PART I FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the company's unaudited consolidated financial statements and accompanying notes [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets%20as%20of%20September%2030%2C%202019%20and%20December%2031%2C%202018) **Consolidated Balance Sheet Highlights (in thousands):** | Item | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | **ASSETS** | | | | Cash and cash equivalents | $16,414 | $27,278 | | Marketable securities (current) | $24,921 | $16,378 | | Total current assets | $47,787 | $49,644 | | Total assets | $63,586 | $61,787 | | **LIABILITIES AND SHAREHOLDERS' EQUITY** | | | | Accounts payable and other accrued liabilities | $2,615 | $1,092 | | Deferred revenue (current) | $2,391 | $3,226 | | Total current liabilities | $5,006 | $4,318 | | Total liabilities | $7,745 | $5,172 | | Total Shareholders' equity | $55,841 | $56,615 | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations%20for%20the%20three%20and%20nine%20months%20ended%20September%2030%2C%202019%20and%202018) **Consolidated Statements of Operations Highlights (in thousands):** | Item | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $5,828 | $4,914 | $17,668 | $15,965 | | Gross profit | $3,910 | $2,979 | $11,431 | $9,640 | | Operating loss | $(8,032) | $(8,606) | $(24,856) | $(25,262) | | Net loss | $(7,761) | $(8,342) | $(24,157) | $(24,492) | | Loss per common share — basic | $(0.65) | $(0.73) | $(2.07) | $(2.16) | | Loss per common share — diluted | $(0.65) | $(0.73) | $(2.07) | $(2.16) | [Consolidated Statements of Shareholders' Equity](index=5&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity%20for%20the%20three%20and%20nine%20months%20ended%20September%2030%2C%202019%20and%202018) **Shareholders' Equity Changes (in thousands):** | Item | Balance at Dec 31, 2018 | Issuance of common stock, net of costs (9M 2019) | Net loss (9M 2019) | Balance at Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Shareholders' Equity | $56,615 | $19,615 | $(24,157) | $55,841 | - Stock-based compensation for the nine months ended September 30, 2019, was **$6,228k**[18](index=18&type=chunk) [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20nine%20months%20ended%20September%2030%2C%202019%20and%202018) **Consolidated Statements of Cash Flows Highlights (in thousands):** | Cash Flow Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(16,763) | $(16,104) | | Net cash provided by (used in) investing activities | $(11,256) | $9,681 | | Net cash provided by (used in) financing activities | $17,155 | $(625) | | Net decrease in cash and cash equivalents | $(10,864) | $(7,048) | | Cash and cash equivalents at end of period | $16,414 | $33,775 | [Notes to Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) [1. Description of Business and Significant Accounting Policies](index=7&type=section&id=1.%20Description%20of%20Business%20and%20Significant%20Accounting%20Policies) This note describes the company's core business and the adoption of the new lease accounting standard ASC 842 - Digimarc Corporation enables automatic and reliable identification and interaction with various media forms through its Digimarc Platform, which includes Digimarc Barcode and Digimarc Discover software[24](index=24&type=chunk) - The Company adopted ASC 842, 'Leases,' on January 1, 2019, electing not to restate comparative periods and recording right-of-use assets of **$2,709k** and lease liabilities of **$3,792k**[27](index=27&type=chunk) [2. Fair Value of Financial Instruments](index=8&type=section&id=2.%20Fair%20Value%20of%20Financial%20Instruments) This note details the fair value hierarchy and maturity profile of the company's financial instruments **Fair Value Hierarchy of Financial Instruments (September 30, 2019, in thousands):** | Category | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Money market securities | $1,001 | $— | $— | $1,001 | | Commercial paper | $— | $29,776 | $— | $29,776 | | Corporate notes | $— | $7,318 | $— | $7,318 | | U.S. treasuries | $— | $4,020 | $— | $4,020 | | **Total** | **$1,001** | **$41,114** | **$—** | **$42,115** | **Fair Value Maturities (September 30, 2019, in thousands):** | Category | Total | Less than 1 year | 1-5 years | 5-10 years | More than 10 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash equivalents and marketable securities | $42,115 | $40,618 | $1,497 | $— | $— | [3. Revenue Recognition](index=8&type=section&id=3.%20Revenue%20Recognition) This note outlines revenue recognition policies for key streams and provides a breakdown of deferred revenue - Service revenue is recognized as services are performed, primarily from software development and consulting agreements[30](index=30&type=chunk) - Subscription revenue, derived from Digimarc Discover, Barcode, and Guardian products, is generally recurring, paid in advance, and recognized over the typical one-to-three-year subscription term[30](index=30&type=chunk) **Deferred Revenue (in thousands):** | Category | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Deferred revenue, current | $2,391 | $3,226 | | Deferred revenue, long term | $146 | $46 | | **Total** | **$2,537** | **$3,272** | [4. Segment Information](index=9&type=section&id=4.%20Segment%20Information) This note confirms the company's single operating segment and breaks down revenue by geography and customer - Digimarc operates in a single reporting segment: media management solutions, generating revenue through development services, subscriptions, and intellectual property licensing[34](index=34&type=chunk) **Revenue by Geographic Area (in thousands):** | Geographic Area | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Domestic | $2,136 | $1,387 | | International | $3,692 | $3,527 | | **Total** | **$5,828** | **$4,914** | | Geographic Area | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Domestic | $5,225 | $4,127 | | International | $12,443 | $11,838 | | **Total** | **$17,668** | **$15,965** | **Major Customers (Percentage of Revenue):** | Customer | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Central Banks | 57% | 62% | | Walmart Inc. | 14% | * (Less than 10%) | [5. Stock-Based Compensation](index=10&type=section&id=5.%20Stock-Based%20Compensation) This note details stock-based compensation expenses, valuation methods, and remaining unrecognized costs **Stock-Based Compensation Expense (in thousands):** | Category | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Cost of revenue | $163 | $134 | | Sales and marketing | $459 | $442 | | Research, development and engineering | $366 | $367 | | General and administrative | $984 | $846 | | Intellectual property | $69 | $76 | | **Total stock-based compensation expense** | **$2,041** | **$1,865** | | Category | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Cost of revenue | $524 | $456 | | Sales and marketing | $1,467 | $1,198 | | Research, development and engineering | $1,077 | $1,015 | | General and administrative | $2,823 | $2,461 | | Intellectual property | $203 | $215 | | **Total stock-based compensation expense** | **$6,094** | **$5,345** | - Total unrecognized compensation costs related to non-vested stock-based awards were **$15,473k** as of September 30, 2019, expected to be recognized over weighted average periods through September 30, 2023[44](index=44&type=chunk)[45](index=45&type=chunk) **Stock Option Activity (Nine Months Ended September 30, 2019, in thousands, except per share data):** | Activity | Options | Weighted Average Exercise Price ($) | | :--- | :--- | :--- | | Outstanding at December 31, 2018 | 513 | $28.52 | | Granted | 100 | $39.54 | | Exercised | (23) | $12.77 | | Outstanding at September 30, 2019 | 590 | $31.00 | | Exercisable at September 30, 2019 | 357 | $28.97 | [6. Shareholders' Equity](index=13&type=section&id=6.%20Shareholders'%20Equity) This note discusses the Equity Distribution Agreement used to raise capital through common stock sales - In May 2019, the Company entered into an Equity Distribution Agreement to sell up to **$30,000k** of common stock. For the nine months ended September 30, 2019, **336k shares** were sold for net cash proceeds of **$19,615k**[51](index=51&type=chunk) [7. Earnings Per Common Share](index=13&type=section&id=7.%20Earnings%20Per%20Common%20Share) This note explains the calculation of basic and diluted earnings per share using the two-class method **Earnings (Loss) Per Common Share (Basic & Diluted):** | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Loss per common share — basic | $(0.65) | $(0.73) | $(2.07) | $(2.16) | | Loss per common share — diluted | $(0.65) | $(0.73) | $(2.07) | $(2.16) | | Weighted average common shares outstanding — basic | 11,924 | 11,394 | 11,693 | 11,333 | | Weighted average common shares outstanding — diluted | 11,924 | 11,394 | 11,693 | 11,333 | [8. Trade Accounts Receivable](index=14&type=section&id=8.%20Trade%20Accounts%20Receivable) This note breaks down trade accounts receivable and identifies major customer balances **Trade Accounts Receivable (in thousands):** | Category | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Trade accounts receivable | $3,585 | $3,903 | | Allowance for doubtful accounts | $(15) | $(15) | | **Trade accounts receivable, net** | **$3,570** | **$3,888** | | Unpaid deferred revenue included in trade accounts receivable | $857 | $2,030 | **Major Customers in Trade Accounts Receivable (September 30, 2019):** | Customer | Percentage of Trade Accounts Receivable, Net | | :--- | :--- | | Central Banks | 52% | | Customer B | 11% | [9. Property and Equipment](index=15&type=section&id=9.%20Property%20and%20Equipment) This note details the company's property and equipment, including costs, depreciation, and net value **Property and Equipment, Net (in thousands):** | Category | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Gross property and equipment | $12,394 | $11,847 | | Less accumulated depreciation and amortization | $(8,800) | $(7,892) | | **Property and equipment, net** | **$3,594** | **$3,955** | [10. Intangibles](index=15&type=section&id=10.%20Intangibles) This note breaks down intangible assets, including patent costs, useful lives, and net carrying value **Intangibles, Net (in thousands):** | Category | Estimated Life (years) | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | :--- | | Capitalized patent costs | 17-20 | $9,254 | $8,757 | | Intangible assets acquired (total gross) | | $3,270 | $3,270 | | Gross intangible assets | | $12,524 | $12,027 | | Accumulated amortization | | $(5,801) | $(5,378) | | **Intangibles, net** | | **$6,723** | **$6,649** | [11. Leases](index=15&type=section&id=11.%20Leases) This note details the adoption of ASC 842 and key information on operating lease assets and liabilities - The Company adopted ASC 842, 'Leases,' as of January 1, 2019, using the retrospective approach and electing the package of practical expedients[67](index=67&type=chunk) **Lease Details (September 30, 2019, in thousands):** | Item | Amount | | :--- | :--- | | Right of use assets | $2,376 | | Lease liabilities, current | $678 | | Lease liabilities, long-term | $2,593 | | Weighted-average remaining life | 4.5 years | | Weighted-average discount rate | 8.20% | - Operating lease expense for the nine months ended September 30, 2019, was **$772k**, with cash paid for operating leases totaling **$1,014k**[71](index=71&type=chunk) [12. Income Taxes](index=17&type=section&id=12.%20Income%20Taxes) This note explains the 0% effective tax rate resulting from a full valuation allowance against deferred tax assets - The effective tax rate for the nine months ended September 30, 2019 and 2018, was **0%** due to a full valuation allowance recorded against deferred tax assets[73](index=73&type=chunk) - The valuation allowance against net deferred tax assets increased by **$7,723k** to **$50,072k** as of September 30, 2019, from **$42,349k** as of December 31, 2018[73](index=73&type=chunk) [13. Commitments and Contingencies](index=17&type=section&id=13.%20Commitments%20and%20Contingencies) This note addresses intellectual property indemnification provisions and ongoing legal proceedings - The Company's product license and services agreements include indemnification provisions for third-party claims related to its intellectual property, with no claims made to date[75](index=75&type=chunk) - The Company is subject to legal proceedings in the ordinary course of business but does not believe their resolution will have a material adverse effect on its financial position, results of operations, or cash flows[76](index=76&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on financial condition, results of operations, and liquidity [Overview](index=18&type=section&id=Overview) This section overviews the company's media identification technologies, strategic shift, and recent partnerships - Digimarc's core business involves enabling automatic and reliable identification and interaction with various media forms using its proprietary Digimarc Platform, which includes Digimarc Barcode and Digimarc Discover software[81](index=81&type=chunk) - The company has shifted its focus from direct patent monetization to encouraging large-scale adoption of its technologies, increasing the scale and rate of growth of its products and services business, and laying a foundation for continuing innovation[96](index=96&type=chunk) - Recent developments include partnerships with Datalogic and Microsoft, collaborations with GS1 US and GS1 Germany, adoption by the U.S. Department of Agriculture for bioengineered food disclosure, and expanded capabilities for high-speed inspection systems[87](index=87&type=chunk)[90](index=90&type=chunk)[92](index=92&type=chunk)[94](index=94&type=chunk) [Results of Operations](index=21&type=section&id=Results%20of%20Operations) This section analyzes revenue growth, modest operating expense increases, and the year-over-year net loss [Summary](index=21&type=section&id=Summary) This section summarizes revenue growth of 19% and 11% and a modest increase in operating expenses - Total revenue for the three months ended September 30, 2019, increased **19%** to **$5.8 million**, and for the nine months, it increased **11%** to **$17.7 million**, driven by higher subscription and service revenue[101](index=101&type=chunk) - Total operating expenses for the three and nine months ended September 30, 2019, increased **3%** to **$11.9 million** and **4%** to **$36.3 million**, respectively, primarily due to routine annual compensation adjustments[102](index=102&type=chunk) [Revenue](index=22&type=section&id=Revenue) This section details revenue changes, with growth in service and subscription and a decline in license revenue **Revenue Breakdown (in thousands):** | Revenue Type | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Service | $3,003 | $2,787 | $216 | 8% | | Subscription | $2,273 | $1,532 | $741 | 48% | | License | $552 | $595 | $(43) | (7)% | | **Total** | **$5,828** | **$4,914** | **$914** | **19%** | | Revenue Type | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Service | $10,167 | $9,630 | $537 | 6% | | Subscription | $5,924 | $4,554 | $1,370 | 30% | | License | $1,577 | $1,781 | $(204) | (11)% | | **Total** | **$17,668** | **$15,965** | **$1,703** | **11%** | - Increases in service revenue were primarily due to the timing of program work with the Central Banks[105](index=105&type=chunk) - Subscription revenue increases were driven by higher Digimarc Discover and Digimarc Barcode revenue, partially offset by lower Digimarc Guardian revenue[107](index=107&type=chunk) [Revenue by Geography](index=23&type=section&id=Revenue%20by%20Geography) This section details revenue growth in both domestic and international markets, driven by different products **Revenue by Geography (in thousands):** | Geographic Area | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Domestic | $2,136 | $1,387 | $749 | 54% | | International | $3,692 | $3,527 | $165 | 5% | | **Total** | **$5,828** | **$4,914** | **$914** | **19%** | | Geographic Area | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Domestic | $5,225 | $4,127 | $1,098 | 27% | | International | $12,443 | $11,838 | $605 | 5% | | **Total** | **$17,668** | **$15,965** | **$1,703** | **11%** | - Domestic revenue increases were primarily due to higher Digimarc Discover and Digimarc Barcode revenue from domestic customers[110](index=110&type=chunk) - International revenue increases were primarily due to the timing of program work with the Central Banks[110](index=110&type=chunk) [Cost of Revenue](index=23&type=section&id=Cost%20of%20Revenue) This section details the primary components of cost of revenue for service, subscription, and license offerings - Cost of service revenue includes allocated costs from sales and marketing, R&D, and intellectual property, direct program delivery costs, compensation, contractor payments, equipment charges, depreciation, travel, and infrastructure[111](index=111&type=chunk) - Cost of subscription revenue primarily includes compensation for operations personnel, outside contractors for operational support, and internet service provider connectivity charges and image search data fees[112](index=112&type=chunk) - Cost of license revenue primarily includes amortization of capitalized patent costs and patent maintenance fees[113](index=113&type=chunk) [Gross Profit](index=24&type=section&id=Gross%20Profit) This section analyzes the gross profit increase, driven by higher subscription and service revenue **Gross Profit Breakdown (in thousands):** | Gross Profit Type | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Service | $1,716 | $1,486 | $230 | 15% | | Subscription | $1,814 | $1,052 | $762 | 72% | | License | $380 | $441 | $(61) | (14)% | | **Total** | **$3,910** | **$2,979** | **$931** | **31%** | **Gross Profit Percentage (as % of related revenue components):** | Gross Profit % | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Service | 57% | 53% | | Subscription | 80% | 69% | | License | 69% | 74% | | **Total** | **67%** | **61%** | - Increases in total gross profit were primarily due to higher subscription and service revenue[115](index=115&type=chunk) - Service and subscription gross profit percentages increased due to higher respective revenues, while license gross profit percentage decreased due to lower license revenue[116](index=116&type=chunk)[117](index=117&type=chunk)[118](index=118&type=chunk) [Operating Expenses](index=24&type=section&id=Operating%20Expenses) This section details the increase in operating expenses, driven by higher headcount and compensation costs [Sales and marketing](index=24&type=section&id=Sales%20and%20marketing) **Sales and Marketing Expenses (in thousands):** | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $4,839 | $4,741 | $98 | 2% | | Period | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $14,876 | $14,385 | $491 | 3% | - The increase in sales and marketing expenses for the three months was primarily due to increased headcount and compensation-related expenses of **$0.2 million**, partially offset by decreased marketing costs and professional fees of **$0.1 million**[123](index=123&type=chunk) [Research, development and engineering](index=25&type=section&id=Research%2C%20development%20and%20engineering) **Research, Development and Engineering Expenses (in thousands):** | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | R&D and engineering | $4,105 | $4,069 | $36 | 1% | | Period | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | R&D and engineering | $12,124 | $12,074 | $50 | 0% | - Increases in research, development and engineering expenses for both the three and nine month periods were insignificant[126](index=126&type=chunk) [General and administrative](index=25&type=section&id=General%20and%20administrative) **General and Administrative Expenses (in thousands):** | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | G&A | $2,656 | $2,447 | $209 | 9% | | Period | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | G&A | $8,194 | $7,495 | $699 | 9% | - The increase in general and administrative expenses for the nine months was primarily due to increased headcount and compensation-related expenses (**$0.4 million**), increased infrastructure and centralized costs (**$0.2 million**), and increased professional and consulting fees (**$0.1 million**)[131](index=131&type=chunk) [Intellectual property](index=26&type=section&id=Intellectual%20property) **Intellectual Property Expenses (in thousands):** | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | IP | $342 | $328 | $14 | 4% | | Period | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | IP | $1,093 | $948 | $145 | 15% | - The increase in intellectual property expenses for the nine months ended September 30, 2019, was primarily due to increased legal costs[135](index=135&type=chunk) [Stock-based compensation](index=27&type=section&id=Stock-based%20compensation) **Total Stock-Based Compensation Expense (in thousands):** | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Total | $2,041 | $1,865 | $176 | 9% | | Period | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Total | $6,094 | $5,345 | $749 | 14% | - Changes in stock-based compensation expense were primarily due to the timing and amount of stock awards[137](index=137&type=chunk) [Other income, net](index=27&type=section&id=Other%20income%2C%20net) This section details the decrease in other income, driven by lower interest income on cash balances **Other Income, Net (in thousands):** | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Other income, net | $259 | $273 | $(14) | (5)% | | Period | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Other income, net | $727 | $799 | $(72) | (9)% | - The decreases in other income, net, were primarily due to lower interest income as a result of lower cash and investment balances[139](index=139&type=chunk) [Income Taxes](index=27&type=section&id=Income%20Taxes) This section explains the 0% effective tax rate due to a full valuation allowance on deferred tax assets - The effective tax rate for the nine months ended September 30, 2019 and 2018, was **0%** due to a full valuation allowance recorded against deferred tax assets[140](index=140&type=chunk) - The valuation allowance against deferred tax assets increased by **$7,723k** to **$50,072k** as of September 30, 2019, from **$42,349k** as of December 31, 2018[140](index=140&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) This section analyzes the company's liquidity, capital resources, cash flows, and future capital needs **Liquidity Metrics (in thousands):** | Item | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Working capital | $42,781 | $45,326 | | Current ratio | 9.5:1 | 11.5:1 | | Total cash, cash equivalents and marketable securities | $42,832 | $43,656 | - The **$0.8 million decrease** in total cash, cash equivalents, and marketable securities was primarily due to cash used in operations, common stock purchases for tax withholding, and capital expenditures, partially offset by net proceeds from common stock issuance and stock option exercises[143](index=143&type=chunk) [Operating Cash Flow](index=28&type=section&id=Operating%20Cash%20Flow) This section analyzes changes in operating, investing, and financing cash flows for the nine-month period **Operating Cash Flow Components (Nine Months Ended Sep 30, in thousands):** | Item | 2019 | 2018 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(24,157) | $(24,492) | $335 | 1% | | Non-cash items | $7,725 | $6,949 | $776 | 11% | | Changes in operating assets and liabilities | $(331) | $1,439 | $(1,770) | (123)% | | **Net cash used in operating activities** | **$(16,763)** | **$(16,104)** | **$(659)** | **(4)%** | - Cash flows used in operating activities increased by **$0.7 million**, primarily due to changes in operating assets and liabilities (e.g., collection of a **$1.75 million** upfront license fee in January 2018), partially offset by higher non-cash items like stock-based compensation[148](index=148&type=chunk) - Cash flows from investing activities decreased by **$20.9 million**, shifting from **$9.7 million provided** in 2018 to **$11.3 million used** in 2019, mainly due to higher net purchases of marketable securities[149](index=149&type=chunk) - Cash flows from financing activities increased by **$17.8 million**, from **$0.6 million used** in 2018 to **$17.2 million provided** in 2019, primarily due to the sale of common stock[150](index=150&type=chunk) [Future Cash Expectations](index=29&type=section&id=Future%20Cash%20Expectations) This section outlines expectations for future cash needs and available capital resources from equity agreements - Current cash, cash equivalents, and short-term marketable securities are expected to satisfy projected working capital and capital expenditure requirements for at least the next 12 months[151](index=151&type=chunk) - Under an Equity Distribution Agreement, the company sold **335,748 shares** for **$20.3 million** in gross proceeds (**$19.6 million net cash**) as of September 30, 2019, with up to **$30 million** authorized[151](index=151&type=chunk) - **$49.9 million** remains available for future issuances under a **$100 million** shelf registration statement, which expires in June 2020[151](index=151&type=chunk) [Off-Balance Sheet Arrangements](index=29&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the company has no material off-balance sheet arrangements, aside from operating leases - The company has no material off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, results of operations, liquidity, capital expenditures, or capital resources, other than operating leases recorded upon adoption of ASC 842[152](index=152&type=chunk) [Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995](index=29&type=section&id=Safe%20Harbor%20Statement%20under%20the%20Private%20Securities%20Litigation%20Reform%20Act%20of%201995) This section provides a cautionary statement regarding forward-looking statements and associated risks - The report includes forward-looking statements subject to uncertainties and factors that are difficult to predict and beyond the company's control, which could cause actual results to differ materially[153](index=153&type=chunk) - Key risk factors include revenue concentration with few customers, revenue trends, global deployment of products, investment levels, anticipated expenses, stock awards, intellectual property, accounting pronouncements, market size, international growth, liquidity, stock price volatility, capital market conditions, credit risk, adoption of technology, competitive differentiation, facilities, employee relations, cybersecurity, bylaws, and legal proceedings[155](index=155&type=chunk) [Item 4. Controls and Procedures](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of disclosure controls and procedures with no material changes reported [Evaluation of Disclosure Controls and Procedures](index=31&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[159](index=159&type=chunk) [Changes in Controls](index=31&type=section&id=Changes%20in%20Controls) - There were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting during the three months ended September 30, 2019[160](index=160&type=chunk) PART II OTHER INFORMATION [Item 1. Legal Proceedings](index=32&type=section&id=Item%201.%20Legal%20Proceedings) This section notes that ongoing legal proceedings are not expected to have a material adverse effect - The company is subject to legal proceedings and claims arising in the ordinary course of business, but does not believe their resolution will have a material adverse effect on its financial position, results of operations, or cash flows[163](index=163&type=chunk) [Item 1A. Risk Factors](index=32&type=section&id=Item%201A.%20Risk%20Factors) This section confirms no material changes to the risk factors disclosed in the 2018 Annual Report on Form 10-K - Detailed information about risk factors affecting Digimarc's actual results is set forth in Part I, Item 1A of the 2018 Annual Report[164](index=164&type=chunk) - As of September 30, 2019, there have been no material changes to the risk factors set forth in the 2018 Annual Report[164](index=164&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=32&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details common stock repurchases made to satisfy tax liabilities on vested restricted shares - The company repurchases shares of common stock to satisfy required withholding tax liability in connection with the vesting of restricted shares[165](index=165&type=chunk) **Purchases of Equity Securities (Three Months Ended September 30, 2019):** | Period | Total Number of Shares Purchased | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | August 1, 2019 to August 31, 2019 | 19,596 | $40.29 | | September 1, 2019 to September 30, 2019 | 2,423 | $39.54 | | **Total** | **22,019** | **$40.21** | [Item 6. Exhibits](index=33&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL data - Exhibits include Rule 13a-14(a)/15d-14(a) Certifications of the Chief Executive Officer and Chief Financial Officer, Section 1350 Certifications, and various XBRL taxonomy documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents)[167](index=167&type=chunk) [SIGNATURES](index=34&type=section&id=SIGNATURES) This section contains the official signatures confirming the due authorization and filing of the report - The report was duly caused to be signed on behalf of Digimarc Corporation by Charles Beck, Chief Financial Officer, on October 31, 2019[170](index=170&type=chunk)

Financial Data and Key Metrics Changes - Q3 revenue increased by 19% to $5.8 million from $4.9 million in the same quarter last year, primarily driven by a 48% increase in subscription revenue [7][10] - Gross margin for the quarter improved to 67%, up from 61% in the previous year, mainly due to higher subscription revenue [8] - Net loss for Q3 was $7.8 million or $0.65 per diluted share, compared to a net loss of $8.3 million or $0.73 per diluted share in Q3 last year [10] Business Line Data and Key Metrics Changes - Subscription revenue rose by 48%, reflecting increased Discover and Barcode bookings [7] - Service revenue increased by $200,000, while license revenue remained flat [7] - Discover and Barcode bookings were approximately 95% higher than Q3 last year, totaling $1.1 million [8] Market Data and Key Metrics Changes - The company anticipates cash usage to be between $6 million to $7 million in Q4, lower than Q3 due to timing of vendor payments and customer receipts [12] - The company has $9.7 million remaining on its $30 million ATM program authorization [11] Company Strategy and Development Direction - The company aims to enable a large community of developers to build applications on its platform, providing financial and operational leverage as it scales [19] - The strategy includes focusing on enhancing partnerships with major retailers like Walmart, with ongoing projects to improve store operations and customer experience [21][24] - The company is exploring various financing strategies to support its involvement in initiatives like HolyGrail 2.0 [65][67] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the acceleration of bookings and the potential for significant growth in Discover and Barcode bookings in 2020 [14][15] - The company expects service revenue to be modestly higher in 2020, with license revenue anticipated to remain flat [13] - Management highlighted the importance of collaboration with industry leaders to address challenges in recycling and sustainability [36][38] Other Important Information - The company has made substantial progress in enhancing private brand packaging for Walmart and is expanding its partnerships with other retailers [22][27] - The company is actively involved in sustainability initiatives, with a focus on reducing manufacturing defects and plastics waste [50][51] Q&A Session Summary Question: Update on HolyGrail 2.0 leadership group and pricing model - Management is exploring various financing options but cannot provide a specific timetable for the pricing model or upfront payments [65][67] Question: Potential for signing recycling deals in early 2021 - Management refrained from commenting on specific timelines but emphasized readiness to support commercialization efforts [70][72] Question: Overview of the revenue funnel and top items - The focus remains on retail, CPG, and packaging, with a significant number of pilots in progress, aiming to expedite movement to production [76][81] Question: Update on headcount additions - New hires will primarily be in development and delivery systems to support the expanding use of the platform [84][85] Question: Progress in Japan and ongoing programs - Management noted progress in Japan despite resource constraints, with ongoing R&D and limited deployments [100][102] Question: Applications showcased at Adobe Max - The company will demonstrate applications related to consumer engagement and supply chain management in the apparel sector [103][107] Question: Collaboration with Berry Plastics on HolyGrail efforts - Management highlighted Berry Plastics as a key partner in the circular economy and packaging initiatives [108][110] Question: Update on strategic discussions - Management is engaged in discussions with multiple companies but cannot provide specific details at this time [112][115] Question: Role of GS1 in Digimarc's growth - Management maintains a strong relationship with GS1 and is collaborating on standards for plastics recycling [116][118]

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, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to | --- | --- | |------------------------------------------------------------------------------------------------------------------------------|-------------- ...

Financial Data and Key Metrics Changes - Q2 revenue increased by 14% to $6.2 million from $5.4 million in the same quarter last year, primarily driven by a 45% increase in subscription revenue [6][10] - Gross margin improved to 65%, up from 59% year-over-year, reflecting higher subscription revenue [9][17] - Net loss for Q2 was $7.9 million or $0.68 per diluted share, compared to a net loss of $8 million or $0.71 per diluted share in Q2 last year [10] - Working capital position improved significantly with $19.6 million raised under the ATM program [11][14] Business Line Data and Key Metrics Changes - Subscription revenue rose by 45%, while service revenue increased by $200,000, and license revenue decreased by $100,000 due to lower royalty reporting [6][7] - Discover and Barcode bookings surged by approximately 750%, reaching $1.7 million from $200,000 in Q2 last year [7][17] Market Data and Key Metrics Changes - The company signed a significant contract with Walmart, contributing $750,000 to bookings, and is focused on enhancing fresh product labels and private brand packaging [8][18] - The company is experiencing increased interest from retailers and CPGs, with ongoing discussions for pilot programs with several retailers in North America and Europe [21][27] Company Strategy and Development Direction - The company aims to leverage its partnership with Walmart to enhance its market presence and drive adoption of Digimarc Barcode across the retail sector [18][22] - There is a focus on expanding into the plastics recycling market, with ongoing initiatives to improve sorting and recycling processes [28][32] - The company is exploring equity-based strategic partnerships to accelerate growth and enhance its platform capabilities [46] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, citing significant growth in bookings and working capital, and emphasized the importance of executing on existing contracts [17][46] - The company is cautious about the timing of new initiatives and is prioritizing securing funding before accelerating projects [77][79] Other Important Information - The company plans to make 5 to 10 new hires in the second half of the year to meet growing demand [9] - Management highlighted the importance of establishing governance structures for recycling initiatives to ensure long-term success [80] Q&A Session Summary Question: Inquiry about Walmart suppliers' engagement - Management noted that many suppliers are becoming aware of the need to integrate Digimarc Barcode, but specific numbers are not available due to the broad nature of Walmart's supplier base [49][50] Question: Momentum in potential revenue impact areas - Management indicated that engagement with industry-leading retailers is increasing, and there are several supply chain projects in development that could have financial impacts [55][56] Question: Update on ATM program and strategic funding - Management confirmed that there are no plans to resume the ATM program at this time, focusing instead on strategic funding opportunities [61][62] Question: Relationship with Adobe - Management stated that the relationship with Adobe has been longstanding and is expected to grow, particularly in areas related to digital image protection [68][70] Question: Update on hangtags opportunity - Management confirmed ongoing deliveries to Costco and suggested that discussions with other general merchandisers are in progress [71] Question: Clarification on pilot production - Management explained that products found in stores are part of limited production pilots, which serve as a step towards full production [73] Question: Timeline for HolyGrail 2.0 project - Management emphasized that while there is pressure to increase recycling rates, the timeline for project completion is uncertain and dependent on securing funding [76][78]

Digimarc Corporation (NASDAQ:DMRC) Q1 2019 Earnings Conference Call May 1, 2019 5:00 PM ET Company Participants Bruce Davis - President, CEO and Chairman Charles Beck - EVP, CFO and Treasurer Conference Call Participants Michael Nichols - B. Riley FBR, Inc. James Ricchiuti - Needham & Company Jeffrey Rhee - Craig-Hallum Operator Good afternoon, and thank you for participating in today's conference call. Now I will turn the call over to Bruce Davis, Chairman and CEO of Digimarc. Mr. Davis, please proceed. Br ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to | --- | --- | |-------------------------------------------------------------------------------------------------------------------------------------------- ...

Digimarc Corporation (NASDAQ:DMRC) Q4 2018 Earnings Conference Call February 21, 2019 5:00 PM ET Company Participants Dahlia Wei - Director of Investor Relations Bruce Davis - Chairman and Chief Executive Officer Charles Beck - Chief Financial Officer Conference Call Participants Marc Weisenburger - B. Riley FBR Robin Knipp - Janney Montgomery Scott Ilya Grozovsky - National Securities Jeff Bernstein - Cowen Operator Good afternoon and thank you for participating in today's Conference Call. Now, I'll to tur ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2018 OR ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 001-34108 DIGIMARC CORPORATION (Exact name of registrant as specified in its charter) Oregon 26-2828185 (State or other jurisdiction of i ...