Digimarc(DMRC) - 2021 Q2 - Quarterly Report

Part I: Financial Information Financial Statements (Unaudited) This section presents unaudited consolidated financial statements, reporting a $15.4 million net loss for Q2 2021, an increase from $7.5 million in Q2 2020, with total assets decreasing to $80.5 million Consolidated Balance Sheet Highlights (In Thousands) | | June 30, 2021 ($) | December 31, 2020 ($) | | :--- | :--- | :--- | | Total Assets | 80,548 | 97,028 | | Total Liabilities | 15,306 | 13,189 | | Total Shareholders' Equity | 65,242 | 83,839 | Consolidated Statements of Operations Highlights (In Thousands, Except Per Share Data) | | Three Months Ended June 30, 2021 ($) | Three Months Ended June 30, 2020 ($) | | :--- | :--- | :--- | | Total Revenue | 6,278 | 6,497 | | Operating Loss | (15,436) | (7,538) | | Net Loss | (15,422) | (7,461) | | Loss Per Share — basic & diluted | (0.94) | (0.62) | - Net cash used in operating activities increased to $12.5 million for the six months ended June 30, 2021, up from $10.1 million in the prior-year period[19] Notes to Consolidated Financial Statements Detailed notes explain accounting policies, highlighting revenue reliance on Government contracts, increased stock-based compensation from a CEO separation, and a pending $5.0 million PPP loan forgiveness application - The company focuses on automatic media identification via its Digimarc Platform, encompassing Barcode, Discover, and Verify software and services[22] - Government contracts contributed $7.7 million (59%) to the $13.0 million total revenue for the six months ended June 30, 2021, with Central Banks and Walmart as major customers[32][36] - A Separation Agreement with the former CEO in April 2021 led to accelerated stock award vesting and a modification charge, increasing stock-based compensation expense by $4.0 million for Q2 2021[43][45][46] - The company's $5.0 million PPP loan forgiveness application, submitted in December 2020, is currently pending SBA review[75] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights a 3% Q2 2021 revenue decrease to $6.3 million and a widened operating loss due to a 65% increase in expenses, including $7.5 million in non-recurring costs, while affirming $61.1 million in cash is sufficient for 12 months - Q2 2021 revenue decreased 3% year-over-year, while operating expenses surged 65%, primarily due to $7.5 million in non-recurring CEO separation and severance costs[92] - The COVID-19 pandemic caused project delays with retail customers, and the company applied for forgiveness of its PPP loan obtained for liquidity[88] - Cash, cash equivalents, and marketable securities decreased to $61.1 million at June 30, 2021, from $77.7 million at year-end 2020, though management deems current cash sufficient for the next 12 months[120][121][126] Results of Operations Operational performance analysis shows Q2 2021 total revenue decreased 3% to $6.3 million due to a 5% drop in Government revenue, while operating expenses surged 65% from $6.2 million CEO separation costs and $1.3 million severance, widening the operating loss Revenue by Type (Q2 2021 vs Q2 2020) | Revenue Type | Amount ($M) | Change (%) | | :--- | :--- | :--- | | Service | 3.79 | (3)% | | Subscription | 2.49 | (5)% | | Total | 6.28 | (3)% | Operating Expenses (Q2 2021 vs Q2 2020) | Operating Expense | Amount ($M) | Change (%) | Key Driver | | :--- | :--- | :--- | :--- | | Sales & Marketing | 6.28 | +35% | $1.3M severance costs | | R&D | 4.21 | 0% | - | | General & Administrative | 9.18 | +198% | $6.2M CEO separation costs | | Total | 19.67 | +65% | Non-recurring costs | - Stock-based compensation expense increased 190% in Q2 2021 to $6.7 million, driven by accelerated vesting of awards related to the former CEO's retirement and organizational changes[114] Liquidity and Capital Resources Liquidity weakened as cash, equivalents, and marketable securities decreased by $16.6 million to $61.1 million due to increased cash used in operations ($12.5 million), stock repurchases, and capital expenditures, though current capital is deemed sufficient for 12 months with access to additional funds Liquidity Metrics | Metric | June 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Working Capital | $55.2 M | $74.1 M | | Current Ratio | 5.5:1 | 8.6:1 | | Cash, equivalents & marketable securities | $61.1 M | $77.7 M | - Net cash used in operating activities increased to $12.5 million for the six months ended June 30, 2021, up from $10.1 million in the prior-year period, driven by a higher net loss[125] - The company has an Equity Distribution Agreement with $6.9 million available for future issuance and a shelf registration statement with $97.9 million available as of June 30, 2021[130][131] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting identified during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[139] - No material changes to internal control over financial reporting were identified during the quarter[140] Part II: Other Information Legal Proceedings The company is subject to routine legal proceedings but does not anticipate any current matters will materially adversely affect its financial position, results of operations, or cash flows - Management does not expect current legal matters from ordinary business to materially affect the company's financials[143] Risk Factors No material changes to risk factors previously disclosed in the 2020 Annual Report on Form 10-K were reported as of June 30, 2021 - As of June 30, 2021, no material changes to risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K were reported[144] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 85,790 shares at an average price of $33.85 per share during Q2 2021 to satisfy tax withholding obligations from employee restricted stock award vesting Share Repurchases (Q2 2021) | Period (2021) | Shares Purchased | Average Price Paid ($) | | :--- | :--- | :--- | | April | 53,356 | 35.00 | | May | 18,635 | 30.50 | | June | 13,799 | 33.89 | | Total Q2 | 85,790 | 33.85 | - Shares were repurchased to satisfy tax withholding liabilities upon stock option exercises and restricted stock award vesting[145] Exhibits Filed exhibits include the Separation Agreement with the former CEO, the Employment Agreement with the new CEO, and CEO/CFO certifications required by Sarbanes-Oxley Act - Filed exhibits include the Separation Agreement with former CEO Bruce Davis, the Employment Agreement with new CEO Riley McCormack, and CEO/CFO certifications[149]