognized as performed, with contracts ranging from days to several years[38](index=38&type=chunk) Revenue by Type and Market (in thousands) | Revenue Type (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Commercial Subscription | $4,378 | $2,756 | $7,963 | $6,247 | | Commercial Service | $338 | $1,114 | $636 | $1,462 | | Total Commercial | $4,716 | $3,870 | $8,599 | $7,709 | | Government Subscription | $300 | $488 | $600 | $788 | | Government Service | $3,714 | $3,389 | $7,374 | $6,661 | | Total Government | $4,014 | $3,877 | $7,974 | $7,449 | | Total Revenue | $8,730 | $7,747 | $16,573 | $15,158 | [Note 4. Segment Information](index=12&type=section&id=Note%204.%20Segment%20Information) Digimarc operates as a single segment for product digitization solutions, with geographically diversified revenue and reliance on a few major customers - The Company operates as a single reporting segment: product digitization solutions, generating revenue primarily through software subscriptions and software development services[47](index=47&type=chunk) Revenue by Geographic Area (in thousands) | Geographic Area (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Domestic | $2,853 | $2,007 | $5,620 | $4,370 | | International | $5,877 | $5,740 | $10,953 | $10,788 | | Total | $8,730 | $7,747 | $16,573 | $15,158 | Revenue Concentration by Major Customers (as % of total revenue) | Customer | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Customer A | 46% | 47% | 48% | 47% | | Customer B | 21% | <10% | 22% | <10% | [Note 5. Stock-Based Compensation](index=13&type=section&id=Note%205.%20Stock-Based%20Compensation) Stock-based compensation, including options and RSUs, decreased for both periods ended June 30, 2023, primarily due to fewer employee stock grants - Stock-based compensation includes expense charges for stock options, restricted stock, restricted stock units, and performance stock units, with fair values estimated using Black-Scholes or Monte Carlo models[51](index=51&type=chunk)[52](index=52&type=chunk)[57](index=57&type=chunk) Stock-Based Compensation Expense (in thousands) | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Stock-based compensation expense | $2,578 | $3,274 | $5,454 | $5,742 | | Capitalized to software and patent costs | $14 | $44 | $27 | $80 | | Total stock-based compensation | $2,592 | $3,318 | $5,481 | $5,822 | - Total unrecognized compensation costs as of June 30, 2023, were **$20,052 thousand**, expected to be recognized over weighted average periods through June 30, 2027[62](index=62&type=chunk)[63](index=63&type=chunk) [Note 6. Shareholders' Equity](index=16&type=section&id=Note%206.%20Shareholders'%20Equity) On April 5, 2022, Digimarc completed a registered direct offering, issuing 2.25 million common shares for $58.275 million gross proceeds - On April 5, 2022, the Company issued and sold **2,250 thousand common shares** in a registered direct offering at **$25.90 per share**, generating gross cash proceeds of **$58,275 thousand**[70](index=70&type=chunk) [Note 7. Earnings Per Share](index=17&type=section&id=Note%207.%20Earnings%20Per%20Share) Digimarc calculates basic and diluted EPS using the treasury stock method, reporting basic and diluted losses per share for both periods - Basic and diluted earnings per share are calculated in accordance with ASC 260, 'Earnings Per Share,' using the treasury stock method[73](index=73&type=chunk)[74](index=74&type=chunk) Earnings Per Share (in thousands, except per share data) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net loss - basic (in thousands) | $(10,623) | $(14,639) | $(24,663) | $(32,420) | | Basic loss per share | $(0.53) | $(0.75) | $(1.23) | $(1.76) | | Diluted loss per share | $(0.53) | $(0.75) | $(1.23) | $(1.76) | - Anti-dilutive shares, including those with exercise prices higher than the average market price and those due to net loss, were excluded from diluted earnings (loss) per share calculations[75](index=75&type=chunk) [Note 8. Trade Accounts Receivable](index=17&type=section&id=Note%208.%20Trade%20Accounts%20Receivable) Trade accounts receivable, net, significantly increased, with a substantial portion from unpaid deferred revenue, and the company maintains an allowance for doubtful accounts Trade Accounts Receivable (in thousands) | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Trade accounts receivable, current | $12,095 | $5,541 | | Trade accounts receivable, net | $11,999 | $5,464 | | Unpaid deferred revenue included in trade accounts receivable | $6,102 | $2,183 | - The Company maintains an allowance for doubtful accounts, evaluated quarterly on a customer-by-customer basis, considering historical write-off experience, delinquency, and potential risk of loss[79](index=79&type=chunk) Major Customer Concentration in Trade Accounts Receivable | Major Customers (as % of trade accounts receivable, net) | June 30, 2023 | December 31, 2022 | | :------------------------------------------------------- | :------------ | :---------------- | | Company A | 55% | <10% | | Company B | 21% | 55% | [Note 9. Business Combination](index=18&type=section&id=Note%209.%20Business%20Combination) On January 3, 2022, Digimarc acquired EVRYTHNG for $36.634 million, allocating $35.72 million to intangibles and $7.97 million to goodwill - On January 3, 2022, Digimarc acquired EVRYTHNG, a London-based product cloud company, for an aggregate preliminary purchase price of **$36,634 thousand**[82](index=82&type=chunk) - The purchase price included **$31,519 thousand** in common stock, **$1,601 thousand** in warrants (which expired unexercised in 2022), and cash paid for closing costs[82](index=82&type=chunk) EVRYTHNG Acquisition Purchase Price Allocation (in thousands) | Purchase Price Allocation (in thousands) | January 3, 2022 | | :--------------------------------------- | :-------------- | | Intangibles | $35,720 | | Goodwill | $7,970 | | Total purchase price | $37,934 | [Note 10. Property and Equipment](index=20&type=section&id=Note%2010.%20Property%20and%20Equipment) Property and equipment, net, decreased to $1.775 million at June 30, 2023, primarily due to accumulated depreciation, with assets depreciated straight-line Property and Equipment, Net (in thousands) | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------- | :------------ | :---------------- | | Gross property and equipment | $13,998 | $14,006 | | Less accumulated depreciation | $(12,223) | $(11,616) | | Property and equipment, net | $1,775 | $2,390 | - Depreciation on property and equipment is calculated using the straight-line method over estimated useful lives of two to ten years[93](index=93&type=chunk) [Note 11. Goodwill](index=20&type=section&id=Note%2011.%20Goodwill) Digimarc performs annual goodwill impairment tests, concluding no impairment as of June 30, 2023, with goodwill slightly increasing due to currency adjustments - The Company tests goodwill for impairment annually in June and whenever events or changes in circumstances indicate that the carrying value may exceed the fair value[95](index=95&type=chunk) - As of June 30, 2023, and 2022, management concluded there was no impairment to goodwill[33](index=33&type=chunk)[95](index=95&type=chunk) Goodwill Balance (in thousands) | Metric (in thousands) | Balance at December 31, 2022 | Currency translation adjustments | Balance at June 30, 2023 | | :-------------------- | :--------------------------- | :------------------------------- | :----------------------- | | Goodwill | $8,229 | $339 | $8,568 | [Note 12. Intangibles](index=20&type=section&id=Note%2012.%20Intangibles) Intangible assets, including patents and acquired intangibles, are reviewed for impairment with no charges, and amortization expense totaled $3.029 million for the six months - Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable; no impairment charges were recorded for the six months ended June 30, 2023 and 2022[97](index=97&type=chunk) Intangible Assets, Net (in thousands) | Intangible Asset (in thousands) | Estimated Life (years) | June 30, 2023 | December 31, 2022 | | :------------------------------ | :--------------------- | :------------ | :---------------- | | Capitalized patent costs | ~17 | $10,758 | $10,646 | | Purchased intellectual property | 10 | $250 | $250 | | Developed technology | 5 | $22,617 | $21,661 | | Customer relationships | 10 | $10,808 | $10,351 | | Intangibles, net | | $31,421 | $33,170 | Amortization Expense and Estimated Future Amortization (in thousands) | Amortization Expense (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :---------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Amortization expense | $1,536 | $1,583 | $3,029 | $3,260 | | Estimated Future Amortization Expense (in thousands) | | :----------------------------------- | | Remaining in 2023 | $3,089 | | 2024 | $6,174 | | 2025 | $6,152 | | 2026 | $6,119 | | 2027 | $1,561 | [Note 13. Leases](index=21&type=section&id=Note%2013.%20Leases) Digimarc leases office space, recorded a $250 thousand impairment for its former headquarters, and operating lease expense was $842 thousand for the six months - The Company entered into a sublease agreement and lease extension for a new corporate headquarters in Beaverton, Oregon, with a term through September 2030[104](index=104&type=chunk) - An impairment of lease right of use assets and leasehold improvements of **$250 thousand** was recorded in Q2 2023, triggered by vacating the prior corporate headquarters[109](index=109&type=chunk) Lease Metrics and Operating Lease Expense (in thousands) | Lease Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Lease right of use assets | $4,202 | $4,720 | | Lease liabilities, current | $629 | $939 | | Lease liabilities, long-term| $6,066 | $5,977 | | Operating Lease Expense (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Operating lease expense | $469 | $463 | $842 | $924 | [Note 14. Other Income](index=23&type=section&id=Note%2014.%20Other%20Income) Other income, net, significantly increased due to higher interest income from marketable securities and the impact of refundable tax credits Other Income, Net (in thousands) | Other Income (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Interest income | $439 | $84 | $860 | $91 | | Refundable tax credit | $151 | — | $406 | — | | Foreign currency gains (losses) | $56 | $4 | $123 | $(13) | | Total other income, net | $647 | $93 | $1,392 | $89 | - The increase in other income, net, was primarily due to higher interest income reflecting higher interest rates on marketable securities and the impact of refundable tax credits[179](index=179&type=chunk)[180](index=180&type=chunk) [Note 15. Income Taxes](index=23&type=section&id=Note%2015.%20Income%20Taxes) Digimarc's effective tax rate was 0-1% due to a valuation allowance against deferred tax assets, which increased to $89.549 million - The effective tax rate for the six months ended June 30, 2023 and 2022, was **0%** and **1%**, respectively, significantly lower than the statutory tax rate due to a valuation allowance against deferred tax assets[113](index=113&type=chunk)[181](index=181&type=chunk) - The valuation allowance against net deferred tax assets increased by **$6,549 thousand** to **$89,549 thousand** as of June 30, 2023, from **$83,000 thousand** at December 31, 2022[114](index=114&type=chunk)[182](index=182&type=chunk) [Note 16. Commitments and Contingencies](index=23&type=section&id=Note%2016.%20Commitments%20and%20Contingencies) Digimarc's contracts include indemnification provisions, and the company is subject to ordinary legal proceedings, not expecting material adverse effects - Certain contracts include indemnification provisions for third-party intellectual property infringement claims, with no claims made to date[116](index=116&type=chunk) - The Company is subject to legal proceedings and claims in the ordinary course of business but does not believe their resolution will have a material adverse effect on its consolidated financial statements[117](index=117&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Digimarc's financial condition and results of operations, covering revenue, expenses, non-GAAP measures, and liquidity [Overview](index=24&type=section&id=Overview) Digimarc is a global leader in product digitization, leveraging its Illuminate Platform and extensive patent portfolio, enhanced by the EVRYTHNG acquisition - Digimarc is a global leader in product digitization and digital media identification, delivering business value across industries through unique identities and cloud-based solutions[122](index=122&type=chunk) - The Digimarc Illuminate Platform combines digital watermarks and QR codes with product cloud technologies to digitize products and enable interactions[123](index=123&type=chunk) - The company has an extensive intellectual property protection program with approximately **920 U.S. and foreign patents** granted and applications pending as of June 30, 2023[126](index=126&type=chunk) [Critical Accounting Policies and Estimates](index=25&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Detailed information on critical accounting policies and estimates is incorporated by reference from the 2022 Annual Report on Form 10-K - Detailed information about critical accounting policies and estimates is set forth in Part III, Item 15 of the 2022 Annual Report, in 'Note 1: Description of Business and Summary of Significant Accounting Policies'[128](index=128&type=chunk) [Results of Operations](index=26&type=section&id=Results%20of%20Operations) Total revenue increased due to subscription growth, while operating expenses decreased, leading to reduced net losses despite continued unprofitability - Total revenue for the three months ended June 30, 2023, increased by **$1.0 million (13%)** to **$8.7 million**, and for the six months, increased by **$1.4 million (9%)** to **$16.6 million**[133](index=133&type=chunk)[134](index=134&type=chunk) - The increase in revenue primarily reflects higher subscription revenue from new commercial contracts and higher service revenue from Central Banks, partially offset by lower service revenue from HolyGrail recycling projects and lower subscription revenue from sunsetting the Piracy Intelligence product[133](index=133&type=chunk)[134](index=134&type=chunk) - Total operating expenses decreased by **$2.8 million (15%)** for the three months and **$5.2 million (13%)** for the six months ended June 30, 2023, primarily due to lower compensation costs (headcount reduction) and reduced contractor/consulting expenses, partially offset by one-time severance costs[135](index=135&type=chunk)[136](index=136&type=chunk) [Revenue](index=27&type=section&id=Revenue) Subscription revenue grew significantly due to new commercial contracts, while service revenue decreased, mainly from lower HolyGrail project revenue Revenue Performance (in thousands) | Revenue Type (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Dollar Change | Percent Change | | :-------------------------- | :--------------------------- | :--------------------------- | :------------ | :------------- | | Subscription | $4,678 | $3,244 | $1,434 | 44% | | Service | $4,052 | $4,503 | $(451) | (10)% | | Total | $8,730 | $7,747 | $983 | 13% | | Revenue Type (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Dollar Change | Percent Change | | :-------------------------- | :--------------------------- | :--------------------------- | :------------ | :------------- | | Subscription | $8,563 | $7,035 | $1,528 | 22% | | Service | $8,010 | $8,123 | $(113) | (1)% | | Total | $16,573 | $15,158 | $1,415 | 9% | - Subscription revenue increase primarily reflects higher revenue from new commercial contracts, partially offset by lower revenue from sunsetting the Piracy Intelligence product[139](index=139&type=chunk)[140](index=140&type=chunk) - Service revenue decrease primarily reflects lower revenue from HolyGrail recycling projects, partially offset by higher service revenue from the Central Banks[142](index=142&type=chunk)[143](index=143&type=chunk) [Cost of Revenue](index=28&type=section&id=Cost%20of%20revenue) Cost of subscription revenue includes hosting and patent costs, while service revenue costs cover compensation and contractor expenses, with amortization from EVRYTHNG acquisition - Cost of subscription revenue primarily includes internet cloud hosting costs, image search data fees, outside contractors for operational support, and amortization of capitalized patent costs[154](index=154&type=chunk) - Cost of service revenue primarily includes compensation for software developers and professional services, payments to outside contractors, charges for equipment directly used by customers, depreciation, and billed travel costs[163](index=163&type=chunk) - Amortization expense on acquired intangible assets relates to the developed technology intangible asset acquired in the EVRYTHNG acquisition[156](index=156&type=chunk) [Gross Profit](index=30&type=section&id=Gross%20profit) Total gross profit increased by $0.9 million (22%) for three months and $1.8 million (24%) for six months, driven by subscription revenue growth and favorable mix Gross Profit Performance (in thousands) | Gross Profit (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Dollar Change | Percent Change | | :-------------------------- | :--------------------------- | :--------------------------- | :------------ | :------------- | | Subscription (excl. amortization) | $3,907 | $2,358 | $1,549 | 66% | | Service (excl. amortization) | $2,084 | $2,759 | $(675) | (24)% | | Total | $4,869 | $3,997 | $872 | 22% | | Gross Profit (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Dollar Change | Percent Change | | :-------------------------- | :--------------------------- | :--------------------------- | :------------ | :------------- | | Subscription (excl. amortization) | $6,997 | $5,107 | $1,890 | 37% | | Service (excl. amortization) | $4,327 | $4,548 | $(221) | (5)% | | Total | $9,113 | $7,341 | $1,772 | 24% | - The increase in total gross profit was primarily due to higher subscription gross profit contribution, reflecting higher subscription revenue, a favorable mix, and lower platform costs[158](index=158&type=chunk)[159](index=159&type=chunk) - Subscription gross profit margin increased due to higher subscription revenue, a favorable mix, and lower platform costs, while service gross profit margin decreased due to lower service revenue, an unfavorable mix, and higher one-time professional service costs[160](index=160&type=chunk)[161](index=161&type=chunk)[162](index=162&type=chunk)[163](index=163&type=chunk) [Operating Expenses](index=31&type=section&id=Operating%20expenses) Operating expenses decreased across sales, G&A, and amortization due to lower compensation and contractor costs, while R&D increased due to severance and headcount Operating Expenses (in thousands) | Operating Expense (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Dollar Change | Percent Change | | :------------------------------- | :--------------------------- | :--------------------------- | :------------ | :------------- | | Sales and marketing | $5,106 | $8,073 | $(2,967) | (37)% | | Research, development and engineering | $6,161 | $6,065 | $96 | 2% | | General and administrative | $4,352 | $4,487 | $(135) | (3)% | | Amortization expense on acquired intangible assets | $268 | $321 | $(53) | (17)% | | Impairment of lease right of use assets and leasehold improvements | $250 | — | $250 | 100% | | Total operating expenses | $16,137 | $18,946 | $(2,809) | (15)% | | Operating Expense (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Dollar Change | Percent Change | | :------------------------------- | :--------------------------- | :--------------------------- | :------------ | :------------- | | Sales and marketing | $11,404 | $16,018 | $(4,614) | (29)% | | Research, development and engineering | $13,987 | $12,156 | $1,831 | 15% | | General and administrative | $8,979 | $10,895 | $(1,916) | (18)% | | Amortization expense on acquired intangible assets | $528 | $663 | $(135) | (20)% | | Impairment of lease right of use assets and leasehold improvements | $250 | $574 | $(324) | (56)% | | Total operating expenses | $35,148 | $40,306 | $(5,158) | (13)% | - Sales and marketing expenses decreased primarily due to lower compensation costs (headcount reduction), decreased allocation of facilities and IT costs, and reduced contractor/consulting expenses[165](index=165&type=chunk) - Research, development and engineering expenses increased due to one-time severance costs, higher compensation costs (headcount increase), and increased software and maintenance expenses, partially offset by decreased allocation of facilities and IT costs[167](index=167&type=chunk)[168](index=168&type=chunk) [Other Income, Net](index=36&type=section&id=Other%20income%2C%20net) Other income, net, significantly increased due to higher interest income from marketable securities and the positive impact of refundable tax credits Other Income, Net (in thousands) | Other Income, Net (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Dollar Change | Percent Change | | :------------------------------- | :--------------------------- | :--------------------------- | :------------ | :------------- | | Total other income, net | $647 | $93 | $554 | 596% | | Other Income, Net (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Dollar Change | Percent Change | | :------------------------------- | :--------------------------- | :--------------------------- | :------------ | :------------- | | Total other income, net | $1,392 | $89 | $1,303 | 1464% | - The increase in other income, net, was primarily due to higher interest income reflecting higher interest rates on marketable securities and the impact of refundable tax credits[179](index=179&type=chunk)[180](index=180&type=chunk) [Income Taxes](index=36&type=section&id=Income%20Taxes) Digimarc's effective tax rate was 0-1% due to a valuation allowance against deferred tax assets, which increased to $89.5 million - The effective tax rate for the six months ended June 30, 2023 and 2022, was **0%** and **1%**, respectively, due to a valuation allowance against deferred tax assets[181](index=181&type=chunk) - The valuation allowance against deferred tax assets increased to **$89.5 million** as of June 30, 2023, from **$83.0 million** at December 31, 2022, primarily due to cumulative losses[182](index=182&type=chunk)[183](index=183&type=chunk) [Non-GAAP Financial Measures](index=36&type=section&id=Non-GAAP%20Financial%20Measures) Non-GAAP measures provide supplemental insights by excluding non-cash and non-recurring items, showing improved gross profit and reduced operating expenses - Non-GAAP financial measures are used to evaluate core operating results by excluding non-cash and non-recurring activities that can affect comparability[186](index=186&type=chunk) Non-GAAP Financial Performance (in thousands, except percentages and per share data) | Non-GAAP Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Non-GAAP gross profit | $6,455 | $5,526 | $12,170 | $10,406 | | Non-GAAP gross profit margin | 74% | 71% | 73% | 69% | | Non-GAAP operating expenses | $12,924 | $15,005 | $28,404 | $32,047 | | Non-GAAP net loss | $(5,824) | $(9,169) | $(14,862) | $(21,096) | | Non-GAAP loss per share (diluted) | $(0.29) | $(0.47) | $(0.74) | $(1.14) | - Non-GAAP operating expenses decreased primarily due to lower cash compensation costs (headcount reduction) and reduced contractor/consulting expenses, partially offset by one-time cash severance costs[192](index=192&type=chunk)[193](index=193&type=chunk) [Liquidity and Capital Resources](index=38&type=section&id=Liquidity%20and%20Capital%20Resources) Working capital and total cash decreased, but operating cash flow improved, and the company expects sufficient liquidity for 12 months, with a new shelf registration Liquidity Metrics (in thousands) | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------- | :------------ | :---------------- | | Working capital | $37,705 | $54,007 | | Current ratio | 3.8:1 | 6.3:1 | | Total cash, cash equivalents and marketable securities | $34,542 | $52,542 | - The **$18.0 million** decrease in cash, cash equivalents, and marketable securities resulted primarily from cash used in operations, purchases of common stock for tax withholding, and purchases of property and equipment and capitalized patent costs[195](index=195&type=chunk)[199](index=199&type=chunk) - Cash flows used in operating activities decreased by **$9.2 million** for the six months ended June 30, 2023, primarily due to a lower net loss and favorable changes in operating assets and liabilities[197](index=197&type=chunk) - Cash flows from financing activities decreased by **$58.5 million** for the six months ended June 30, 2023, primarily reflecting the absence of the **$58.2 million** net proceeds from the registered direct stock offering in April 2022[199](index=199&type=chunk) - The company believes its current cash, cash equivalents, and marketable securities balances will satisfy projected working capital and capital expenditure requirements for at least the next 12 months[200](index=200&type=chunk) - A new shelf registration statement on Form S-3 became effective on July 19, 2023, allowing the company to sell up to **$100 million** in securities[202](index=202&type=chunk) [Item 4. Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of June 30, 2023, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[211](index=211&type=chunk) - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2023[212](index=212&type=chunk) - EVRYTHNG has been integrated into the company's internal control over financial reporting and management's evaluation of its effectiveness[212](index=212&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=42&type=section&id=Item%201.%20Legal%20Proceedings) Digimarc is subject to ordinary course legal proceedings and claims, not expecting a material adverse effect on its financial statements - The Company is subject to legal proceedings and claims in the ordinary course of business[215](index=215&type=chunk) - Management does not believe that the resolution of any such matters will have a material adverse effect on its financial position, results of operations, or cash flows[215](index=215&type=chunk) [Item 1A. Risk Factors](index=42&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors were disclosed in the 2022 Annual Report, which details factors affecting Digimarc's financial results - As of June 30, 2023, there have been no material changes to the risk factors previously disclosed in the 2022 Annual Report[216](index=216&type=chunk) - Detailed information about risk factors that may affect Digimarc's actual results are set forth in Part I, Item 1A: 'Risk Factors' of the 2022 Annual Report[216](index=216&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=42&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Digimarc repurchases common stock to satisfy tax withholding liabilities related to stock option exercises and restricted stock vesting - The Company repurchases shares of common stock to satisfy required withholding of income tax liability in connection with the exercise of stock options and vesting of restricted stock, restricted stock units, and performance stock units[217](index=217&type=chunk) Common Stock Repurchases for Tax Withholding | Period | Total number of shares purchased (1) | Average price paid per share (1) | | :-------------------------------- | :----------------------------------- | :------------------------------- | | April 1, 2023 to April 30, 2023 | — | — | | May 1, 2023 to May 31, 2023 | 21,853 | $28.53 | | June 1, 2023 to June 30, 2023 | — | — | | Total | 21,853 | $28.53 | [Item 5. Other Information](index=43&type=section&id=Item%205.%20Other%20information) Shareholders approved amendments to the 2018 Incentive Plan on May 10, 2023, authorizing an additional 1.2 million shares of common stock - On May 10, 2023, shareholders approved amendments to the Digimarc Corporation 2018 Incentive Plan, authorizing the issuance of an additional **1.2 million shares** of common stock[220](index=220&type=chunk) [Item 6. Exhibits](index=43&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including equity compensation programs and certifications - The exhibits include the Equity Compensation Program for Non-Employee Directors, the amended 2018 Incentive Plan, Rule 13a-14(a)/15d-14(a) Certifications of the CEO and CFO, Section 1350 Certifications, and various Inline XBRL documents[222](index=222&type=chunk) [SIGNATURES](index=44&type=section&id=SIGNATURES) The report was duly signed by Charles Beck, Chief Financial Officer, on August 8, 2023, certifying its submission - The report was signed by Charles Beck, Chief Financial Officer, on August 8, 2023[224](index=224&type=chunk)