Digimarc(DMRC) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited consolidated financial statements for Q2 2025 show decreased assets, a net loss, and declining revenues Consolidated Balance Sheets Total assets decreased to $60.7 million from $75.8 million, driven by lower cash and marketable securities, while equity declined Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $10,109 | $12,365 | | Marketable securities | $5,979 | $16,365 | | Total current assets | $25,110 | $39,331 | | Total assets | $60,746 | $75,766 | | Total current liabilities | $9,425 | $9,138 | | Total liabilities | $14,263 | $14,407 | | Total shareholders' equity | $46,483 | $61,359 | Consolidated Statements of Operations and Comprehensive Loss The company reported a net loss of $8.2 million for Q2 2025 and $20.0 million for the six months, with revenues declining year-over-year Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2025 | Q2 2024 | Six Months 2025 | Six Months 2024 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $8,010 | $10,379 | $17,378 | $20,317 | | Gross Profit | $4,707 | $6,863 | $10,792 | $13,075 | | Operating Loss | $(8,426) | $(9,982) | $(20,505) | $(20,839) | | Net Loss | $(8,220) | $(9,270) | $(19,950) | $(19,608) | | Loss per Share (basic) | $(0.38) | $(0.43) | $(0.93) | $(0.93) | Consolidated Statements of Cash Flows Net cash used in operating activities improved to $10.2 million, while investing activities provided cash, and financing activities used cash Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | $(10,174) | $(15,252) | | Net cash provided by (used in) investing activities | $9,925 | $(5,458) | | Net cash provided by (used in) financing activities | $(2,066) | $29,868 | | Net decrease in cash and cash equivalents | $(2,256) | $9,142 | Notes to Consolidated Financial Statements Details on Digimarc's digital watermarking business, revenue disaggregation, customer concentration, and a recent workforce reduction - Digimarc is a global leader in digital watermarking technologies, offering solutions through its Digimarc Illuminate SaaS cloud-based platform for identification and authentication of items[22][23] Revenue by Market (in thousands) | Market | Q2 2025 | Q2 2024 | Six Months 2025 | Six Months 2024 | | :--- | :--- | :--- | :--- | :--- | | Commercial | $4,363 | $6,257 | $10,173 | $11,976 | | Government | $3,647 | $4,122 | $7,205 | $8,341 | - The company has significant customer concentration, with Customer A, B, and C accounting for 45%, 11%, and 10% of revenue, respectively, in Q2 2025[53] - In February 2025, the company initiated a reorganization involving a global workforce reduction, incurring $3.2 million in cash severance costs during the first six months of 2025[99][100] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes revenue decline to contract terminations and budget cuts, implementing cost-saving measures, and affirming liquidity Results of Operations Total revenue decreased by 23% due to contract expirations and lower government service revenue, while operating expenses decreased - Commercial subscription revenue was negatively impacted by the termination of a contract in April 2025 and the expiration of another in June 2024. Government service revenue is expected to be $1.7 to $1.9 million lower in fiscal 2025 due to a smaller approved budget from the Central Banks[121] - The company expects fiscal 2025 expenses to be significantly lower due to a reorganization announced in February 2025, which is projected to reduce annualized cash expenses by approximately $16.5 million, with an additional $5.5 million in other identified cost savings[124] Annual Recurring Revenue (ARR) (in thousands) | Date | ARR | YoY Change ($) | YoY Change (%) | | :--- | :--- | :--- | :--- | | June 30, 2025 | $15,881 | $(8,042) | (34)% | | June 30, 2024 | $23,923 | - | - | Non-GAAP Financial Measures Non-GAAP net loss for Q2 2025 was $2.3 million, with operating expenses decreasing due to lower cash compensation from reduced headcount Reconciliation of GAAP to Non-GAAP Net Loss (in thousands) | Metric | Q2 2025 | Q2 2024 | Six Months 2025 | Six Months 2024 | | :--- | :--- | :--- | :--- | :--- | | GAAP net loss | $(8,220) | $(9,270) | $(19,950) | $(19,608) | | Non-GAAP net loss | $(2,269) | $(4,937) | $(10,899) | $(10,407) | - Non-GAAP operating expenses for Q2 2025 decreased by $5.2 million compared to Q2 2024, mainly due to $4.9 million in lower cash compensation costs resulting from a smaller workforce[180] Liquidity and Capital Resources Liquidity decreased to $16.1 million, but management believes current cash is sufficient for the next 12 months due to cost reductions Liquidity Metrics (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Working capital | $15,685 | $30,193 | | Cash, cash equivalents and short-term marketable securities | $16,088 | $28,730 | - Cash used in operating activities for the first six months of 2025 decreased to $10.2 million from $15.3 million in the prior year, reflecting favorable timing of customer receipts and vendor payments[186] - Management believes that current cash, cash equivalents, and marketable securities balances will be sufficient to satisfy projected working capital and capital expenditure requirements for at least the next 12 months[191] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable for the current reporting period - The company stated that Quantitative and Qualitative Disclosures About Market Risk are not applicable[202] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to 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 the end of the period covered by the report[204] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[205] PART II. OTHER INFORMATION Legal Proceedings A putative class action complaint was filed against Digimarc and two executives on July 7, 2025, alleging federal securities law violations - A putative class action complaint was filed against the company and certain officers on July 7, 2025, alleging violations of federal securities laws[208] Risk Factors A new risk factor highlights potential costs and disruptions from activist shareholders and related securities litigation - A new risk factor was added regarding the potential for activist shareholders to take actions that could be costly, disrupt operations, and divert management's attention[210] - Volatility in the stock price resulting from activist initiatives could make the company a target of securities litigation, leading to substantial costs[210] Unregistered Sales of Equity Securities and Use of Proceeds Digimarc repurchased 37,397 shares in Q2 2025 at an average price of $13.45 to satisfy tax withholding obligations for employee awards Issuer Purchases of Equity Securities (Q2 2025) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2025 | 52 | $13.08 | | May 2025 | 37,345 | $13.45 | | June 2025 | 0 | $0.00 | | Total | 37,397 | $13.45 | Other Information No officers or directors adopted, modified, or terminated Rule 10b5-1 trading arrangements during Q2 2025 - No officers or directors adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the three months ended June 30, 2025[213] Exhibits This section lists key exhibits filed, including the amended 2018 Incentive Plan, Employee Stock Purchase Plan, and CEO/CFO certifications - Key exhibits filed include the Digimarc Corporation 2018 Incentive Plan (as amended), the Employee Stock Purchase Plan, and certifications from the CEO and CFO[214]