Digimarc(DMRC) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION The company's unaudited consolidated financial statements for Q3 2023 show increased revenue, reduced net loss, and a decrease in total assets Item 1. Financial Statements The unaudited consolidated financial statements for the period ended September 30, 2023, show a year-over-year increase in revenue and a reduction in net loss Consolidated Balance Sheets As of September 30, 2023, total assets decreased to $88.8 million from $113.8 million, primarily due to reduced marketable securities Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $44,951 | $64,141 | | Total Assets | $88,842 | $113,777 | | Total Current Liabilities | $13,522 | $10,134 | | Total Liabilities | $19,959 | $16,187 | | Total Shareholders' Equity | $68,883 | $97,590 | Consolidated Statements of Operations and Comprehensive Loss For Q3 2023, revenue increased to $9.0 million, and the net loss narrowed to $(10.7) million, reflecting improved financial performance Q3 2023 vs Q3 2022 Financial Performance (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Total Revenue | $8,994 | $7,821 | | Subscription Revenue | $4,811 | $4,086 | | Service Revenue | $4,183 | $3,735 | | Gross Profit | $5,223 | $4,165 | | Operating Loss | $(11,156) | $(15,527) | | Net Loss | $(10,723) | $(14,930) | | Loss Per Share (basic) | $(0.53) | $(0.76) | Nine Months 2023 vs 2022 Financial Performance (in thousands, except per share data) | Metric | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | | Total Revenue | $25,567 | $22,979 | | Subscription Revenue | $13,374 | $11,121 | | Service Revenue | $12,193 | $11,858 | | Gross Profit | $14,336 | $11,506 | | Operating Loss | $(37,191) | $(48,492) | | Net Loss | $(35,386) | $(47,350) | | Loss Per Share (basic) | $(1.76) | $(2.51) | Consolidated Statements of Cash Flows Net cash used in operating activities significantly improved to $(16.7) million for the nine months ended September 30, 2023 Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(16,679) | $(36,888) | | Net Cash Provided by Investing Activities | $17,529 | $6,926 | | Net Cash (Used in) Provided by Financing Activities | $(2,069) | $56,628 | | Net (Decrease) Increase in Cash | $(1,263) | $26,566 | Notes to Consolidated Financial Statements The notes detail the company's SaaS platform, revenue disaggregation, significant customer concentration, and other financial disclosures - The company's business is centered on its Digimarc Illuminate SaaS platform, which digitizes products using identifiers like digital watermarks and QR codes to create a 'digital twin' for each item[21][22] Revenue by Major Market (Nine Months Ended Sep 30, in thousands) | Market | 2023 | 2022 | | :--- | :--- | :--- | | Commercial | $13,323 | $11,884 | | Government | $12,244 | $11,095 | | Total | $25,567 | $22,979 | - The company has significant customer concentration, with Customer A accounting for 48% of revenue and Customer B for 21% for the nine months ended Sep 30, 2023[47] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q3 2023 revenue growth to increased subscription and service revenue, alongside reduced operating expenses, while maintaining sufficient liquidity Results of Operations Q3 2023 revenue increased by $1.2 million (15%) year-over-year, driven by higher subscription and service revenue, while operating expenses decreased by 17% - Q3 revenue growth was driven by higher subscription revenue from new and existing commercial contracts and a larger annual budget from the Central Banks for project work[129] - Q3 operating expenses decreased by 17% year-over-year, mainly due to lower severance costs ($1.4 million), reduced compensation from lower headcount ($1.1 million), and lower contractor expenses ($0.6 million)[131] Annual Recurring Revenue (ARR) Growth (in thousands) | Metric | As of Sep 30, 2023 | As of Sep 30, 2022 | % Increase | | :--- | :--- | :--- | :--- | | ARR | $19,559 | $12,682 | 54% | Non-GAAP Financial Measures Non-GAAP net loss for Q3 2023 improved to $(5.9) million, with gross profit margin increasing to 76% due to favorable revenue mix and lower costs GAAP vs. Non-GAAP Net Loss (in thousands) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | GAAP Net Loss | $(10,723) | $(14,930) | | Non-GAAP Net Loss | $(5,936) | $(9,300) | - The increase in Non-GAAP gross profit margin to 76% in Q3 2023 from 72% in Q3 2022 was primarily due to higher subscription revenue with a favorable mix and lower platform costs[186] Liquidity and Capital Resources Total cash, cash equivalents, and marketable securities decreased to $33.3 million, but management believes current liquidity is sufficient for the next 12 months Liquidity Position (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Working Capital | $31,429 | $54,007 | | Total cash, cash equivalents and marketable securities | $33,331 | $52,542 | - Net cash used in operating activities for the first nine months of 2023 improved significantly to $(16.7) million from $(36.9) million in the prior year period, mainly due to a lower net loss and favorable changes in working capital[194] - The company believes its current cash and marketable securities will be sufficient to satisfy projected working capital and capital expenditure requirements for at least the next 12 months[197] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal controls - The CEO and CFO have concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[208] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[209] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and required exhibits Item 1. Legal Proceedings The company is subject to ordinary course legal proceedings but expects no material adverse effect on its financial position - There are no ongoing legal proceedings expected to have a material adverse effect on the company's financial statements[211] Item 1A. Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - As of September 30, 2023, no material changes have been made to the risk factors disclosed in the 2022 Annual Report[212] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2023, the company repurchased 21,561 shares at $35.12 per share to satisfy tax withholding obligations for restricted stock awards Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2023 | — | — | | August 2023 | 21,561 | $35.12 | | September 2023 | — | — | | Total | 21,561 | $35.12 | - The share purchases were conducted to satisfy required income tax withholding upon the vesting of employee restricted stock, not as part of a publicly announced buyback program[213][214] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and Inline XBRL financial data files - The report includes standard exhibits such as CEO/CFO certifications and interactive data files (Inline XBRL)[216]