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)

Financial Data and Key Metrics Changes - Service revenue declined 10% from $4.5 million to $4.1 million, impacted by a non-recurring project work from the Holy Grail Recycling project [1] - Subscription gross profit margin improved from 73% in Q2 last year to 84% in Q2 this year, reflecting a favorable mix of subscription revenue and declining product infrastructure costs [2] - Operating expenses decreased from $18.9 million in Q2 last year to $16.1 million this quarter, attributed to a reduction in force and cost-saving initiatives [4] - Net loss per share improved from $0.75 in Q2 last year to $0.53 this quarter, with non-GAAP net loss per share decreasing from $0.47 to $0.29 [4] Business Line Data and Key Metrics Changes - Subscription revenue accounted for 54% of total revenue, growing 44% from $3.2 million to $4.7 million, with a 59% growth rate when excluding the end-of-life Piracy Intelligence product [28][29] - Service gross profit margin decreased from 61% in Q2 last year to 51% this year, influenced by project work and higher costs [3] Market Data and Key Metrics Changes - Total revenue for the quarter was $8.7 million, an increase of 13% from $7.7 million in Q2 last year [28] - First-year commercial bookings reached $8.8 million, a 4x increase compared to $2.2 million in Q2 last year [24][25] Company Strategy and Development Direction - The company is focused on growing subscription revenue and has seen momentum across all areas of its business, indicating a transformation towards a product digitization hyperscaler [16][18] - The company is preparing to launch a solution addressing the authenticity of digital media and the safety of input for generative AI models, positioning itself as a leader in this space [30][31] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in lower cash usage in the second half of 2023 due to timing of customer receipts and growing revenues [5][7] - The company anticipates continued expansion of subscription gross profit margins and a sustainable business model capable of high cash flow generation [2][5] Other Important Information - The company ended the quarter with $34.5 million in cash and investments, having used $8.5 million during the quarter, significantly lower than $14.7 million in Q2 last year [4] - The company signed multiyear extensions with six important customers, contributing to increased annual recurring revenue [38] Q&A Session Summary Question: Factors driving lower cash usage in the second half - Management indicated that lower cash usage would result from timing of customer receipts and growing revenues, including a significant contract with Walmart [7] Question: Target customers for generative AI solutions - Management noted that the generative AI solutions would target both existing customers and new customers, emphasizing the broad applicability of their technology [60] Question: Clarification on the Sandbox version of the platform - Management explained that the Sandbox version allows customers flexibility in selecting components of the platform without incurring full costs, catering to specific needs [48] Question: Multiyear contracts and their impact - Management highlighted that multiyear contracts contribute to committed revenue beyond the first year, indicating a stronger long-term revenue outlook [27]

Financial Data and Key Metrics Changes - Total revenue for Q1 2023 was $7.8 million, an increase of $400,000 or 6% from $7.4 million in Q1 2022 [44] - Subscription revenue accounted for 50% of total revenue, growing 2% from $3.8 million to $3.9 million, with an adjusted increase of 21% when excluding the former Piracy Intelligence product [44][45] - Net loss per common share improved to $0.70 from $1.03 in Q1 2022, while non-GAAP net loss per share decreased to $0.45 from $0.69 [48] - Operating expenses decreased to $19 million from $21.4 million in Q1 2022, with a significant reduction in cash usage expected to continue [21][48] Business Line Data and Key Metrics Changes - Service revenue grew 9% from $3.6 million to $4 million, driven by a larger annual budget from Central Banks [19] - Service gross profit margin improved from 49% in Q1 2022 to 57% in Q1 2023 due to lower professional services costs [20] - First-year commercial bookings were $2.3 million, down from $3.8 million in Q1 2022, impacted by the completion of specific projects [18] Market Data and Key Metrics Changes - The company signed a $32 million, 5-year contract to protect the authenticity of precious metals and critical building materials, marking entry into the security printing market [6][7] - The contract includes potential upsides from increased capacity needs and additional product launches [14] Company Strategy and Development Direction - The company aims to digitize the world's products and is focused on building a scalable and high-margin revenue model through partnerships with value-added resellers (VARs) [4][36] - The Digimarc Illuminate Platform is foundational to the company's strategy, allowing for the development of accretive products that enhance customer value [5][11] - The company is pursuing a restructuring plan that is expected to yield approximately $8 million in annual expense savings [22] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the momentum across all business areas and the potential for significant growth in the product digitization market [25] - The company anticipates continued growth in service revenue from Central Banks, projecting over 10% growth for the year [19] Other Important Information - The company is evaluating additional metrics to better capture underlying growth rates due to the impact of multi-year contracts on reported bookings [17] - Cash usage during the quarter was $9.5 million, a reduction from $16.7 million in Q1 2022, with expectations for continued decline in cash usage [48] Q&A Session Summary Question: Can you elaborate on the use cases for the new contract? - Management indicated that the Digimarc Illuminate Platform is being used to protect packaging for precious metals and critical building materials, as well as for digitizing items in a deposit return system [54] Question: How will revenue recognition work for the new contract? - Revenue recognition will be ratable, but due to the staggered start dates of the products, the $6 million will not be recognized evenly [58] Question: What is the enthusiasm level among VARs for the Digimarc products? - Enthusiasm is growing as VARs recognize the value of the Digimarc Illuminate Platform for product digitization, with many seeing it as a necessary tool to remain competitive [78] Question: What are the expectations for cash burn for the remainder of the year? - Management noted that with growing revenue and reduced operating expenses, cash burn is expected to decrease significantly [85]

Revenue Performance - Total revenue for the three-month period ended March 31, 2023, increased by $0.4 million, or 6%, to $7.8 million compared to $7.4 million in the same period in 2022[120] - Subscription revenue for the three-month period ended March 31, 2023, was $3.885 million, a 2% increase from $3.791 million in 2022[122] - Service revenue for the same period increased by $0.338 million, or 9%, to $3.958 million compared to $3.620 million in 2022[122] - Domestic revenue increased by $0.404 million, or 17%, to $2.767 million in Q1 2023 compared to $2.363 million in Q1 2022[126] - International revenue saw a slight increase of $0.028 million, or 1%, totaling $5.076 million in Q1 2023 compared to $5.048 million in 2022[126] - The government segment's total revenue increased by $0.388 million, or 11%, to $3.960 million in Q1 2023 compared to $3.572 million in Q1 2022[129] Profitability Metrics - Gross profit margin improved to 54% in Q1 2023 from 45% in Q1 2022[119] - Total gross profit for the three months ended March 31, 2023, increased by $0.9 million to $4.244 billion, a 27% increase compared to the same period in 2022[132] - Subscription gross profit rose by $0.3 million, reflecting higher subscription revenue and a favorable mix, resulting in a gross profit margin of 80%, up from 73%[131][133] - Service gross profit increased by $0.5 million, with a gross profit margin of 57%, up from 49%, due to higher service revenue and lower professional services costs[131][134] - Non-GAAP gross profit for the three months ended March 31, 2023, increased by $0.8 million to $5.715 million compared to $4.880 million for the same period in 2022[156] - Non-GAAP gross profit margin improved to 73% for the three months ended March 31, 2023, up from 66% in the same period in 2022[157] Operating Expenses - Total operating expenses decreased by $2.3 million, or 11%, to $19.0 million in Q1 2023 compared to $21.4 million in Q1 2022[121] - Sales and marketing expenses decreased by $1.647 million to $6.298 billion, a 21% reduction, representing 80% of total revenue[135][136] - Research, development, and engineering expenses increased by $1.735 million to $7.826 billion, accounting for 100% of total revenue[136][137] - General and administrative expenses decreased by $1.781 million to $4.627 billion, representing 59% of total revenue[140][142] - Non-GAAP operating expenses decreased by $1.6 million to $15.480 million for the three months ended March 31, 2023, compared to $17.042 million for the same period in 2022[158] Net Loss and Cash Flow - The company reported an operating loss of $188 thousand for Q1 2023, an improvement from a loss of $243 thousand in Q1 2022[119] - The net loss for the three months ended March 31, 2023, was $14.040 million, a reduction of 21% from the net loss of $17.781 million in the same period in 2022[162] - Cash, cash equivalents, and short-term marketable securities totaled $43.025 million as of March 31, 2023, down from $52.542 million as of December 31, 2022[159] - Net cash used in operating activities decreased by $3.112 million to $8.744 million for the three months ended March 31, 2023, compared to $11.856 million for the same period in 2022[162] - Cash flows provided by investing activities increased by $6.217 million for the three months ended March 31, 2023, compared to the same period in 2022[163] Future Outlook and Risks - The company anticipates incurring an additional $21.576 million in stock-based compensation expense through March 31, 2027, for outstanding awards[146] - A significant portion of the company's revenue is concentrated among a few customers, which poses a risk to future revenue stability[171] - The company believes it has one of the world's most extensive patent portfolios in digital watermarking and related fields, which could enhance its competitive advantage[171] - Future investments in research, development, and engineering of products and technology are anticipated to drive growth and market opportunities[171] - The company is participating in the HolyGrail 2.0 initiative, which is expected to demonstrate the utility of its products in the recycling industry[171] - The company is focused on international growth opportunities and plans to invest in these markets in the future[172] - The company anticipates variability in contracted arrangements due to changes in circumstances, which could affect revenue projections[172] - Future financial obligations are expected to be met within the coming fiscal year, indicating a stable liquidity position[172] - The company is monitoring capital market conditions and credit risk exposure, which could impact its cost of capital[172] - The company does not undertake any obligation to publicly update or revise forward-looking statements, emphasizing the uncertainty of future performance[174]

Financial Data and Key Metrics Changes - The company achieved 85% year-over-year growth in first-year commercial bookings, totaling $19.1 million in 2022 [12] - Subscription revenue grew by 32% year-over-year, reaching $15.2 million in 2022, with subscription revenue accounting for over half of total revenue for the first time in a decade [32] - Total revenue for Q4 was $7.2 million, a 1% increase from $7.1 million in Q4 of the previous year [33] - The net loss per common share for Q4 was $0.62, compared to $0.50 in Q4 last year [36] Business Line Data and Key Metrics Changes - Service revenue remained flat year-over-year at $15 million, but is expected to increase in 2023 due to an extended contract with central banks [13] - Subscription revenue in Q4 represented 57% of total revenue, growing 13% from $3.6 million [33] - The company recorded a gross profit margin of 53% for Q4, down from 70% in the previous year, primarily due to amortization expenses from the acquisition of Everything [34] Market Data and Key Metrics Changes - The company is actively engaging in discussions with multiple brands and retailers regarding the adoption of its recycling solutions, indicating a growing market interest [9] - The serviceable addressable market for the retail experience product is significant enough to potentially drive profitability [27] Company Strategy and Development Direction - The company aims to digitize products globally, focusing on ease of business and guiding customers through their Digimarc journey [4][25] - A restructuring plan was announced to streamline operations and improve margins, involving a workforce reduction of approximately 17% [16][30] - The company is prioritizing product candidates with strong market drivers and network effects to enhance adoption and revenue growth [24][75] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about future business prospects, emphasizing the importance of building a financially sustainable business [30] - The company is seeing momentum across all areas of its business and is focused on creating a market it is uniquely positioned to lead [37] - Management highlighted the importance of ongoing activity and intent from stakeholders, despite a lack of broad publicity regarding product launches [40] Other Important Information - The company ended the year with $52.5 million in cash and investments, having used $3.8 million during Q4 [36] - A significant portion of operating expenses in Q4 was attributed to the acquisition of Everything, with non-GAAP operating expenses rising to $14.3 million [35] Q&A Session Questions and Answers Question: What is the timeline for the recycle product to convert into revenue opportunities? - Management indicated hope for revenue generation from the recycle product within 2023, particularly in France and Canada [45] Question: How does the workforce reduction relate to business confidence? - Management clarified that the workforce reduction was not a reflection of business confidence but a necessary step for long-term sustainability [42][43] Question: Can you provide an update on the Walmart contract and its use case? - Management stated that while there may not be immediate publicity, there is ongoing activity and intent regarding the Walmart contract [70]

Acquisition and Partnerships - Digimarc completed the acquisition of EVRYTHNG Limited on January 3, 2022, enhancing its product cloud capabilities[17] - The partnership with Sealed Air aims to deliver smart packaging solutions across multiple markets, combining Digimarc's digitization platform with Sealed Air's digital packaging innovations[24] Revenue and Contracts - In 2022, 46% of Digimarc's revenue was generated from a long-term contract with Central Banks, which has been extended through December 31, 2029[37][38] - The company anticipates a minimum of $44 million in future revenue from current contracts as of December 31, 2022, up from $29 million in 2021, with approximately $24 million expected to be recognized in 2023[44] - Digimarc's backlog may not guarantee actual revenue due to potential modifications or cancellations of contracts included in the backlog[49] Technology and Innovation - Digimarc's technology achieved a 99% detection rate in a semi-industrial trial for digital watermarks, demonstrating effectiveness across various plastic packaging materials[23] - Digimarc Recycle technology demonstrated 99% accuracy in sorting flexible plastics, facilitating the creation of new end-markets for recycled materials[27] - The company has approximately 950 U.S. and foreign patents granted and pending, positioning it as a leader in digital watermarking technology[40] Employee Engagement and Development - The wellness program through Regence Empower has a participation rate of 45%, which is an increase of 10% from the previous year[66] - The company has implemented a performance management system to support continuous learning and development, with strong participation in employee surveys[64] - Compensation and benefits are reviewed against the market annually, ensuring competitive base salaries and restricted stock units for outstanding performance[60] - The company promotes internal mobility and transparency in leveling and promoting employees, with salary ranges posted for new positions[61] - The company provides various training and development programs, including tuition reimbursement and online training platforms[65] Diversity, Equity, and Inclusion (DEI) - The Digimarc Methodology for organizational health has been adopted to foster diversity, equity, and inclusion (DEI) within the company culture[55] - The Board of Directors oversees the company's ESG efforts, including DEI programs, through the Governance, Nominating, and Sustainability Committee[56] - The Chief People Officer is responsible for developing and advancing the company's human capital strategy, which includes DEI initiatives[67] Employee Benefits and Community Engagement - The company has a Self-Managed Paid Time Off (PTO) program for exempt employees, allowing flexibility in time off[62] - The company supports community outreach through a matching program for employee donations to charities[63] Employee Turnover - Digimarc's employee turnover rate increased to 14% in 2022, attributed to a more competitive labor market[51] Environmental, Social, and Governance (ESG) - The company has formed an internal ESG team to manage its environmental, social, and governance impacts, aligning with industry standards[32][34]

Digimarc Corporation (NASDAQ:DMRC) Q3 2022 Earnings Conference Call November 3, 2022 5:00 PM ET Company Participants Joel Meyer – Chief Legal Officer Charles Beck – Chief Financial Officer Riley McCormack – Chief Executive Officer Conference Call Participants Matt Collard – PCB Advisory Jeff Bernstein – Cowen Jeff Van Rhee – Craig-Hallum Capital Group Operator Good day, and welcome to the Digimarc Q3 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | --- | --- | |-------------------------------------------------------------------------------------------------------|-----------------------------------------------------| | | | | For ...

Start Time: 17:00 January 1, 0000 5:18 PM ET Digimarc Corporation (NASDAQ:DMRC) Q2 2022 Earnings Conference Call August 03, 2022, 17:00 PM ET Company Participants Riley McCormack - President and CEO Charles Beck - EVP, CFO and Treasurer Joel Meyer - EVP, Chief Legal Officer and Corporate Secretary Conference Call Participants Operator Greetings, and welcome to the Digimarc Corporation Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answe ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | --- | --- | |-------------------------------------------------------------------------------------------------------|-----------------------------------------------------| | | | | For the ...