PART I. FINANCIAL INFORMATION Item 1. Financial Statements (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 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 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 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 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 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 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 solutions23 - The Digimarc Illuminate Platform combines digital watermarks and/or QR codes with product cloud technologies to digitize products, enabling interaction with consumers and digital devices24 - 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 disclosures34 Note 2. Fair Value of Financial Instruments 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 nature35 - 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 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 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 term38 - Service revenue is mainly from software development and professional services, generally recognized as performed, with contracts ranging from days to several years38 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 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 services47 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 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 models515257 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, 20276263 Note 6. Shareholders' Equity 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 thousand70 Note 7. Earnings Per Share 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 method7374 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 calculations75 Note 8. Trade Accounts Receivable 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 loss79 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 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 thousand82 - 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 costs82 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 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 years93 Note 11. Goodwill 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 value95 - As of June 30, 2023, and 2022, management concluded there was no impairment to goodwill3395 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 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 202297 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 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 2030104 - 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 headquarters109 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 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 credits179180 Note 15. Income Taxes 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 assets113181 - 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, 2022114182 Note 16. Commitments and Contingencies 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 date116 - 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 statements117 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Digimarc's financial condition and results of operations, covering revenue, expenses, non-GAAP measures, and liquidity 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 solutions122 - The Digimarc Illuminate Platform combines digital watermarks and QR codes with product cloud technologies to digitize products and enable interactions123 - 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, 2023126 Critical Accounting Policies and Estimates 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 Results of Operations 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 million133134 - 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 product133134 - 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 costs135136 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 product139140 - Service revenue decrease primarily reflects lower revenue from HolyGrail recycling projects, partially offset by higher service revenue from the Central Banks142143 Cost of Revenue 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 costs154 - 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 costs163 - Amortization expense on acquired intangible assets relates to the developed technology intangible asset acquired in the EVRYTHNG acquisition156 Gross Profit 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 costs158159 - 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 costs160161162163 Operating Expenses 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 expenses165 - 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 costs167168 Other Income, Net 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 credits179180 Income Taxes 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 assets181 - 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 losses182183 Non-GAAP Financial Measures 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 comparability186 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 costs192193 Liquidity and Capital Resources 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 costs195199 - 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 liabilities197 - 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 2022199 - 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 months200 - 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 securities202 Item 4. Controls and Procedures 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, 2023211 - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2023212 - EVRYTHNG has been integrated into the company's internal control over financial reporting and management's evaluation of its effectiveness212 PART II. OTHER INFORMATION Item 1. Legal Proceedings 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 business215 - 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 flows215 Item 1A. Risk Factors 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 Report216 - 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 Report216 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 units217 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 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 stock220 Item 6. Exhibits 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 documents222 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, 2023224
Digimarc(DMRC) - 2023 Q2 - Quarterly Report