PART I ITEM 1: BUSINESS Digimarc is a global leader in digital watermarking, providing the Illuminate platform and product suite for identification, authentication, and digital connectivity, with recent acquisitions and contract extensions - Digimarc is a pioneer and global leader in digital watermarking technologies, focusing on the identification and authentication of physical and digital items18 - The Digimarc Illuminate platform is a SaaS cloud-based platform providing tools for advanced digital watermarks, dynamic QR codes, digital twins, and insights for digital interactions19 - The product suite includes Digimarc Validate (authentication), Digimarc Engage (consumer connectivity), Digimarc Recycle (sustainability), and Digimarc Retail Experience (retail optimization)20 - Key business developments include the acquisition of EVRYTHNG (January 2022), an expanded multi-year agreement with Walmart (December 2022), and a five-year extension of the Central Banks contract through December 31, 2029 (December 2022)172325 - In May 2023, Digimarc secured a 5-year contract worth over $32 million to protect precious metals, building materials, and a national recycling system; in September 2023, Digimarc Validate expanded to protect digital asset copyright, crucial for generative AI2627 - Revenue is generated from two primary markets: commercial (retailers, brands) and government (Central Banks), primarily through software subscriptions and software development services2829 - As of December 31, 2023, Digimarc held approximately 850 U.S. and foreign patents granted and applications pending in digital watermarking and related fields31 Anticipated Future Revenue from Current Contracts | Metric | Amount (in millions) | | :-------------------------------- | :------------------- | | Minimum future revenue (Dec 31, 2023) | $43.7 | | Expected revenue in 2024 | $27.1 | Employee Headcount (December 31, 2023) | Department | Number of Employees | | :-------------------------------- | :------------------ | | Sales, Marketing, Product, Operations, Customer Support | 86 | | Research, Development and Engineering | 123 | | Finance, Administration, IT, IP, Legal | 39 | | Total Full-Time Employees | 248 | - Voluntary employee turnover was 4% for the year ended December 31, 202340 ITEM 1A: RISK FACTORS Digimarc faces substantial risks from slow market adoption, customer dependence, intense competition, operating losses, and challenges in international operations, talent, acquisitions, cybersecurity, and IP - The commercial market for Digimarc's disruptive technology is in early stages; slow adoption could negatively affect revenue and lead to continued operating losses6263 - Future growth is materially dependent on the successful advocacy and implementation of Digimarc's technology by its business partners66 - A small number of customers account for a substantial portion of revenue (78% from five customers in 2023), making the loss of any large contract a material business disruption737475 - The market is highly competitive, with alternative technologies (e.g., generative AI, traditional anti-counterfeiting, object recognition, RFID, digital fingerprints, object sorting) and larger competitors posing a threat to market share and profitability767779 - International operations expose the company to risks such as staffing difficulties, regulatory changes, intellectual property protection challenges, currency fluctuations, and political instability8182 - Dependence on key employees for future success; inability to retain, hire, or integrate them could hamper growth and product delivery83 - Acquisitions, such as EVRYTHNG, carry inherent risks including integration challenges, potential dilution, increased expenses, and disruption to operations8687 - An unfavorable assessment of digital watermarking technology by initiatives like HolyGrail 2.0 or the perceived superiority of competing technologies (chemical tracers, AI) could discourage adoption of Digimarc Recycle9092 - Security systems may be circumvented, leading to disclosure of sensitive information, business interruptions, and reputational damage; data breaches and cyber-attacks pose risks to intellectual property and financial stability959899 - The company was not profitable in 2023 or 2022 and may not achieve profitability in the future, which could lead to asset impairment charges or valuation allowances against deferred tax assets104106107 - Inability to adequately secure or enforce patent protection, or facing infringement claims, could adversely affect the business and lead to costly litigation109114 ITEM 1B: UNRESOLVED STAFF COMMENTS The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported124 ITEM 1C: CYBERSECURITY Digimarc maintains a robust cybersecurity program, overseen by the Audit Committee, achieving SOC 2 Type II certification in 2023 with no material threats - Digimarc has implemented robust information security processes for assessing, identifying, and managing cybersecurity risks, led by the Senior Director of Information Security125 - The cybersecurity program includes regular risk assessments, third-party penetration testing, continuous enterprise-wide monitoring, and incident response plans126 - In 2023, the Company achieved SOC 2 Type II certification for its product digitization platform, confirming effective information security controls127 - The Board of Directors, through its Audit Committee, provides vital oversight of the cybersecurity risk management program128 - No cybersecurity threats were identified in 2023 that materially affected or are reasonably likely to materially affect the company's business strategy, results of operations, or financial condition130 ITEM 2: PROPERTIES Digimarc relocated its headquarters to a new 65,500 sq ft facility in Beaverton, Oregon, with the former 47,000 sq ft lease expiring soon - New corporate headquarters in Beaverton, Oregon, is approximately 65,500 square feet, with a lease term through September 2030131 - The former corporate headquarters, also in Beaverton, is approximately 47,000 square feet, with its lease expiring in March 2024132 - Management believes the existing office space is suitable and adequate for current and foreseeable future needs133 ITEM 3: LEGAL PROCEEDINGS Digimarc is involved in ordinary course legal proceedings, not anticipating a material adverse effect on its financial position or operations - The company is subject to legal proceedings and claims in the ordinary course of business134 - Management does not believe that the resolution of any current matters will have a material adverse effect on its financial position, results of operations, or cash flows134 ITEM 4: MINE SAFETY DISCLOSURES This item is not applicable to Digimarc Corporation - Not applicable135 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Digimarc's common stock trades on Nasdaq (DMRC), with 20.4 million shares outstanding and recent repurchases for tax withholding - Digimarc's common stock trades on the Nasdaq Stock Market LLC under the symbol "DMRC"138 - As of February 22, 2024, there were 20,443,596 shares of common stock outstanding and 263 shareholders of record8138 Issuer Purchases of Equity Securities (Q4 2023) | Period | Total number of shares purchased | Average price paid per share | | :--------------------------------- | :------------------------------- | :--------------------------- | | November 1, 2023 to November 30, 2023 | 20,422 | $33.73 | | Total | 20,422 | $33.73 | - These purchases were fully vested shares withheld by the company to satisfy required tax withholding liability upon the vesting of restricted stock awards, restricted stock units, and performance restricted stock units139 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Digimarc's 2023 revenue grew 15% to $34.9 million, operating loss reduced 22% to $(48.2) million due to lower expenses, and liquidity is deemed sufficient for 12 months - Total revenue increased by $4.7 million, or 15%, to $34.9 million in 2023160 - Total operating expenses decreased by $8.8 million, or 11%, to $68.4 million in 2023161 Key Financial Highlights (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Change | | :---------------- | :----------- | :----------- | :------- | | Total Revenue | $34,851 | $30,197 | $4,654 | | Gross Profit | $20,165 | $15,323 | $4,842 | | Operating Loss | $(48,207) | $(61,809) | $13,602 | | Net Loss | $(45,959) | $(59,798) | $13,839 | Overview Digimarc leads in digital watermarking, using its Illuminate SaaS platform and product suite for identification, authentication, and digital connectivity, bolstered by patents and the EVRYTHNG acquisition - Digimarc is a pioneer and global leader in digital watermarking technologies, focused on identification and authentication of physical and digital items143 - The Digimarc Illuminate platform is a distinctive SaaS cloud-based platform for digital connectivity, enabling advanced digital watermarks, dynamic QR codes, and digital twins144 - The product suite includes Digimarc Validate, Engage, Recycle, and Retail Experience, addressing business needs in automation, authenticity, sustainability, and customer trust145148 - Digimarc has a 25+ year relationship with Central Banks, providing technology to deter digital counterfeiting of currency146 - As of December 31, 2023, the company held approximately 850 U.S. and foreign patents in digital watermarking and related fields147 - The acquisition of EVRYTHNG in January 2022 allowed Digimarc to offer a complete SaaS product digitization platform149 Critical Accounting Policies and Estimates Financial statements require significant estimates for revenue recognition, goodwill, income taxes, and intangible assets, with revenue recognized via a five-step model - Financial statement preparation requires significant estimates and judgments, including those related to bad debts, contingencies, goodwill, income taxes, intangible assets, marketable securities, property and equipment, and revenue recognition150 - Revenue recognition follows ASC 606, involving five steps: identifying contracts, performance obligations, transaction price, allocation, and recognition upon satisfaction of obligations152153154155156 - Subscription revenue is primarily from SaaS platform access and licensing fees, recognized over the typical one-to-three-year contract term; service revenue is mainly from software development services, recognized as performed157 Results of Operations—the Years Ended December 31, 2023 and December 31, 2022 Digimarc's 2023 total revenue increased 15% to $34.9 million, gross profit rose 32% to $20.2 million, and operating loss improved 22% to $(48.2) million due to 11% lower operating expenses Consolidated Statements of Operations Data (in thousands, except per share data) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :---------------------------------------- | :---------------------- | :---------------------- | | Revenue: | | | | Subscription | $18,973 | $15,219 | | Service | $15,878 | $14,978 | | Total revenue | $34,851 | $30,197 | | Cost of revenue: | | | | Subscription (1) | $2,975 | $3,878 | | Service (1) | $7,252 | $6,557 | | Amortization expense on acquired intangible assets | $4,459 | $4,439 | | Total cost of revenue | $14,686 | $14,874 | | Gross profit | $20,165 | $15,323 | | Operating expenses: | | | | Sales and marketing | $22,409 | $29,718 | | Research, development and engineering | $26,577 | $26,490 | | General and administrative | $18,071 | $18,945 | | Amortization expense on acquired intangible assets | $1,065 | $1,064 | | Impairment of lease right of use assets and leasehold improvements | $250 | $915 | | Total operating expenses | $68,372 | $77,132 | | Operating loss | $(48,207) | $(61,809) | | Other income, net | $2,452 | $2,108 | | Loss before income taxes | $(45,755) | $(59,701) | | Provision for income taxes | $(204) | $(97) | | Net loss | $(45,959) | $(59,798) | | Loss per share — basic | $(2.26) | $(3.12) | | Loss per share — diluted | $(2.26) | $(3.12) | | Weighted average shares outstanding — basic | 20,322 | 19,140 | | Weighted average shares outstanding — diluted | 20,322 | 19,140 | Consolidated Statements of Operations Data (Percentages of Total Revenue) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :---------------------------------------- | :---------------------- | :---------------------- | | Revenue: | | | | Subscription | 54% | 50% | | Service | 46% | 50% | | Total revenue | 100% | 100% | | Cost of revenue: | | | | Subscription (1) | 9% | 13% | | Service (1) | 21% | 22% | | Amortization expense on acquired intangible assets | 13% | 15% | | Total cost of revenue | 42% | 49% | | Gross profit | 58% | 51% | | Operating expenses: | | | | Sales and marketing | 64% | 98% | | Research, development and engineering | 76% | 88% | | General and administrative | 52% | 63% | | Amortization expense on acquired intangible assets | 3% | 4% | | Impairment of lease right of use assets and leasehold improvements | 1% | 3% | | Total operating expenses | 196% | 255% | | Operating loss | (138)% | (205)% | | Other income, net | 7% | 7% | | Loss before income taxes | (131)% | (198)% | | Provision for income taxes | (1)% | —% | | Net loss | (132)% | (198)% | Revenue Total revenue increased 15% to $34.9 million in 2023, driven by 25% subscription growth and 6% service revenue growth, with international revenue at 67% and ARR up 71% to $22.3 million Revenue by Type (2023 vs. 2022, in thousands) | Revenue Type | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Subscription | $18,973 | $15,219 | $3,754 | 25% | | Service | $15,878 | $14,978 | $900 | 6% | | Total | $34,851 | $30,197 | $4,654 | 15% | - Subscription revenue increased primarily due to $4.9 million from new and existing commercial contracts, partially offset by $0.9 million lower revenue from sunsetting the Piracy Intelligence product in 2022163 - Service revenue increased primarily due to $1.9 million from the Central Banks, reflecting a larger annual budget for program work, partially offset by $0.8 million lower revenue from the timing of HolyGrail 2.0 recycling projects165 Revenue by Geography (2023 vs. 2022, in thousands) | Geography | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Domestic | $11,380 | $10,029 | $1,351 | 13% | | International | $23,471 | $20,168 | $3,303 | 16% | | Total | $34,851 | $30,197 | $4,654 | 15% | - International revenue accounted for 67% of total revenue in both 2023 and 2022166 Revenue by Market (2023 vs. 2022, in thousands) | Market | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :--------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Commercial: | | | | | | Subscription | $17,773 | $13,832 | $3,941 | 28% | | Service | $1,042 | $2,056 | $(1,014) | (49)% | | Total Commercial | $18,815 | $15,888 | $2,927 | 18% | | Government: | | | | | | Subscription | $1,200 | $1,387 | $(187) | (13)% | | Service | $14,836 | $12,922 | $1,914 | 15% | | Total Government | $16,036 | $14,309 | $1,727 | 12% | | Total | $34,851 | $30,197 | $4,654 | 15% | Annual Recurring Revenue (ARR) (in thousands) | Metric | As of Dec 31, 2023 | As of Dec 31, 2022 | Dollar Increase | Percent Increase | | :---- | :----------------- | :----------------- | :-------------- | :--------------- | | ARR | $22,251 | $13,013 | $9,238 | 71% | - ARR increase was primarily driven by new commercial subscription contracts and, to a lesser extent, increased subscription fees on existing commercial contracts171 Cost of revenue Total cost of revenue slightly decreased by 1% to $14.7 million in 2023, with subscription costs down 23% and service costs up 11%, while amortization remained stable Cost of Revenue (2023 vs. 2022, in thousands) | Cost Type | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Subscription (1) | $2,975 | $3,878 | $(903) | (23)% | | Service (1) | $7,252 | $6,557 | $695 | 11% | | Amortization expense on acquired intangible assets | $4,459 | $4,439 | $20 | —% | | Total cost of revenue | $14,686 | $14,874 | $(188) | (1)% | - Cost of subscription revenue primarily includes internet cloud hosting costs, image search data fees, and amortization of capitalized patent costs173 - Cost of service revenue primarily includes compensation, benefits, incentive compensation for software developers, quality assurance, professional services, payments to outside contractors, and travel costs173 - Amortization expense on acquired intangible assets relates to the developed technology intangible asset acquired in the EVRYTHNG acquisition175 Gross profit Gross profit increased 32% to $20.2 million in 2023, improving the margin to 58%, primarily driven by higher subscription revenue and a favorable revenue mix Gross Profit (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Subscription Gross Profit (1) | $15,998 | $11,341 | $4,657 | 41% | | Service Gross Profit (1) | $8,626 | $8,421 | $205 | 2% | | Amortization expense on acquired intangible assets | $(4,459) | $(4,439) | $(20) | —% | | Total Gross Profit | $20,165 | $15,323 | $4,842 | 32% | Gross Profit Margin (2023 vs. 2022) | Metric | 2023 | 2022 | | :---------------------------------------- | :--- | :--- | | Subscription Gross Profit Margin (1) | 84% | 75% | | Service Gross Profit Margin (1) | 54% | 56% | | Total Gross Profit Margin | 58% | 51% | - The 9 percentage point increase in subscription gross profit margin (excluding amortization) was primarily due to higher subscription revenue combined with a more favorable mix of subscription revenue in 2023178 Operating expenses Total operating expenses decreased 11% to $68.4 million in 2023, driven by lower sales and marketing (down 25%) and general and administrative (down 5%) expenses, while R&D remained flat Operating Expenses (2023 vs. 2022, in thousands) | Expense Type | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Sales and marketing | $22,409 | $29,718 | $(7,309) | (25)% | | Research, development and engineering | $26,577 | $26,490 | $87 | —% | | General and administrative | $18,071 | $18,945 | $(874) | (5)% | | Amortization expense on acquired intangible assets | $1,065 | $1,064 | $1 | —% | | Impairment of lease right of use assets and leasehold improvements | $250 | $915 | $(665) | (73)% | | Total operating expenses | $68,372 | $77,132 | $(8,760) | (11)% | Sales and marketing Sales and marketing expenses decreased 25% to $22.4 million in 2023, primarily due to lower compensation, facility, IT, contractor, consulting, travel, and training costs Sales and Marketing Expenses (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :------------------------ | :----------- | :----------- | :----------------------- | :-------------------------- | | Sales and marketing | $22,409 | $29,718 | $(7,309) | (25)% | | Sales and marketing (as % of total revenue) | 64% | 98% | | | - The decrease was primarily due to $3.9 million lower compensation costs (reflecting lower headcount), $1.5 million lower allocation of facility and information technology costs, $1.3 million lower contractor and consulting costs, and $0.9 million lower travel and training costs182 Research, development and engineering Research, development, and engineering expenses remained flat at $26.6 million in 2023, with increases in severance and contractor costs offset by lower facility, IT, and compensation expenses Research, Development and Engineering Expenses (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Research, development and engineering | $26,577 | $26,490 | $87 | —% | | Research, development and engineering (as % of total revenue) | 76% | 88% | | | - The increase was primarily due to $0.9 million increased severance costs, $0.6 million increased contractor and consulting costs, and $0.5 million increased hardware, software and maintenance costs183 - These increases were partially offset by $1.3 million decreased allocation of facility and information technology costs and $0.6 million decreased compensation costs183 General and administrative General and administrative expenses decreased 5% to $18.1 million in 2023, driven by lower legal, contractor, consulting, and operating tax costs, partially offset by increased facility and IT allocations General and Administrative Expenses (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | General and administrative | $18,071 | $18,945 | $(874) | (5)% | | General and administrative (as % of total revenue) | 52% | 63% | | | - The decrease was primarily due to $0.9 million lower legal costs, $0.8 million lower contractor and consulting costs, $0.6 million lower hardware, software and maintenance costs, and $0.3 million lower operating taxes (largely reflecting the U.K. stamp tax owed on the EVRYTHNG acquisition in 2022)190 - These decreases were partially offset by $2.8 million increased allocation of facility and information technology costs (offset by $0.8 million of lower facilities costs) and $0.2 million increased compensation costs190 Amortization expense on acquired intangible assets Amortization expense on acquired intangible assets remained stable at $1.1 million in 2023, primarily from the EVRYTHNG acquisition's customer relationships, with a slight increase due to foreign currency rates Amortization Expense on Acquired Intangible Assets (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Amortization expense on acquired intangible assets | $1,065 | $1,064 | $1 | —% | | Amortization expense on acquired intangible assets (as % of total revenue) | 3% | 4% | | | - This expense relates to the amortization of the customer relationships intangible asset acquired in the EVRYTHNG acquisition186 - The increase was primarily due to the impact of changes in foreign currency exchange rates187 Impairment of lease right of use assets and leasehold improvements Impairment expense for lease right of use assets and leasehold improvements decreased 73% to $0.250 million in 2023, reflecting lower charges for the former corporate headquarters Impairment of Lease Right of Use Assets and Leasehold Improvements (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Impairment of lease right of use assets and leasehold improvements | $250 | $915 | $(665) | (73)% | | Impairment of lease right of use assets and leasehold improvements (as % of total revenue) | 1% | 3% | | | - The decrease was primarily due to the differences in the amount of impairment charges recorded for each respective year on the former corporate headquarters188 Stock-based compensation Total stock-based compensation expense decreased 1% to $11.2 million in 2023 due to fewer employee equity grants, with $15.4 million anticipated through 2027 for outstanding awards Stock-Based Compensation Expense (2023 vs. 2022, in thousands) | Expense Category | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Cost of revenue | $1,126 | $913 | $213 | 23% | | Sales and marketing | $2,640 | $3,842 | $(1,202) | (31)% | | Research, development and engineering | $2,962 | $2,646 | $316 | 12% | | General and administrative | $4,430 | $3,888 | $542 | 14% | | Total stock-based compensation | $11,158 | $11,289 | $(131) | (1)% | - The decrease in stock-based compensation expense was primarily due to a lower amount of employee equity grants made in 2023 than in 2022191 - The company anticipates incurring an additional $15.4 million in stock-based compensation expense through December 31, 2027, for awards outstanding as of December 31, 2023192 Leases Digimarc's new headquarters lease in Beaverton, Oregon, extends through September 2030 with $8.8 million remaining, while the former headquarters lease expires March 2024 with $0.2 million remaining - The new corporate headquarters lease in Beaverton, Oregon, runs through September 2030, with remaining rent payments of $8.8 million as of December 31, 2023193 - The lease for the former corporate headquarters in Beaverton, Oregon, expires in March 2024, with remaining rent payments of $0.2 million as of December 31, 2023194 Impairment of Lease Right of Use Assets and Leasehold Improvements (in thousands) | Year Ended December 31, | Amount | | :---------------------- | :----- | | 2023 | $250 | | 2022 | $915 | Other income, net Other income, net, increased 16% to $2.5 million in 2023, driven by higher interest income from marketable securities, partially offset by lower U.K. R&D tax credits Other Income, Net (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :------------------------ | :----------- | :----------- | :----------------------- | :-------------------------- | | Other income, net | $2,452 | $2,108 | $344 | 16% | | Other income, net (as % of total revenue) | 7% | 7% | | | - The increase was primarily due to $0.9 million of higher interest income from higher interest rates on marketable securities195 - This was partially offset by $0.6 million of lower estimated refundable research and development tax credits in the U.K. due to recent changes in tax laws195 Provision for income taxes Digimarc's effective tax rate was 0% in 2023 and 2022 due to a full valuation allowance against deferred tax assets, which increased to $95.3 million due to cumulative losses - The effective tax rate was 0% for both 2023 and 2022, due to a valuation allowance against deferred tax assets197198 - The valuation allowance against deferred tax assets increased by $12.256 million to $95.256 million as of December 31, 2023197 - The valuation allowance is maintained largely due to the cumulative loss incurred over the previous three years, which is significant negative evidence for assessing deferred tax asset realizability197 Non-GAAP Financial Measures Digimarc uses non-GAAP measures to assess core performance, with 2023 non-GAAP gross profit up 24% to $26.3 million, operating expenses down 11% to $55.0 million, and a non-GAAP net loss of $(26.4) million - Non-GAAP financial measures are used to evaluate core operating results by removing non-cash and non-recurring activities that affect comparability202 Non-GAAP Financial Performance (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Change | Percent Change | | :-------------------------- | :----------- | :----------- | :------------ | :------------- | | Non-GAAP Gross Profit | $26,323 | $21,251 | $5,072 | 24% | | Non-GAAP Gross Profit Margin | 76% | 70% | 6 ppts | - | | Non-GAAP Operating Expenses | $54,994 | $61,830 | $(6,836) | (11)% | | Non-GAAP Net Loss | $(26,423) | $(38,568) | $12,145 | (31)% | | Non-GAAP Loss Per Share (Diluted) | $(1.30) | $(2.02) | $0.72 | (36)% | - Non-GAAP gross profit increased primarily due to higher gross profit contribution from higher subscription revenue and a more favorable mix of subscription revenue in 2023204 - Non-GAAP operating expenses decreased primarily due to $4.1 million lower cash compensation costs (lower headcount), $1.5 million lower contractor and consulting costs, $1.1 million lower travel and training costs, and $0.9 million lower legal costs206 Liquidity and Capital Resources Digimarc's cash and marketable securities decreased by $25.4 million to $27.2 million in 2023, driven by operations and stock purchases, but management expects current liquidity to cover needs for the next 12 months Liquidity and Capital Resources (in thousands) | Metric | December 31, 2023 | December 31, 2022 | | :---------------------------------------- | :------------------ | :------------------ | | Working capital | $24,555 | $54,007 | | Current ratio | 3:1 | 6.3:1 | | Cash, cash equivalents and short-term marketable securities | $27,182 | $52,542 | | Total cash, cash equivalents and marketable securities | $27,182 | $52,542 | - The $25.4 million decrease in cash, cash equivalents, and marketable securities was primarily due to cash used in operations, purchases of common stock for tax withholding, and purchases of property and equipment and capitalized patent costs208 - The company's investment policy limits credit exposure to any one financial institution or type of financial instrument, with exceptions for U.S. government securities211 Cash Flows from Operating Activities (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Net cash used in operating activities | $(21,995) | $(44,408) | $22,413 | (50)% | Cash Flows from Investing Activities (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Net cash provided by investing activities | $12,561 | $3,757 | $8,804 | 234% | Cash Flows from Financing Activities (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | Dollar Increase/(Decrease) | Percent Increase/(Decrease) | | :---------------------------------------- | :----------- | :----------- | :----------------------- | :-------------------------- | | Net cash (used in) provided by financing activities | $(2,760) | $60,499 | $(63,259) | (105)% | - The decrease in cash from financing activities was primarily due to $62.9 million net proceeds from the issuance of common stock in 2022215 - Management believes currently available cash and marketable securities will satisfy projected working capital and capital expenditure requirements for at least the next 12 months216 Registered Direct Offering On February 24, 2024, Digimarc completed a registered direct stock offering of 929,000 shares at $35.00, generating $32.5 million, following a similar $58.3 million offering in April 2022 - On February 24, 2024, the company entered into purchase agreements for a registered direct stock offering of 929,000 common shares at $35.00 per share, generating $32.5 million in gross cash proceeds217218 - On April 5, 2022, the company issued 2.25 million common shares in a registered direct stock offering at $25.90 per share, resulting in $58.3 million in gross cash proceeds219 Equity Distribution Agreement Digimarc's Equity Distribution Agreement, allowing up to $30.0 million in stock sales, saw $5.0 million sold in 2022, no sales in 2023, and was terminated effective March 1, 2024 - An Equity Distribution Agreement, dated May 16, 2019, allowed the company to sell up to $30.0 million of common stock220 - During 2022, 222,000 shares were sold at an average price of $22.42 per share, totaling $5.0 million in cash proceeds220 - No shares were sold under this agreement during the year ended December 31, 2023220 - The company provided notice to terminate the Equity Distribution Agreement effective March 1, 2024220 Shelf Registration Digimarc's new S-3 shelf registration, effective July 19, 2023, allows for up to $100.0 million in securities sales, with $67.5 million remaining after a recent $32.5 million offering - A new shelf registration statement on Form S-3 was filed on June 23, 2023, becoming effective on July 19, 2023, and expiring on July 19, 2026222 - Under this new shelf registration statement, the company may sell securities in one or more offerings up to $100.0 million222 - After the $32.5 million registered direct stock offering closed on February 27, 2024, $67.5 million remained available under the new shelf registration statement222 Forward-Looking Statements This Annual Report contains forward-looking statements subject to significant uncertainties, and investors are cautioned not to place undue reliance on them, as the company undertakes no obligation to update them - This Annual Report on Form 10-K includes "forward-looking statements" subject to uncertainties and factors that are difficult to predict and beyond the company's control224 - Actual results could differ materially from those anticipated in these forward-looking statements, and investors are cautioned not to place undue reliance on them224 - The company does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information, or circumstances227 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This item is not applicable to Digimarc Corporation - Not applicable228 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This item refers to the Consolidated Financial Statements and Notes, filed as part of this Annual Report on Form 10-K and listed under Part III, Item 15 - The Consolidated Financial Statements and accompanying Notes are filed as part of this Annual Report on Form 10-K229 - These documents are listed under Part III, Item 15, Exhibits and Financial Statement Schedules229 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The company reported no changes in or disagreements with accountants on accounting and financial disclosure - No unresolved staff comments were reported230 ITEM 9A: CONTROLS AND PROCEDURES Management concluded that Digimarc's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes in Q4 2023 - Management, under the supervision of the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2023230231 - Management concluded that internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework234 - There was no change in internal control over financial reporting during the quarter ended December 31, 2023, that materially affected or is reasonably likely to materially affect it235 ITEM 9B: OTHER INFORMATION No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q4 2023 - No director or officer adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended December 31, 2023236 ITEM 9C: DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS This item is not applicable to Digimarc Corporation - Not applicable237 PART III ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE This item incorporates information on directors, executive officers, and corporate governance by reference from Digimarc's 2024 Proxy Statement, including adopted Codes of Conduct and Ethics - Information required by this item is incorporated by reference from the Proxy Statement for the 2024 annual meeting of shareholders239241 - Digimarc has adopted a Code of Business Conduct and a Code of Ethics for Financial Professionals240 ITEM 11: EXECUTIVE COMPENSATION This item incorporates executive compensation information by reference from Digimarc's 2024 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2024 annual meeting of shareholders242 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS This item incorporates information on security ownership of beneficial owners and management, and related stockholder matters, by reference from Digimarc's 2024 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2024 annual meeting of shareholders242 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE This item incorporates information on certain relationships, related transactions, and director independence by reference from Digimarc's 2024 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2024 annual meeting of shareholders243 ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES This item incorporates information on principal accountant fees and services by reference from Digimarc's 2024 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2024 annual meeting of shareholders243 ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This item lists financial statements, confirms omission of schedules, and provides a comprehensive exhibit index detailing various agreements and corporate documents, noting that representations are for party benefit - The following documents are filed as part of this Annual Report on Form 10-K: Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Loss, Consolidated Statements of Shareholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements244 - All financial statement schedules have been omitted as they are not required or applicable, or the information is shown in the consolidated financial statements or related notes244 - A detailed Exhibit Index is provided, listing various agreements and corporate documents245249250251254 - Agreements included as exhibits may contain representations and warranties made solely for the benefit of the parties, not intended as categorical statements of fact, and may apply different standards of materiality246248 SIGNATURES SIGNATURES The Annual Report on Form 10-K was signed by Charles Beck (CFO) and Riley McCormack (CEO and Director), along with other directors, on February 29, 2024 - The report was signed on behalf of Digimarc Corporation by Charles Beck (Chief Financial Officer) and Riley McCormack (President, Chief Executive Officer and Director) on February 29, 2024258 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS This section provides an index to the consolidated financial statements, including the Independent Auditor's Report, Balance Sheets, Statements of Operations, Shareholders' Equity, Cash Flows, and accompanying Notes Index to Consolidated Financial Statements | Document | Page | | :---------------------------------------- | :--- | | Report of Independent Registered Public Accounting Firm | F-2 | | Consolidated Balance Sheets | F-4 | | Consolidated Statements of Operations and Comprehensive Loss | F-5 | | Consolidated Statements of Shareholders' Equity | F-6 | | Consolidated Statements of Cash Flows | F-7 | | Notes to Consolidated Financial Statements | F-8 | Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on Digimarc's 2023 and 2022 consolidated financial statements, affirming fair presentation in conformity with U.S. GAAP, with revenue recognition for new contracts identified as a critical audit matter - KPMG LLP issued an unqualified opinion on Digimarc's consolidated financial statements for December 31, 2023, and 2022263 - The consolidated financial statements present fairly, in all material respects, the financial position and results of operations in conformity with U.S. generally accepted accounting principles263 - The critical audit matter identified was the evaluation of the Company's revenue recognition related to new contracts due to the unique nature of new revenue contracts within each software and service offering269270 Consolidated Balance Sheets As of December 31, 2023, total assets decreased to $80.6 million from $113.8 million, liabilities increased to $18.6 million, and shareholders' equity decreased to $61.9 million, primarily due to reduced cash and net loss Consolidated Balance Sheets (in thousands) | Metric | December 31, 2023 | December 31, 2022 | | :---------------------------------------- | :------------------ | :------------------ | | ASSETS | | | | Cash and cash equivalents | $21,456 | $33,598 | | Marketable securities | $5,726 | $18,944 | | Trade accounts receivable, net | $5,813 | $5,427 | | Other current assets | $4,085 | $6,172 | | Total current assets | $37,080 | $64,141 | | Property and equipment, net | $1,570 | $2,390 | | Intangibles, net | $28,458 | $33,170 | | Goodwill | $8,641 | $8,229 | | Lease right of use assets | $4,017 | $4,720 | | Other assets | $786 | $1,127 | | Total assets | $80,552 | $113,777 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Accounts payable and other accrued liabilities | $6,672 | $5,989 | | Deferred revenue | $5,853 | $4,145 | | Total current liabilities | $12,525 | $10,134 | | Long-term lease liabilities | $5,994 | $5,977 | | Other long-term liabilities | $106 | $76 | | Total liabilities | $18,625 | $16,187 | | Shareholders' equity: | | | | Preferred stock | $50 | $50 | | Common stock | $20 | $20 | | Additional paid-in capital | $376,189 | $367,692 | | Accumulated deficit | $(311,768) | $(265,809) | | Accumulated other comprehensive loss | $(2,564) | $(4,363) | | Total shareholders' equity | $61,927 | $97,590 | | Total liabilities and shareholders' equity | $80,552 | $113,777 | Consolidated Statements of Operations and Comprehensive Loss For 2023, total revenue increased 15% to $34.9 million, gross profit grew 32% to $20.2 million, and net loss improved to $(46.0) million, reflecting reduced operating expenses and positive foreign currency adjustments Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share data) | Metric | Year Ended December 31, 2023 | Year Ended December 31, 2022 | | :---------------------------------------- | :--------------------------- | :--------------------------- | | Revenue: | | | | Subscription | $18,973 | $15,219 | | Service | $15,878 | $14,978 | | Total revenue | $34,851 | $30,197 | | Cost of revenue: | | | | Subscription (1) | $2,975 | $3,878 | | Service (1) | $7,252 | $6,557 | | Amortization expense on acquired intangible assets | $4,459 | $4,439 | | Total cost of revenue | $14,686 | $14,874 | | Gross profit | $20,165 | $15,323 | | Operating expenses: | | | | Sales and marketing | $22,409 | $29,718 | | Research, development and engineering | $26,577 | $26,490 | | General and administrative | $18,071 | $18,945 | | Amortization expense on acquired intangible assets | $1,065 | $1,064 | | Impairment of lease right of use assets and leasehold improvements | $250 | $915 | | Total operating expenses | $68,372 | $77,132 | | Operating loss | $(48,207) | $(61,809) | | Other income, net | $2,452 | $2,108 | | Loss before income taxes | $(45,755) | $(59,701) | | Provision for income taxes | $(204) | $(97) | | Net loss | $(45,959) | $(59,798) | | Loss per share — basic | $(2.26) | $(3.12) | | Loss per share — diluted | $(2.26) | $(3.12) | | Weighted average shares outstanding — basic | 20,322 | 19,140 | | Weighted average shares outstanding — diluted | 20,322 | 19,140 | | Comprehensive loss: | | | | Unrealized gain (loss) on marketable securities, net of tax of $0 | $138 | $(144) | | Foreign currency translation adjustment, net of tax of $0 | $1,661 | $(4,219) | | Other comprehensive income (loss) | $1,799 | $(4,363) | | Net loss | $(45,959) | $(59,798) | | Comprehensive loss | $(44,160) | $(64,161) | Consolidated Statements of Shareholders' Equity As of December 31, 2023, total shareholders' equity decreased to $61.9 million from $97.6 million, primarily due to a net loss of $(46.0) million and stock repurchases, partially offset by stock-based compensation Consolidated Statements of Shareholders' Equity (in thousands) | Metric | December 31, 2023 | December 31, 2022 | | :---------------------------------------- | :------------------ | :------------------ | | Preferred Stock | $50 | $50 | | Common Stock | $20 | $20 | | Additional Paid-in Capital | $376,189 | $367,692 | | Accumulated Deficit | $(311,768) | $(265,809) | | Accumulated Other Comprehensive Loss | $(2,564) | $(4,363) | | Total Shareholders' Equity | $61,927 | $97,590 | - The decrease in total shareholders' equity was primarily due to a net loss of $(45,959) thousand279 - Stock-based compensation contributed $11,221 thousand to additional paid-in capital in 2023279 - The company purchased $2,724 thousand of common stock in 2023, primarily for tax withholding279 Consolidated Statements of Cash Flows In 2023, net cash used in operating activities decreased 50% to $(22.0) million, investing activities provided $12.6 million, and financing activities shifted to a $(2.8) million use, primarily due to the absence of large stock issuances Consolidated Statements of Cash Flows (in thousands) | Metric | Year Ended December 31, 2023 | Year Ended December 31, 2022 | | :---------------------------------------- | :--------------------------- | :--------------------------- | | Cash flows from operating activities: | | | | Net cash used in operating activities | $(21,995) | $(44,408) | | Cash flows from investing activities: | | | | Net cash provided by investing activities | $12,561 | $3,757 | | Cash flows from financing activities: | | | | Net cash (used in) provided by financing activities | $(2,760) | $60,499 | | Effect of exchange rate on cash | $52 | $(39) | | Net (decrease) increase in cash and cash equivalents | $(12,142) | $19,809 | | Cash and cash equivalents at beginning of period | $33,598 | $13,789 | | Cash and cash equivalents at end of period | $21,456 | $33,598 | - Net cash used in operating activities decreased by $22.4 million, primarily due to a $13.8 million lower net loss and favorable changes in operating assets and liabilities213 - Net cash provided by investing activities increased by $8.8 million, mainly from $4.6 million higher net maturities of marketable securities, $3.5 million net cash paid for the EVRYTHNG acquisition in 2022 (not in 2023), and $0.6 million lower purchases of property and equipment214 - Net cash from financing activities decreased by $63.3 million, primarily due to $62.9 million net proceeds from the issuance of common stock in 2022215 Notes to Consolidated Financial Statements The Notes detail Digimarc's business, accounting policies, and financial performance, covering digital watermarking, the EVRYTHNG acquisition, revenue recognition, stock-based compensation, income taxes, liquidity, and subsequent events - Digimarc is a pioneer and global leader in digital watermarking technologies, offering the Illuminate SaaS platform and product suite for identification and authentication283284285288 - Critical accounting policies include revenue recognition (ASC 606), stock-based compensation (ASC 718), income taxes (ASC 740), and business combinations (EVRYTHNG acquisition)287305306308311 - The company adopted ASU No. 2016-13 (CECL model) on January 1, 2023, with no material impact, and is evaluating ASU No. 2023-07 (Segment Reporting) and ASU No. 2023-09 (Income Tax Disclosures)314316317 Disaggregated Revenue by Major Target Market (in thousands) | Market | Year Ended December 31, 2023 | Year Ended December 31, 2022 | | :--------------- | :--------------------------- | :--------------------------- | | Commercial: | | | | Subscription | $17,773 | $13,832 | | Service | $1,042 | $2,056 | | Total Commercial | $18,815 | $15,888 | | Government: | | | | Subscription | $1,200 | $1,387 | | Service | $14,836 | $12,922 | | Total Government | $16,036 | $14,309 | | Total | $34,851 | $30,197 | Major Customers (Percentage of Revenue) | Customer | Year Ended December 31, 2023 | Year Ended December 31, 2022 | | :--------- | :--------------------------- | :--------------------------- | | Customer A | 46% | 46% | | Customer B | 21% | 17% | - The EVRYTHNG acquisition on January 3, 2022, had an aggregate preliminary purchase price of $36,634 thousand, with $35,720 thousand allocated to intangible assets (developed technology and customer relationships) and $7,970 thousand to goodwill361364 - Total stock-based compensation expense was $11,158 thousand in 2023, with $15,370 thousand in unrecognized compensation costs remaining as of December 31, 2023, to be recognized through December 31, 2027343344 - The effective tax rate was 0% for 2023 and 2022 due to a full valuation allowance of $95,256 thousand against deferred tax assets, primarily driven by cumulative losses399403 - Subsequent to year-end, on February 24, 2024, the company completed a registered direct stock offering of 929,000 common shares at $35.00 per share, generating $32,500 thousand in gross cash proceeds409
Digimarc(DMRC) - 2023 Q4 - Annual Report