Digimarc(DMRC) - 2021 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for the three months ended March 31, 2021, including Balance Sheets, Statements of Operations, Shareholders' Equity, Cash Flows, and Notes, with a reported net loss of $8.2 million Consolidated Balance Sheets As of March 31, 2021, total assets decreased to $90.1 million from $97.0 million at year-end 2020, primarily due to reduced cash, while total liabilities remained stable at $13.4 million Balance Sheet Items (In thousands) | Balance Sheet Items (In thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $4,705 | $19,696 | | Total current assets | $76,620 | $83,832 | | Total assets | $90,148 | $97,028 | | Liabilities & Equity | | | | Total current liabilities | $10,750 | $9,776 | | Total liabilities | $13,355 | $13,189 | | Total shareholders' equity | $76,793 | $83,839 | Consolidated Statements of Operations Total revenue for the three months ended March 31, 2021, increased to $6.7 million from $6.2 million year-over-year, resulting in a net loss of $8.2 million or ($0.50) per share, an improvement from $8.9 million or ($0.74) per share in Q1 2020 Income Statement (In thousands, except EPS) | Income Statement (In thousands, except EPS) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Total revenue | $6,700 | $6,189 | | Gross profit | $4,339 | $3,991 | | Operating loss | $(8,226) | $(9,055) | | Net loss | $(8,222) | $(8,908) | | Loss per common share — basic & diluted | $(0.50) | $(0.74) | Consolidated Statements of Cash Flows Net cash used in operating activities was $6.0 million, investing activities $8.1 million, and financing activities $0.9 million for Q1 2021, leading to a $15.0 million net decrease in cash, ending the period with $4.7 million Cash Flow Activities (In thousands) | Cash Flow Activities (In thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(5,988) | $(5,749) | | Net cash provided by (used in) investing activities | $(8,133) | $4,815 | | Net cash used in financing activities | $(870) | $(29) | | Net decrease in cash and cash equivalents | $(14,991) | $(963) | | Cash and cash equivalents at end of period | $4,705 | $10,250 | Notes to Consolidated Financial Statements The notes detail accounting policies, revenue recognition, segment information, stock-based compensation, debt, and subsequent events, highlighting reliance on government contracts, a $5.0 million PPP loan, and the financial impact of the CEO's retirement - The company's business is centered on the Digimarc Platform, providing automatic identification software and services for various media like packaging, print, and digital content[23] Revenue by Market (In thousands) | Revenue by Market (In thousands) | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Total Government | $3,885 | $3,952 | | Total Commercial | $2,815 | $2,237 | | Total | $6,700 | $6,189 | - A consortium of central banks and Walmart Inc. were major customers, accounting for 58% and 11% of Q1 2021 revenue respectively[37][38] - Subsequent to the quarter's end, on April 12, 2021, the President and CEO retired, with a separation agreement expected to result in approximately $6.2 million in expenses in Q2 2021, including $4.0 million in stock-based compensation[77][79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 financial results, noting an 8% revenue increase to $6.7 million driven by 19% subscription growth, a 4% decrease in operating expenses to $12.6 million, and sufficient liquidity for the next 12 months Results of Operations Total revenue for Q1 2021 increased 8% year-over-year to $6.7 million, driven by 19% subscription revenue growth, with gross profit rising 9% to $4.3 million and total operating expenses decreasing 4% to $12.6 million Revenue Analysis (In thousands) | Revenue Analysis (In thousands) | Q1 2021 | Q1 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Service Revenue | $3,784 | $3,738 | 1% | | Subscription Revenue | $2,916 | $2,451 | 19% | | Total Revenue | $6,700 | $6,189 | 8% | - The increase in subscription revenue was primarily due to a new commercial contract where most of the minimum value was recognized upfront upon software delivery[96] Operating Expenses (In thousands) | Operating Expenses (In thousands) | Q1 2021 | Q1 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Sales and marketing | $4,941 | $5,246 | (6)% | | Research, development and engineering | $4,131 | $4,433 | (7)% | | General and administrative | $3,493 | $3,367 | 4% | | Total operating expenses | $12,565 | $13,046 | (4)% | Liquidity and Capital Resources As of March 31, 2021, total cash, cash equivalents, and marketable securities decreased by $7.1 million to $70.7 million, primarily due to operations and stock repurchases, though current resources are deemed sufficient for the next 12 months Liquidity Metrics (In thousands) | Liquidity Metrics (In thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Working capital | $65,870 | $74,056 | | Total cash, cash equivalents and marketable securities | $70,660 | $77,728 | - Cash used in operating activities increased slightly to $6.0 million in Q1 2021 from $5.7 million in Q1 2020, attributed to the timing of customer receipts and vendor payments[121] - The company received a $5.0 million PPP loan in April 2020 and applied for 100% forgiveness in September 2020, with a decision from the SBA pending[126] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[136] - 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[137] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is subject to ordinary course legal proceedings and claims, but does not anticipate any material adverse effect on its financial position or results of operations - The company does not expect any current legal proceedings to have a material adverse effect on its financial position, results of operations, or cash flows[140] Item 1A. Risk Factors No material changes occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - As of March 31, 2021, there were no material changes to the risk factors disclosed in the company's 2020 Annual Report[141] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter, the company repurchased 19,644 shares of common stock at an average price of $44.36 per share to satisfy tax withholding liabilities related to restricted stock vesting Share Repurchases | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | February 1, 2021 to February 28, 2021 | 19,644 | $44.36 | | Total Q1 2021 | 19,644 | $44.36 | - The share purchases were conducted to satisfy required withholding tax liability upon the vesting of restricted stock and were not part of a publicly announced repurchase plan[142] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the Separation Agreement for the retiring CEO and the Employment Agreement for the new CEO, along with required certifications and XBRL data - Key exhibits filed include the Separation Agreement for retiring CEO Bruce Davis and the Employment Agreement for new CEO Riley McCormack, both effective April 12, 2021[144] Signatures Signatures The quarterly report was duly authorized and signed on April 29, 2021, by Charles Beck, Chief Financial Officer and Principal Financial and Accounting Officer of Digimarc Corporation - The report was signed on April 29, 2021, by Charles Beck, Chief Financial Officer[146][148]