Digimarc(DMRC) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents unaudited consolidated financial statements, including balance sheets, statements of operations, cash flows, and detailed accounting notes Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and shareholders' equity at specific points in time - Total assets decreased by $7,798 thousand (13.6%) from December 31, 2019, to June 30, 2020, primarily driven by a reduction in current assets, especially marketable securities[11] - Total liabilities increased by $4,375 thousand (55.1%) due to the introduction of a note payable (current and long-term) in 2020[11] - Total shareholders' equity decreased by $12,173 thousand (24.6%) mainly due to an increase in accumulated deficit[11] | ASSETS (In thousands) | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Total current assets | $36,164 | $43,294 | | Total assets | $49,590 | $57,388 | | Total current liabilities | $7,006 | $5,444 | | Total liabilities | $12,313 | $7,938 | | Total shareholders' equity | $37,277 | $49,450 | Consolidated Statements of Operations This section details the company's revenues, expenses, and net loss over specific reporting periods - Total revenue increased by 5% for the three months ended June 30, 2020, and 7% for the six months ended June 30, 2020, compared to the prior year periods[15] - Operating loss decreased for both the three-month and six-month periods, indicating improved operational efficiency or reduced expenses[15] - Net loss per common share improved from $(0.68) to $(0.62) for the three-month period and from $(1.42) to $(1.36) for the six-month period[15] | (In thousands, except per share data) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $6,497 | $6,180 | $12,686 | $11,840 | | Gross profit | $4,384 | $3,995 | $8,375 | $7,521 | | Operating loss | $(7,538) | $(8,152) | $(16,593) | $(16,824) | | Net loss | $(7,461) | $(7,933) | $(16,369) | $(16,396) | | Loss per common share — basic | $(0.62) | $(0.68) | $(1.36) | $(1.42) | Consolidated Statements of Shareholders' Equity This section outlines changes in the company's equity accounts, including preferred stock, common stock, additional paid-in capital, and accumulated deficit - Total shareholders' equity decreased from $49,450 thousand at December 31, 2019, to $37,277 thousand at June 30, 2020, primarily due to the net loss of $16,369 thousand[19] - Additional paid-in capital increased by $4,195 thousand, driven by stock-based compensation of $4,607 thousand and issuance of common stock[19] | (In thousands) | Balance at Dec 31, 2019 | Issuance of common stock, net | Stock-based compensation | Net loss | Balance at June 30, 2020 | | :------------- | :---------------------- | :---------------------------- | :----------------------- | :------- | :----------------------- | | Preferred Stock | $50 | — | — | — | $50 | | Common Stock | $12 | $1 | — | — | $13 | | Additional Paid-in Capital | $188,103 | $573 | $4,607 | — | $192,298 | | Accumulated Deficit | $(138,715) | — | — | $(16,369) | $(155,084) | | Total Shareholders' Equity | $49,450 | $574 | $4,607 | $(16,369) | $37,277 | Consolidated Statements of Cash Flows This section reports on the cash generated and used by the company across operating, investing, and financing activities - Net cash used in operating activities decreased by $797 thousand, from $(10,975) thousand in 2019 to $(10,178) thousand in 2020[22] - Investing activities shifted from using $1,177 thousand cash in 2019 to providing $6,278 thousand in 2020, primarily due to higher net maturities of marketable securities[22] - Financing activities provided significantly less cash in 2020 ($4,621 thousand) compared to 2019 ($18,040 thousand), mainly due to reduced common stock issuance, partially offset by the PPP loan[22] | (In thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(10,178) | $(10,975) | | Net cash provided by (used in) investing activities | $6,278 | $(1,177) | | Net cash provided by financing activities | $4,621 | $18,040 | | Net increase in cash and cash equivalents | $721 | $5,888 | | Cash and cash equivalents at end of period | $11,934 | $33,166 | Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures for the financial statements, covering accounting policies and specific financial items Note 1. Description of Business and Significant Accounting Policies This note describes Digimarc's business, platform capabilities, and significant accounting policies for financial statements - Digimarc Corporation invents and provides a platform for automatic identification, applying unique identifiers to various media (packaging, print, audio, video) detectable by industrial scanners and smartphones[25] - The Digimarc Platform features three core capabilities: Digimarc Barcode (identification), Digimarc Discover (discovery software), and Digimarc Verify (quality management tools)[25] - The Company concluded no goodwill impairment as of June 30, 2020, and 2019, as the estimated fair value of its reporting unit substantially exceeded the carrying value[28] - The Company is evaluating ASU No. 2016-13 (CECL model) effective after December 15, 2022, and does not expect ASU No. 2019-12 (Income Taxes) to have a material impact[30][31] Note 2. Fair Value of Financial Instruments This note details the fair value measurements for various financial instruments, including cash equivalents and marketable securities - 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[32] - All cash equivalents and marketable securities as of June 30, 2020, have maturities of less than one year[32] | Financial Instrument (In thousands) | June 30, 2020 (Total) | December 31, 2019 (Total) | | :---------------------------------- | :-------------------- | :------------------------ | | Money market securities | $3,114 | $746 | | Commercial paper | $13,690 | $25,481 | | Pre-refunded municipals | $6,456 | — | | Federal agency notes | $3,299 | — | | Corporate notes | $3,012 | $5,773 | | U.S. treasuries | — | $4,040 | | Total | $29,571 | $36,040 | Note 3. Revenue Recognition This note explains the company's policies for recognizing revenue from software development services and subscriptions, and provides a breakdown by customer type - Revenue is primarily derived from software development services (recognized as performed) and software subscriptions (recognized over typically one to three-year terms)[34] - The Company recognized $2,028 thousand of revenue during the six months ended June 30, 2020, that was included in the December 31, 2019, contract liability balance[38] | Revenue by Customer (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Government Service | $3,713 | $3,530 | $7,365 | $7,164 | | Government Subscription | $361 | $343 | $752 | $771 | | Retail Service | $179 | $45 | $265 | $225 | | Retail Subscription | $1,394 | $1,380 | $2,569 | $1,944 | | Media Subscription | $850 | $882 | $1,735 | $1,736 | | Total Revenue | $6,497 | $6,180 | $12,686 | $11,840 | | Deferred Revenue (In thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------ | :------------ | :---------------- | | Deferred revenue, current | $2,678 | $3,172 | | Deferred revenue, long-term | $53 | $59 | | Total | $2,731 | $3,231 | Note 4. Segment Information This note clarifies that the company operates as a single reporting segment and provides revenue breakdowns by geography and major customers - The Company operates as a single reporting segment focused on automatic identification solutions, generating revenue primarily from software development services and subscriptions[40] - All of the Company's long-lived assets are domiciled in the U.S[42] | Revenue by Geography (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Domestic | $1,856 | $1,772 | $3,615 | $3,089 | | International | $4,641 | $4,408 | $9,071 | $8,751 | | Total | $6,497 | $6,180 | $12,686 | $11,840 | | Major Customers (% of Revenue) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Central Banks | 62% | 62% | 63% | 65% | | Walmart | 12% | <10% | 12% | <10% | Note 5. Stock-Based Compensation This note details the accounting for stock option grants and restricted stock awards, including expense recognition and unrecognized compensation costs - Stock-based compensation includes expense charges for stock option grants and restricted stock awards to employees and directors[43] - Total unrecognized compensation costs related to non-vested stock-based awards were $15,836 thousand as of June 30, 2020, expected to be recognized through June 30, 2024[49][51] | Stock-based Compensation (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $196 | $179 | $386 | $361 | | Sales and marketing | $604 | $489 | $1,083 | $1,008 | | Research, development and engineering | $402 | $357 | $801 | $711 | | General and administrative | $1,125 | $991 | $2,252 | $1,973 | | Total stock-based compensation expense | $2,327 | $2,016 | $4,522 | $4,053 | | Capitalized to software and patent costs | $50 | $49 | $85 | $90 | | Total stock-based compensation | $2,377 | $2,065 | $4,607 | $4,143 | | Restricted Stock Activity (Shares) | Unvested balance, Dec 31, 2019 | Granted | Vested | Forfeited | Unvested balance, June 30, 2020 | | :--------------------------------- | :----------------------------- | :------ | :----- | :-------- | :------------------------------ | | Number of Shares | 435 | 229 | (134) | (4) | 526 | | Weighted Average Grant Date Fair Value | $27.05 | $30.74 | $28.23 | $29.05 | $28.34 | Note 6. Shareholders' Equity This note provides information on changes in shareholders' equity, including common stock issuances under the Equity Distribution Agreement - Under an Equity Distribution Agreement, the Company sold 28 thousand shares for net cash proceeds of $574 thousand during the six months ended June 30, 2020[57] Note 7. Earnings Per Common Share This note explains the calculation of basic and diluted earnings per common share, considering participating securities - Basic and diluted earnings per common share are calculated using the two-class method due to unvested restricted stock being a participating security[58] - Anti-dilutive shares due to exercise prices higher than market price were 550 thousand for both three and six months ended June 30, 2020[60] | Earnings (Loss) per Common Share | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Loss to common shares — basic | $(7,461) | $(7,933) | $(16,369) | $(16,396) | | Weighted average common shares outstanding — basic | 12,108 | 11,665 | 12,073 | 11,576 | | Basic earnings (loss) per common share | $(0.62) | $(0.68) | $(1.36) | $(1.42) | | Diluted earnings (loss) per common share | $(0.62) | $(0.68) | $(1.36) | $(1.42) | Note 8. Trade Accounts Receivable This note details the composition of trade accounts receivable, including the allowance for doubtful accounts and major customer concentrations - The allowance for doubtful accounts is the Company's best estimate of probable credit losses, determined by historical write-off experience and current information[63] - Central Banks accounted for 64% of net trade accounts receivable at June 30, 2020, and 69% at December 31, 2019[64] | Trade Accounts Receivable (In thousands) | June 30, 2020 | December 31, 2019 | | :--------------------------------------- | :------------ | :---------------- | | Trade accounts receivable | $3,601 | $4,036 | | Allowance for doubtful accounts | $(25) | $(15) | | Trade accounts receivable, net | $3,576 | $4,021 | | Unpaid deferred revenue included | $856 | $2,015 | Note 9. Property and Equipment This note outlines the company's property and equipment, including depreciation policies and net carrying values - Property and equipment are stated at cost, with depreciation calculated using the straight-line method over estimated useful lives of two to ten years[65][67] | Property and Equipment (In thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Gross property and equipment | $13,161 | $12,791 | | Less accumulated depreciation and amortization | $(9,802) | $(9,141) | | Property and equipment, net | $3,359 | $3,650 | Note 10. Intangibles This note describes the company's intangible assets, amortization policies, and impairment review procedures - Intangible assets are reviewed for impairment whenever circumstances indicate carrying amount may not be recoverable; no impairment charges were recorded for the six months ended June 30, 2020 and 2019[69] - Capitalized patent costs are amortized on a straight-line basis over 17-20 years, and acquired intangible assets are amortized over their estimated useful lives[70] | Intangibles (In thousands) | June 30, 2020 | December 31, 2019 | | :------------------------- | :------------ | :---------------- | | Gross intangible assets | $12,731 | $12,515 | | Accumulated amortization | $(6,120) | $(5,845) | | Intangibles, net | $6,611 | $6,670 | Note 11. Leases This note details the company's lease accounting under ASC 842, including right-of-use assets, lease liabilities, and operating lease expenses - The Company adopted ASC 842, 'Leases,' as of January 1, 2019, using the retrospective approach and elected practical expedients for short-term leases and combining lease/non-lease components[72] - The Company leases its corporate office in Beaverton, Oregon, with the lease term extended through March 2024[73] | Lease Information (In thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------- | :------------ | :---------------- | | Right of use assets | $2,030 | $2,263 | | Lease liabilities, current | $636 | $663 | | Lease liabilities, long-term | $2,114 | $2,435 | | Weighted-average remaining life | 3.7 years | 4.1 years | | Weighted-average discount rate | 8.20% | 8.20% | | Operating Lease Expense (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease expense | $253 | $260 | $516 | $521 | | Cash paid for operating leases | $296 | $320 | $623 | $692 | Note 12. Note Payable This note provides information on the Paycheck Protection Program (PPP) loan, its terms, and its classification on the balance sheet - On April 16, 2020, the Company entered into a Promissory Note for $5,032 thousand under the Paycheck Protection Program (PPP) of the CARES Act[77] - The Note matures in two years, bears 1.000% interest (deferred for six months), and may be forgiven if proceeds are used for Qualifying Expenses (payroll, rent, utilities, mortgage interest)[78][79] | Note Payable (In thousands) | June 30, 2020 | | :-------------------------- | :------------ | | Note payable | $5,032 | | Accrued interest | $8 | | Total | $5,040 | | Note payable, current | $2,245 | | Note payable, long-term | $2,795 | Note 13. Income Taxes This note explains the company's income tax position, including the effective tax rate and the valuation allowance against deferred tax assets - The effective tax rate for the six months ended June 30, 2020 and 2019, was 0% due to a full valuation allowance against deferred tax assets[83][144] - The valuation allowance against net deferred tax assets increased by $4,033 thousand to $51,842 thousand as of June 30, 2020[83][144] Note 14. Commitments and Contingencies This note discloses the company's commitments and contingencies, including indemnification provisions and legal proceedings - The Company's contracts include indemnification provisions for intellectual property claims, but no claims have been made to date[85] - The Company does not believe that the resolution of any current legal proceedings or claims will have a material adverse effect on its financial position, results of operations, or cash flows[86] Note 15. Subsequent Event This note describes a significant event occurring after the reporting period, specifically a restructuring plan and its expected financial impact - In July 2020, the Company announced a restructuring plan to reduce employees by approximately 7%, expecting $0.9 million in severance costs (cash and stock-based) in Q3 2020[87] - The restructuring is expected to decrease annual operating costs by $2.3 million, comprising $2.1 million cash-based and $0.2 million stock-based compensation[87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Digimarc's business, operational results, liquidity, capital resources, and the impact of COVID-19 Overview This section introduces Digimarc's automatic identification platform, its core capabilities, key benefits, intellectual property, and the impact of the COVID-19 pandemic - Digimarc's platform enables automatic identification for various media, offering solutions for retail, supply chain, consumer engagement, media management, and security[92] - The platform's core capabilities include Digimarc Barcode (imperceptible data carrier), Digimarc Discover (recognition software), and Digimarc Verify (quality management tools)[92] - Key benefits of the Digimarc Platform include enhanced security, brand protection, traceability, sustainability, consumer engagement, and supply chain efficiency[92][94] - The Company holds over 1,000 U.S. and foreign patents in digital watermarking and related fields, shifting its focus from direct patent monetization to large-scale technology adoption and product/service growth[102][105] - The COVID-19 pandemic has caused delays in retail customer projects and prompted the Company to secure a $5.0 million loan under the Paycheck Protection Program to ensure liquidity[106] Results of Operations This section analyzes the company's financial performance, including revenue, cost of revenue, gross profit, and operating expenses over the reporting periods Summary This section provides a high-level summary of the company's total revenue and operating expenses for the reporting periods - Total revenue increased by 5% to $6.5 million for the three months ended June 30, 2020, and by 7% to $12.7 million for the six months ended June 30, 2020[110] - Total operating expenses decreased by 2% to $11.9 million for the three months ended June 30, 2020, but increased by 3% to $25.0 million for the six months ended June 30, 2020[110] Revenue This section details the company's revenue streams, breaking down performance by service and subscription types, and by geographic region - Service revenue increased by 9% for the three-month period and 3% for the six-month period, driven by growth from Government and Retail customers[112][113] - Subscription revenue showed no change for the three-month period but increased by 14% for the six-month period, primarily due to growth in software subscriptions to Retail customers[112][114][115] - Domestic revenue increased by 5% (three months) and 17% (six months) due to growth in service and subscription revenue from domestic Retail customers[118][120] - International revenue increased by 5% (three months) and 4% (six months) due to growth in service revenue from international Government customers[120] | Revenue (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Service | $3,892 (60%) | $3,575 (58%) | $7,630 (60%) | $7,389 (62%) | | Subscription | $2,605 (40%) | $2,605 (42%) | $5,056 (40%) | $4,451 (38%) | | Total | $6,497 (100%) | $6,180 (100%) | $12,686 (100%) | $11,840 (100%) | | Revenue by Geography (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Domestic | $1,856 (29%) | $1,772 (29%) | $3,615 (28%) | $3,089 (26%) | | International | $4,641 (71%) | $4,408 (71%) | $9,071 (72%) | $8,751 (74%) | | Total | $6,497 (100%) | $6,180 (100%) | $12,686 (100%) | $11,840 (100%) | Cost of Revenue This section outlines the primary components contributing to the cost of service and subscription revenues - Cost of service revenue primarily includes compensation, benefits, stock-based compensation, outside contractors, equipment charges, depreciation, and travel costs related to software development services[121] - Cost of subscription revenue primarily includes outside contractors for operational support, Internet service provider charges, image search data fees, and amortization of capitalized patent costs[122] Gross Profit This section analyzes the company's gross profit and gross margin percentages for both service and subscription revenues - Total gross profit increased by 10% for the three-month period and 11% for the six-month period, driven by higher service and subscription revenue[123][124] - Service gross profit as a percentage of service revenue increased due to a favorable mix of billable expenses (higher labor, lower non-labor)[125] - Subscription gross profit as a percentage of subscription revenue remained stable for the three-month period but increased for the six-month period due to higher subscription revenue[126][128] | Gross Profit (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Service | $2,291 (59%) | $1,899 (53%) | $4,345 (57%) | $4,068 (55%) | | Subscription | $2,093 (80%) | $2,096 (80%) | $4,030 (80%) | $3,453 (78%) | | Total | $4,384 (67%) | $3,995 (65%) | $8,375 (66%) | $7,521 (64%) | Operating Expenses This section provides a detailed breakdown and analysis of the company's various operating expenses Sales and marketing This section analyzes changes in sales and marketing expenses, highlighting key drivers such as travel, consulting, and headcount - Sales and marketing expenses decreased by 9% for the three-month period and 2% for the six-month period, primarily due to reduced travel, consulting, and marketing costs, partially offset by increased headcount and compensation[130][131] | Sales and marketing (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Sales and marketing expenses | $4,633 (71%) | $5,087 (82%) | $9,879 (78%) | $10,037 (85%) | Research, development and engineering This section details changes in research, development, and engineering expenses, primarily driven by headcount and compensation adjustments - Research, development and engineering expenses increased by 6% for the three-month period and 8% for the six-month period, primarily due to increased headcount and routine annual compensation adjustments[132][135] | Research, development and engineering (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | R&D expenses | $4,208 (65%) | $3,981 (64%) | $8,641 (68%) | $8,019 (68%) | General and administrative This section examines general and administrative expenses, noting impacts from compensation, travel, consulting, and infrastructure costs - General and administrative expenses remained flat for the three-month period and increased by 3% for the six-month period, driven by compensation adjustments, partially offset by decreased travel, consulting, employee training, and infrastructure costs[136][138][139] | General and administrative (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | G&A expenses | $3,081 | $3,079 | $6,448 | $6,289 | Stock-based compensation This section analyzes the trends in stock-based compensation expense and outlines future unrecognized compensation costs - Stock-based compensation expense increased by 15% for the three-month period and 12% for the six-month period, primarily due to more stock awards granted[141] - The Company anticipates incurring an additional $15,836 thousand in stock-based compensation expense through June 30, 2024[142] | Stock-based Compensation Expense (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total | $2,327 | $2,016 | $4,522 | $4,053 | Other income, net This section discusses changes in other income, net, primarily influenced by interest income and interest expense from the PPP note - Other income, net decreased by 66% for the three-month period and 53% for the six-month period, primarily due to lower interest income from reduced interest rates and investment balances, as well as interest expense from the PPP note[143] | Other income, net (In thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Other income, net | $79 (1%) | $231 (4%) | $221 (2%) | $468 (4%) | Income Taxes This section explains the company's income tax position, including the effective tax rate and the valuation allowance against deferred tax assets - The effective tax rate for both six-month periods ended June 30, 2020 and 2019, was 0% due to a full valuation allowance against deferred tax assets[144] - The valuation allowance increased by $4,033 thousand to $51,842 thousand as of June 30, 2020, reflecting the cumulative loss incurred by the Company[144] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations, including working capital, cash position, and financing activities Working Capital and Cash Position This section provides an overview of the company's working capital, current ratio, and total cash, cash equivalents, and marketable securities - Cash, cash equivalents, and marketable securities decreased by $6,324 thousand from December 31, 2019, to June 30, 2020, primarily due to cash used in operations, common stock purchases for tax withholding, and capital expenditures, partially offset by PPP loan proceeds and common stock issuance[147] - The Company's investment policy limits credit exposure by diversifying investments across major banks and financial institutions, with specific limits on single issuers and industry categories[148][149] | Liquidity Metrics (In thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------- | :------------ | :---------------- | | Working capital | $29,158 | $37,850 | | Current ratio | 5.2:1 | 8.0:1 | | Total cash, cash equivalents and marketable securities | $30,493 | $36,817 | Operating Cash Flow This section analyzes the company's cash flows from operating, investing, and financing activities, highlighting key changes and drivers - Cash flows used in operating activities decreased by $797 thousand, primarily due to higher non-cash items (stock-based compensation) and favorable changes in operating assets and liabilities[152] - Investing activities provided $6,278 thousand in 2020, a significant increase from $1,177 thousand used in 2019, mainly due to higher net maturities of marketable securities[153] - Financing activities provided $4,621 thousand in 2020, a decrease of $13,419 thousand from 2019, primarily due to reduced common stock issuance, partially offset by the PPP loan proceeds[154] | Cash Flows (In thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(16,369) | $(16,396) | | Non-cash items | $5,698 | $5,172 | | Changes in operating assets and liabilities | $493 | $249 | | Net cash used in operating activities | $(10,178) | $(10,975) | Future Cash Expectations This section outlines the company's projections for future cash needs, available financing, and the impact of recent events like the COVID-19 pandemic and restructuring - The Company believes current cash, cash equivalents, and short-term marketable securities will satisfy projected working capital and capital expenditure requirements for at least the next 12 months[155] - As of June 30, 2020, the Company had sold 364 thousand shares for net cash proceeds of $20.2 million under its Equity Distribution Agreement, with $8.2 million remaining available[155] - A new shelf registration statement on Form S-3 was filed in June 2020, allowing the Company to sell up to $100 million in securities, including $49.2 million from a prior expired statement[155] - The COVID-19 pandemic has created stock market volatility, potentially inhibiting near-term financing through the Equity Distribution Agreement[155] - A July 2020 restructuring plan will reduce employees by approximately 7%, incurring $0.9 million in severance costs and decreasing annual operating costs by $2.3 million[155] Off-Balance Sheet Arrangements This section discloses any material off-balance sheet arrangements, including operating lease commitments - The Company does not have any material off-balance sheet arrangements[158] - The Company is party to an operating lease for its corporate office in Beaverton, Oregon, with remaining rent payments totaling $3.1 million through March 2024[158] Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 This section provides a cautionary statement regarding forward-looking statements, outlining risks and uncertainties that could affect actual results - This section contains forward-looking statements subject to risks and uncertainties, which could cause actual results to differ materially from expectations[159] - Key forward-looking statements relate to the effects of COVID-19, financing ability, PPP Note forgiveness, revenue trends, technology adoption, investment levels, expenses, stock awards, intellectual property, and market growth[159][160] - The Company does not undertake to publicly update or revise any forward-looking statements after the filing date of this report[161] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section confirms management's conclusion on the effectiveness of the company's disclosure controls and procedures - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2020[162][163] Changes in Controls This section reports on any material changes in internal control over financial reporting during the reporting period - There were no changes in internal control over financial reporting during the three months ended June 30, 2020, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[164] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section addresses the Company's involvement in legal proceedings and claims - 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 financial position, results of operations, or cash flows[167] Item 1A. Risk Factors This section updates the risk factors, specifically highlighting new risks related to the Paycheck Protection Program loan and the ongoing COVID-19 pandemic - The Company faces risks related to potential audits or reviews of its $5.0 million PPP loan, which could lead to repayment, fines, penalties, and diversion of management's attention[169] - The COVID-19 pandemic presents significant, evolving risks including impacts on employee health, administrative/R&D operations, supplier/customer relationships, demand for services/subscriptions, collectability of receivables, and delays in retail customer projects[170] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the Company's repurchases of equity securities, specifically common stock withheld for tax liabilities - The Company repurchases shares of common stock to satisfy required withholding tax liability upon the vesting of restricted shares[172] | Period | (a) Total number of shares purchased | (b) Average price paid per share | | :----- | :----------------------------------- | :------------------------------- | | April 2020 | 391 | $15.76 | | May 2020 | 21,397 | $15.61 | | June 2020 | 2,373 | $17.95 | | Total | 24,161 | $15.84 | Item 5. Other Information This section discloses a subsequent event regarding a restructuring plan adopted in July 2020 - On July 27, 2020, the Company adopted a restructuring plan to reduce employees by approximately 7%, expecting $0.9 million in severance costs (cash and stock-based) in Q3 2020[174] - Annual operating costs are expected to decrease by $2.3 million as a result of these reductions, consisting of $2.1 million cash-based and $0.2 million stock-based compensation[174] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q - Key exhibits include the Promissory Note with Stearns Bank, N.A., CEO and CFO certifications (Rule 13a-14(a)/15d-14(a) and Section 1350), and Inline XBRL Taxonomy Extension Documents[177] SIGNATURES This section contains the official signatures for the quarterly report - The report was signed on July 30, 2020, by Charles Beck, Chief Financial Officer, as the duly authorized officer and principal financial and accounting officer[180]