d‘
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20192020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34108
DIGIMARC CORPORATION
(Exact name of registrant as specified in its charter)
Oregon |
| 26-2828185 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
9405 SW Gemini Drive, Beaverton, Oregon 97008
(Address of principal executive offices) (Zip Code)
(503) 469-4800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading Symbol |
| Name of Each Exchange on Which Registered |
Common Stock, $0.001 Par Value Per Share |
| DMRC |
| The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ |
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Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
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Emerging growth company | ☐ |
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|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 26, 2019,24, 2020, there were 12,127,96712,642,344 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
DIGIMARC CORPORATION
(In thousands, except per share data)
(UNAUDITED)
|
| March 31, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| |||||
ASSETS |
|
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Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 24,275 |
|
| $ | 27,278 |
|
| $ | 10,250 |
|
| $ | 11,213 |
|
Marketable securities |
|
| 13,193 |
|
|
| 16,378 |
|
|
| 20,320 |
|
|
| 25,604 |
|
Trade accounts receivable, net |
|
| 3,727 |
|
|
| 3,888 |
|
|
| 3,959 |
|
|
| 4,021 |
|
Other current assets |
|
| 2,026 |
|
|
| 2,100 |
|
|
| 2,118 |
|
|
| 2,456 |
|
Total current assets |
|
| 43,221 |
|
|
| 49,644 |
|
|
| 36,647 |
|
|
| 43,294 |
|
Property and equipment, net |
|
| 3,808 |
|
|
| 3,955 |
|
|
| 3,539 |
|
|
| 3,650 |
|
Intangibles, net |
|
| 6,649 |
|
|
| 6,649 |
|
|
| 6,629 |
|
|
| 6,670 |
|
Goodwill |
|
| 1,114 |
|
|
| 1,114 |
|
|
| 1,114 |
|
|
| 1,114 |
|
Other assets |
|
| 3,167 |
|
|
| 425 |
|
|
| 2,524 |
|
|
| 2,660 |
|
Total assets |
| $ | 57,959 |
|
| $ | 61,787 |
|
| $ | 50,453 |
|
| $ | 57,388 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
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Current liabilities: |
|
|
|
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|
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|
|
|
Accounts payable and other accrued liabilities |
| $ | 2,337 |
|
| $ | 1,092 |
|
| $ | 2,349 |
|
| $ | 2,272 |
|
Deferred revenue |
|
| 2,700 |
|
|
| 3,226 |
|
|
| 3,015 |
|
|
| 3,172 |
|
Total current liabilities |
|
| 5,037 |
|
|
| 4,318 |
|
|
| 5,364 |
|
|
| 5,444 |
|
Lease liability and other long-term liabilities |
|
| 3,079 |
|
|
| 854 |
|
|
| 2,346 |
|
|
| 2,494 |
|
Total liabilities |
|
| 8,116 |
|
|
| 5,172 |
|
|
| 7,710 |
|
|
| 7,938 |
|
Commitments and contingencies (Note 12) |
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Commitments and contingencies (Note 13) |
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Shareholders’ equity: |
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|
|
|
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|
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|
|
|
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Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares issued and outstanding at March 31, 2019 and December 31, 2018) |
|
| 50 |
|
|
| 50 |
| ||||||||
Common stock (par value $0.001 per share, 50,000 authorized, 12,135 and 11,891 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively) |
|
| 12 |
|
|
| 12 |
| ||||||||
Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares issued and outstanding at March 31, 2020 and December 31, 2019) |
|
| 50 |
|
|
| 50 |
| ||||||||
Common stock (par value $0.001 per share, 50,000 authorized, 12,645 and 12,446 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively) |
|
| 13 |
|
|
| 12 |
| ||||||||
Additional paid-in capital |
|
| 164,119 |
|
|
| 162,428 |
|
|
| 190,303 |
|
|
| 188,103 |
|
Accumulated deficit |
|
| (114,338 | ) |
|
| (105,875 | ) |
|
| (147,623 | ) |
|
| (138,715 | ) |
Total shareholders’ equity |
|
| 49,843 |
|
|
| 56,615 |
|
|
| 42,743 |
|
|
| 49,450 |
|
Total liabilities and shareholders’ equity |
| $ | 57,959 |
|
| $ | 61,787 |
|
| $ | 50,453 |
|
| $ | 57,388 |
|
The accompanying notes are an integral part of these consolidated financial statements.statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
| Three |
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| Three |
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| Three |
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| Three |
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| Months |
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| Months |
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| Months |
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| Months |
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| Ended |
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| Ended |
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| Ended |
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| Ended |
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|
| March 31, |
|
| March 31, |
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| March 31, |
|
| March 31, |
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| 2019 |
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| 2018 |
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| 2020 |
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| 2019 |
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| ||||
Revenue: |
|
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|
|
|
|
|
|
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|
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Service |
| $ | 3,635 |
|
| $ | 3,507 |
|
|
| $ | 3,738 |
|
| $ | 3,814 |
|
|
Subscription |
|
| 1,563 |
|
|
| 1,578 |
|
|
|
| 2,451 |
|
|
| 1,846 |
|
|
License |
|
| 462 |
|
|
| 528 |
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| |||||||||
Total revenue |
|
| 5,660 |
|
|
| 5,613 |
|
|
|
| 6,189 |
|
|
| 5,660 |
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Cost of revenue: |
|
|
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|
|
|
|
|
|
|
|
|
|
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|
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Service |
|
| 1,531 |
|
|
| 1,563 |
|
|
|
| 1,684 |
|
|
| 1,645 |
|
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Subscription |
|
| 445 |
|
|
| 482 |
|
|
|
| 514 |
|
|
| 489 |
|
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License |
|
| 158 |
|
|
| 140 |
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| |||||||||
Total cost of revenue |
|
| 2,134 |
|
|
| 2,185 |
|
|
|
| 2,198 |
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|
| 2,134 |
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Gross profit |
|
| 3,526 |
|
|
| 3,428 |
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|
|
| 3,991 |
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| 3,526 |
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Operating expenses: |
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Sales and marketing |
|
| 4,950 |
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| 4,887 |
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|
|
| 5,246 |
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| 4,950 |
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Research, development and engineering |
|
| 4,038 |
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|
| 3,947 |
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|
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| 4,433 |
|
|
| 4,038 |
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General and administrative |
|
| 2,852 |
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|
| 2,632 |
|
|
|
| 3,367 |
|
|
| 3,210 |
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|
Intellectual property |
|
| 358 |
|
|
| 315 |
|
| |||||||||
Total operating expenses |
|
| 12,198 |
|
|
| 11,781 |
|
|
|
| 13,046 |
|
|
| 12,198 |
|
|
Operating loss |
|
| (8,672 | ) |
|
| (8,353 | ) |
|
|
| (9,055 | ) |
|
| (8,672 | ) |
|
Other income, net |
|
| 237 |
|
|
| 252 |
|
|
|
| 142 |
|
|
| 237 |
|
|
Loss before income taxes |
|
| (8,435 | ) |
|
| (8,101 | ) |
|
|
| (8,913 | ) |
|
| (8,435 | ) |
|
Provision for income taxes |
|
| (28 | ) |
|
| (11 | ) |
| |||||||||
Benefit (provision) for income taxes |
|
| 5 |
|
|
| (28 | ) |
| |||||||||
Net loss |
| $ | (8,463 | ) |
| $ | (8,112 | ) |
|
| $ | (8,908 | ) |
| $ | (8,463 | ) |
|
Earnings (loss) per common share: |
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|
|
|
|
|
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|
|
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Loss per common share — basic |
| $ | (0.74 | ) |
| $ | (0.72 | ) |
|
| $ | (0.74 | ) |
| $ | (0.74 | ) |
|
Loss per common share — diluted |
| $ | (0.74 | ) |
| $ | (0.72 | ) |
|
| $ | (0.74 | ) |
| $ | (0.74 | ) |
|
Weighted average common shares outstanding — basic |
|
| 11,487 |
|
|
| 11,266 |
|
|
|
| 12,037 |
|
|
| 11,487 |
|
|
Weighted average common shares outstanding — diluted |
|
| 11,487 |
|
|
| 11,266 |
|
|
|
| 12,037 |
|
|
| 11,487 |
|
|
The accompanying notes are an integral part of these consolidated financial statements.statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(UNAUDITED)
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| Additional |
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| Total |
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| Additional |
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| Total |
| ||||
|
| Preferred Stock |
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
| Shareholders' |
|
| Preferred Stock |
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
| Shareholders' |
| ||||||||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Equity |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Equity |
| ||||||||||||||
Three months ended March 31, 2018: |
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BALANCE AT DECEMBER 31, 2017 |
|
| 10 |
|
| $ | 50 |
|
|
| 11,651 |
|
| $ | 12 |
|
| $ | 155,793 |
|
| $ | (73,508 | ) |
| $ | 82,347 |
| ||||||||||||||||||||||||||||
Three months ended March 31, 2020: |
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BALANCE AT DECEMBER 31, 2019 |
|
| 10 |
|
| $ | 50 |
|
|
| 12,446 |
|
| $ | 12 |
|
| $ | 188,103 |
|
| $ | (138,715 | ) |
| $ | 49,450 |
| ||||||||||||||||||||||||||||
Issuance of common stock, net of issuance costs |
|
| — |
|
|
| — |
|
|
| 28 |
|
|
| 1 |
|
|
| 573 |
|
|
| — |
|
|
| 574 |
| ||||||||||||||||||||||||||||
Exercise of stock options |
|
| — |
|
|
| — |
|
|
| 46 |
|
|
| — |
|
|
| 560 |
|
|
| — |
|
|
| 560 |
|
|
| — |
|
|
| — |
|
|
| 8 |
|
|
| — |
|
|
| 135 |
|
|
| — |
|
|
| 135 |
|
Issuance of restricted common stock |
|
| — |
|
|
| — |
|
|
| 178 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 186 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeiture of restricted common stock |
|
| — |
|
|
| — |
|
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Purchase and retirement of common stock |
|
| — |
|
|
| — |
|
|
| (18 | ) |
|
| — |
|
|
| (528 | ) |
|
| — |
|
|
| (528 | ) |
|
| — |
|
|
| — |
|
|
| (23 | ) |
|
| — |
|
|
| (738 | ) |
|
| — |
|
|
| (738 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,715 |
|
|
| — |
|
|
| 1,715 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,230 |
|
|
| — |
|
|
| 2,230 |
|
Cumulative effect of the adoption of the new revenue standard, net of tax |
|
| — |
|
|
| — |
|
|
| - |
|
|
| — |
|
|
| — |
|
|
| 139 |
|
|
| 139 |
| ||||||||||||||||||||||||||||
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,112 | ) |
|
| (8,112 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,908 | ) |
|
| (8,908 | ) |
BALANCE AT MARCH 31, 2018 |
|
| 10 |
|
| $ | 50 |
|
|
| 11,847 |
|
| $ | 12 |
|
| $ | 157,540 |
|
| $ | (81,481 | ) |
| $ | 76,121 |
| ||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
BALANCE AT MARCH 31, 2020 |
|
| 10 |
|
| $ | 50 |
|
|
| 12,645 |
|
| $ | 13 |
|
| $ | 190,303 |
|
| $ | (147,623 | ) |
| $ | 42,743 |
| ||||||||||||||||||||||||||||
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|
Three months ended March 31, 2019: |
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|
BALANCE AT DECEMBER 31, 2018 |
|
| 10 |
|
| $ | 50 |
|
|
| 11,891 |
|
| $ | 12 |
|
| $ | 162,428 |
|
| $ | (105,875 | ) |
| $ | 56,615 |
|
|
| 10 |
|
| $ | 50 |
|
|
| 11,891 |
|
| $ | 12 |
|
| $ | 162,428 |
|
| $ | (105,875 | ) |
| $ | 56,615 |
|
Exercise of stock options |
|
| — |
|
|
| — |
|
|
| 10 |
|
|
| — |
|
|
| 99 |
|
|
| — |
|
|
| 99 |
|
|
| — |
|
|
| — |
|
|
| 10 |
|
|
| — |
|
|
| 99 |
|
|
| — |
|
|
| 99 |
|
Issuance of restricted common stock |
|
| — |
|
|
| — |
|
|
| 255 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 255 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeiture of restricted common stock |
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Purchase and retirement of common stock |
|
| — |
|
|
| — |
|
|
| (20 | ) |
|
| — |
|
|
| (486 | ) |
|
| — |
|
|
| (486 | ) |
|
| — |
|
|
| — |
|
|
| (20 | ) |
|
| — |
|
|
| (486 | ) |
|
| — |
|
|
| (486 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,078 |
|
|
| — |
|
|
| 2,078 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,078 |
|
|
| — |
|
|
| 2,078 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,463 | ) |
|
| (8,463 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,463 | ) |
|
| (8,463 | ) |
BALANCE AT MARCH 31, 2019 |
|
| 10 |
|
| $ | 50 |
|
|
| 12,135 |
|
| $ | 12 |
|
| $ | 164,119 |
|
| $ | (114,338 | ) |
| $ | 49,843 |
|
|
| 10 |
|
| $ | 50 |
|
|
| 12,135 |
|
| $ | 12 |
|
| $ | 164,119 |
|
| $ | (114,338 | ) |
| $ | 49,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
|
| Three |
|
| Three |
|
| Three |
|
| Three |
| ||||
|
| Months |
|
| Months |
|
| Months |
|
| Months |
| ||||
|
| Ended |
|
| Ended |
|
| Ended |
|
| Ended |
| ||||
|
| March 31, |
|
| March 31, |
|
| March 31, |
|
| March 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (8,463 | ) |
| $ | (8,112 | ) |
| $ | (8,908 | ) |
| $ | (8,463 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and write-off of property and equipment |
|
| 357 |
|
|
| 380 |
|
|
| 374 |
|
|
| 357 |
|
Amortization and write-off of intangibles |
|
| 180 |
|
|
| 146 |
|
|
| 201 |
|
|
| 180 |
|
Stock-based compensation |
|
| 2,037 |
|
|
| 1,671 |
|
|
| 2,195 |
|
|
| 2,037 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
| 161 |
|
|
| 2,614 |
|
|
| 62 |
|
|
| 161 |
|
Other current assets |
|
| 74 |
|
|
| 304 |
|
|
| 338 |
|
|
| 74 |
|
Other assets |
|
| (33 | ) |
|
| 44 |
|
|
| 136 |
|
|
| (33 | ) |
Accounts payable and other accrued liabilities |
|
| 800 |
|
|
| (386 | ) |
|
| 61 |
|
|
| 800 |
|
Deferred revenue |
|
| (393 | ) |
|
| (219 | ) |
|
| (146 | ) |
|
| (393 | ) |
Lease liability and other long-term liabilities |
|
| (174 | ) |
|
| (34 | ) |
|
| (159 | ) |
|
| (174 | ) |
Net cash used in operating activities |
|
| (5,454 | ) |
|
| (3,592 | ) |
|
| (5,846 | ) |
|
| (5,454 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (194 | ) |
|
| (302 | ) |
|
| (235 | ) |
|
| (194 | ) |
Capitalized patent costs |
|
| (153 | ) |
|
| (208 | ) |
|
| (137 | ) |
|
| (153 | ) |
Maturity of marketable securities |
|
| 6,744 |
|
|
| 18,657 |
|
|
| 11,691 |
|
|
| 6,744 |
|
Purchase of marketable securities |
|
| (3,559 | ) |
|
| (6,961 | ) |
|
| (6,407 | ) |
|
| (3,559 | ) |
Net cash provided by investing activities |
|
| 2,838 |
|
|
| 11,186 |
|
|
| 4,912 |
|
|
| 2,838 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of issuance costs |
|
| 574 |
|
|
| — |
| ||||||||
Exercise of stock options |
|
| 99 |
|
|
| 560 |
|
|
| 135 |
|
|
| 99 |
|
Purchase of common stock |
|
| (486 | ) |
|
| (528 | ) |
|
| (738 | ) |
|
| (486 | ) |
Net cash provided by (used in) financing activities |
|
| (387 | ) |
|
| 32 |
| ||||||||
Net increase (decrease) in cash and cash equivalents |
|
| (3,003 | ) |
|
| 7,626 |
| ||||||||
Net cash used in financing activities |
|
| (29 | ) |
|
| (387 | ) | ||||||||
Net decrease in cash and cash equivalents |
|
| (963 | ) |
|
| (3,003 | ) | ||||||||
Cash and cash equivalents at beginning of period |
|
| 27,278 |
|
|
| 40,823 |
|
|
| 11,213 |
|
|
| 27,278 |
|
Cash and cash equivalents at end of period |
| $ | 24,275 |
|
| $ | 48,449 |
|
| $ | 10,250 |
|
| $ | 24,275 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received (paid) for income taxes, net |
| $ | (3 | ) |
| $ | 113 |
|
| $ | 16 |
|
| $ | (3 | ) |
Supplemental schedule of non-cash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment and patent costs in accounts payable |
| $ | 2 |
|
| $ | (64 | ) |
| $ | 16 |
|
| $ | 2 |
|
Stock-based compensation capitalized to software and patent costs |
| $ | 41 |
|
| $ | 44 |
|
| $ | 35 |
|
| $ | 41 |
|
Right of use assets obtained in exchange for lease obligations |
| $ | 2,709 |
|
| $ | — |
|
| $ | — |
|
| $ | 2,709 |
|
|
The accompanying notes are an integral part of these consolidated financial statements.statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(UNAUDITED)
1. Description of Business and Significant Accounting Policies
Description of Business
Digimarc Corporation (“Digimarc” or the “Company”), an Oregon corporation, enables governments, banks, retailers, consumer brands, and other businesses around the world to automatically and reliably identify and interact with virtually any form of media. The Company has pioneered the Digimarc Intuitive Computing Platform, (“ICP”)featuring three core functions for the identification, discovery and verification of digitally enhanced media. Digimarc provides objects with an indelible, imperceptible data carrier: Digimarc Barcode. Data in the carrier uniquely identifies the object. The Digimarc Platform also provides software for relevant devices to “discover” objects (i.e., decode data from that carrier) using Digimarc software, known as Digimarc Discover. Digimarc Verify, a comprehensive setsuite of technologies for identifying, discoveringverification and interacting with digitally-enhanced media. The platform includesquality control tools, assesses signal quality and validates data at critical stages of production when the Digimarc Barcode a proprietary method for imperceptibly enhancing packaging, print, images, thermal labels, audiois applied to an object. Together, these core functions enable organizations, application developers, and other objects with data that is detected by enabled devices, such as smart phones, computers, barcode scannerssolution providers to build new features, functionality and machine-vision equipment.additional value on the Digimarc Discover software enables an ecosystem of connected devices to easily identify content or materials and deliver information.Platform.
Interim Consolidated Financial Statements
Our significant accounting policies are detailed in “Note 1: Description of Business and Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2018.2019. Significant changes to our accounting policies as a result of adopting Accounting Standards Codification (“ASC”) 842, “Leases,“Leases,” effective January 1, 2019, isare discussed in Note 1011 below.
The accompanying interim consolidated financial statements have been prepared from the Company’s records without audit and, in management’s opinion, include all adjustments (consisting of only normal recurring adjustments) necessary to fairly reflect the financial condition and the results of operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, which was filed with the SEC on February 22, 2019.27, 2020. The results of operations for the interim periods presented in these consolidated financial statements are not necessarily indicative of the results for the full year.
Reclassifications
Certain prior period amounts in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to current period presentation.presentation, including the reclassification of revenue and expense accounts to better align with the presentation provided by our peers in the software industry. These reclassifications had no material effect on the results of operations or financial position for any period presented.
Contingencies
The Company evaluates all pending or threatened contingencies or commitments, if any, that are reasonably likely to have a material adverse effect on the Company’s operations or financial position. The Company assesses the probability of an adverse outcome and determines if it is remote, reasonably possible or probable as defined in accordance with the provisions of ASC 450, “Contingencies.” If information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and the amount of the loss, or the range of probable loss can be reasonably estimated, then the loss is accrued and charged to operations. If no accrual is made for a loss contingency because one or both of the conditions pursuant to ASC 450 are not met, but the probability of an adverse outcome is at least reasonably possible, the Company will disclose the nature of the contingency and provide an estimate of the possible loss or range of loss, or state that such an estimate cannot be made.
Goodwill
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 value. The Company operates as a single reporting unit. The Company estimates the fair value of its single reporting unit using a market approach, which takes into account the Company’s market capitalization plus an estimated control premium.
Accounting Pronouncements Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (ASC 842),” which supersedes, “Leases (ASC 840).” ASU No. 2016-02 increases the transparency and comparability of organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance requiresrequired that operating leases recognize a right-of-use asset and a lease liability measured at the present value of the lease payments in the statement of financial position, recognize a single lease cost allocated over the lease term on a straight-line basis, and classify all cash payments within operating activities in the statement of cash flows. The amendments in this update arewere effective for fiscal years beginning after December 31, 2018, and interim periods beginning in the first interim period within the year of adoption. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11, “Leases (ASC 842) Targeted Improvements,” to provide a transition election to not restate comparative periods for the effects of applying the new standard. This transition election permitspermitted entities to change the date of initial application to the beginning of the year of adoption and to recognize the effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings. In March 2019, the FASB issued ASU No. 2019-01, “Leases (ASC 842) Codification Improvements,” to increase transparency and comparability about disclosing essential information about leasing transactions. Collectively, ASUs 2016-02, 2018-11 and 2019-01 are defined as “ASC 842.” The Company adopted the new standard on January 1, 2019, and elected not to restate comparative periods. Upon adoption, the Company concluded no adjustment was required to the opening balance of retained earnings to reflect the impact of adopting the new
standard. In addition, the Company recorded right of use assets of $2,709 and lease liabilities of $3,792 and reversed the previously recorded deferred rent liability of $1,083. See Note 10 below11 for further information.
Accounting Pronouncements Issued But Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based upon expected losses rather than incurred losses. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance on its financial condition, results of operations and disclosures.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (ASC 740) Simplifying the Accounting for Income Taxes,” that removes certain exceptions to the general principles and also improves consistent application of and simplifies U.S. GAAP. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company does not expect the impact of the adoption of this standard to have a material impact on its financial condition, results of operations and disclosures.
2. Fair Value of Financial Instruments
The estimated fair values of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable and other accrued liabilities, approximate their carrying values due to the short-term nature of these instruments. The Company’s marketable securities are classified as held-to-maturity and are reported at amortized cost, which approximates fair value.
The Company’s fair value hierarchy for its cash equivalents and marketable securities was as follows:
March 31, 2019 |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||||||||||||||
March 31, 2020 |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||||||||||||||
| $ | 323 |
|
| $ | — |
|
| $ | — |
|
| $ | 323 |
|
| $ | 5,016 |
|
| $ | — |
|
| $ | — |
|
| $ | 5,016 |
| |
Commercial paper |
|
| — |
|
|
| 28,725 |
|
|
| — |
|
|
| 28,725 |
|
|
| — |
|
|
| 20,066 |
|
|
| — |
|
|
| 20,066 |
|
Corporate notes |
|
| — |
|
|
| 7,733 |
|
|
| — |
|
|
| 7,733 |
|
|
| — |
|
|
| 5,043 |
|
|
| — |
|
|
| 5,043 |
|
Total |
| $ | 323 |
|
| $ | 36,458 |
|
| $ | — |
|
| $ | 36,781 |
|
| $ | 5,016 |
|
| $ | 25,109 |
|
| $ | — |
|
| $ | 30,125 |
|
December 31, 2018 |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||||||||||||||
December 31, 2019 |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||||||||||||||
| $ | 1,472 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,472 |
|
| $ | 746 |
|
| $ | — |
|
| $ | — |
|
| $ | 746 |
| |
Commercial paper |
|
| — |
|
|
| 28,343 |
|
|
| — |
|
|
| 28,343 |
|
|
| — |
|
|
| 25,481 |
|
|
| — |
|
|
| 25,481 |
|
Corporate notes |
|
| — |
|
|
| 12,106 |
|
|
| — |
|
|
| 12,106 |
|
|
| — |
|
|
| 5,773 |
|
|
| — |
|
|
| 5,773 |
|
U.S. treasuries |
|
| — |
|
|
| 4,040 |
|
|
| — |
|
|
| 4,040 |
| ||||||||||||||||
Total |
| $ | 1,472 |
|
| $ | 40,449 |
|
| $ | — |
|
| $ | 41,921 |
|
| $ | 746 |
|
| $ | 35,294 |
|
| $ | — |
|
| $ | 36,040 |
|
The fair value maturities of the Company’s cash equivalents and marketable securities as of March 31, 20192020, are as follows:
|
| Maturities by Period |
| |||||||||||||||||
| Total |
|
| Less than 1 year |
|
| 1-5 years |
|
| 5 - 10 years |
|
| More than 10 years |
| ||||||
Cash equivalents and marketable securities |
| $ | 36,781 |
|
| $ | 36,781 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
|
| Maturities by Period |
| |||||||||||||||||
|
| Total |
|
| Less than 1 year |
|
| 1-5 years |
|
| 5 - 10 years |
|
| More than 10 years |
| |||||
Cash equivalents and marketable securities |
| $ | 30,125 |
|
| $ | 30,125 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
The Company considers all highly liquid marketable securities with original maturities of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents include commercial paper and money market funds and commercial paper totaling $23,588$9,805 and $25,543$10,436 at March 31, 20192020, and December 31, 2018,2019, respectively. Cash equivalents are carried at either cost or amortized cost, depending on the type of security, which approximates fair value.
The Company derives its revenue primarily from professionalsoftware development services subscriptions and licensing of its intellectual property.software subscriptions. Applicable revenue recognition criteria are considered separately for each performance obligation as follows:
Service revenue consists primarily of revenue receivedearned from the performance of software development and consulting services. The majority of service revenue arrangementscontracts are structured as time and materials consulting agreements. Revenue for development and consulting services is recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided.
Subscription revenue includesconsists primarily of revenue derivedearned from the sale of Digimarc Discover, Digimarc Barcode and Digimarc Guardiansoftware products and services, is generallyto a lesser extent the licensing of intellectual property. The majority of subscription contracts are recurring, paid in advance and recognized over the term of the subscription, which is typically one to three years.
License revenue includes revenue from licensing the Company’s intellectual property where the Company receives license fees and/or royalties. License fees are typically paid in advance and recognized when the customer has the right to the intellectual property and the license period has begun, and royalties are typically billed in arrears and recognized in the quarter in which the royalty was earned.
Some customerCustomer arrangements may contain multiple performance obligations such as professionalsoftware development services, software licenses, and maintenance and support fees. The Company accounts for individual products and services separately if they are distinct. To determine the transaction price, the Company considers the terms of the contract and the Company’s customary business practices. Some contracts may contain variable consideration. In those cases, the Company estimates the amount of variable consideration based on the sum of probability-weighted amounts in a range of possible consideration amounts. As part of this assessment, the Company will evaluate whether any of the variable consideration is constrained and if it is the Company will not include it in the transaction price. The consideration is allocated between distinct products and services based on their stand-alone selling prices. For items that are not sold separately, the Company estimates the standalone selling price based on reasonably available information, including market conditions, specific factors affecting the Company, and information about the customer. For distinct products and services, the Company typically recognizes the revenue associated with these performance obligations as they are delivered to the customer. For performance obligations whichProducts and services that are not consideredcapable of being distinct the Companyare combined with other products or services until a distinct performance obligation is identified. The revenue associated with this performance obligation is typically recognizes revenuerecognized over the term of the contract as the customer simultaneously receives and consumes the goodsproducts and services as the Company performs them.services.
All revenue recognized in the Consolidated Statements of Operations is considered to be revenue from contracts with customers.
The following table provides information about disaggregated revenue by major product linemarket category in the Company’s single reporting segment:
|
| Three |
|
| Three |
|
| Three |
|
| Three |
| ||||
| Months |
|
| Months |
|
| Months |
|
| Months |
| |||||
|
| March 31, |
|
| March 31, |
|
| Ended |
|
| Ended |
| ||||
|
| 2019 |
|
| 2018 |
|
| March 31, |
|
| March 31, |
| ||||
|
| 2020 |
|
| 2019 |
| ||||||||||
Government |
|
|
|
|
|
|
|
| ||||||||
Service |
| $ | 3,635 |
|
| $ | 3,507 |
|
| $ | 3,652 |
|
| $ | 3,634 |
|
Subscription |
|
|
|
|
|
|
|
|
|
| 391 |
|
|
| 428 |
|
Digimarc Guardian |
|
| 846 |
|
|
| 989 |
| ||||||||
Digimarc Discover and Digimarc Barcode |
|
| 717 |
|
|
| 589 |
| ||||||||
License |
|
| 462 |
|
|
| 528 |
| ||||||||
Total Government |
| $ | 4,043 |
|
| $ | 4,062 |
| ||||||||
Retail |
|
|
|
|
|
|
|
| ||||||||
Service |
| $ | 86 |
|
| $ | 180 |
| ||||||||
Subscription |
|
| 1,175 |
|
|
| 564 |
| ||||||||
Total Retail |
| $ | 1,261 |
|
| $ | 744 |
| ||||||||
Media |
|
|
|
|
|
|
|
| ||||||||
Service |
| $ | — |
|
| $ | — |
| ||||||||
Subscription |
|
| 885 |
|
|
| 854 |
| ||||||||
Total Media |
| $ | 885 |
|
| $ | 854 |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total |
| $ | 5,660 |
|
| $ | 5,613 |
|
| $ | 6,189 |
|
| $ | 5,660 |
|
The Company has contract assets from contracts with customers that are classified as “trade accounts receivable.” Financial information about trade accounts receivable is included in Note 7.8.
The Company has contract liabilities from contracts with customers that are classified as “deferred revenue.” Deferred revenue consists of billings in advance for professional services subscriptions and licensessubscriptions for which the performance obligation has not been satisfied.
The following table provides information about contract liabilities from contracts with customers:
| March 31, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| |||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Deferred revenue, current |
| $ | 2,700 |
|
| $ | 3,226 |
|
| $ | 3,015 |
|
| $ | 3,172 |
|
Deferred revenue, long term |
|
| 179 |
|
|
| 46 |
| ||||||||
Deferred revenue, long-term |
|
| 70 |
|
|
| 59 |
| ||||||||
Total |
| $ | 2,879 |
|
| $ | 3,272 |
|
| $ | 3,085 |
|
| $ | 3,231 |
|
The Company recognized $1,374 of revenue during the three months ended March 31, 2020 that was included in the contract liability balance as of December 31, 2019.
The aggregate amount of transaction priceprices from contractual obligations that are unsatisfied or partially unsatisfied was $16,454$17,454 and $17,496$17,759 as of March 31, 20192020 and December 31, 2018,2019, respectively.
4. Segment Information
Geographic Information
The Company derives its revenue from a single reporting segment: media managementautomatic identification solutions. Revenue is generated in this segment primarily through software development services subscriptions and licensing of intellectual property.software subscriptions. The Company markets its products in the U.S. and in non-U.S. countries through its sales and licensing personnel and channel partners.
Revenue by geographic area, based upon the “bill-to” location, was as follows:
| Three |
|
| Three |
|
|
| Three |
|
| Three |
| ||||||
|
| Months |
|
| Months |
|
|
| Months |
|
| Months |
| |||||
|
| Ended |
|
| Ended |
|
|
| Ended |
|
| Ended |
| |||||
|
| March 31, |
|
| March 31, |
|
|
| March 31, |
|
| March 31, |
| |||||
|
| 2019 |
|
| 2018 |
|
|
|
| 2020 |
|
| 2019 |
| ||||
Domestic |
| $ | 1,317 |
|
| $ | 1,451 |
|
|
| $ | 1,759 |
|
| $ | 1,317 |
| |
International (1) |
|
| 4,343 |
|
|
| 4,162 |
|
|
|
| 4,430 |
|
|
| 4,343 |
| |
Total |
| $ | 5,660 |
|
| $ | 5,613 |
|
|
|
| $ | 6,189 |
|
| $ | 5,660 |
|
(1) | Revenue from the Central Banks, consisting of a consortium of central banks around the world, is classified as international revenue. Reporting revenue by country for this customer is not practicable. |
Major Customers
The following customers accounted for 10% or more of revenue:
| Three |
|
| Three |
|
|
| |||
|
| Months |
|
| Months |
|
|
| ||
|
| Ended |
|
| Ended |
|
|
| ||
|
| March 31, |
|
| March 31, |
|
|
| ||
|
| 2019 |
|
| 2018 |
|
|
| ||
Central Banks |
|
| 68 | % |
|
| 67 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three |
|
| Three |
| ||
|
| Months |
|
| Months |
| ||
|
| Ended |
|
| Ended |
| ||
|
| March 31, |
|
| March 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Central Banks |
|
| 64 | % |
|
| 68 | % |
Walmart |
|
| 12 | % |
| * |
|
* Less than 10%
Long-Lived Assets by Geographical Area
The Company’s long-lived assets are all domiciled in the U.S.
5. Stock-Based Compensation
Stock-based compensation includes expense charges for all stock-based awards to employees and directors. These awards include stock option grants and restricted stock awards.
Stock-based compensation expense related to internal labor is capitalized to software and patent costs based on direct labor hours charged to capitalized software and patent costs.
Determining Fair Value
Stock Options
Valuation and Amortization Method. The Company estimates the fair value of stock options on the date of grant (measurement date) using the Black-Scholes option valuation model. The Company amortizes the fair value of allstock option awards on a straight-line basis over the requisite service periods, which are generallyvesting period of the vesting periods.award.
Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms and vesting schedules of the awards. Stock options granted generally vest over three years and have contractual terms of ten years.
Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock based on historical prices over the most recent period commensurate with the expected life of the award.
Risk-Free Interest Rate. The Company determines the risk-free interest rate using current U.S. treasury yields for bonds with a maturity commensurate with the expected life of the award.
Expected Dividend Yield. The expected dividend yield is derived by the Company’s expected annual dividend rate over the expected term divided by the fair value of the Company’s common stock at the grant date.
There were no stock options granted during the three months ended March 31, 20192020 and 2018.2019.
Restricted Stock
The fair value of restricted stock awarded is based on the fair market value of the Company’s common stock on the date of the grant (measurement date) and is recognized over the vesting period of the award using the straight-line method. Restricted stock awards granted generally vest over three to four years for employee grants and one to three years for director grants.
Stock-Based Compensation
| Three |
|
| Three |
|
| Three |
|
| Three |
| |||||
|
| Months |
|
| Months |
|
| Months |
|
| Months |
| ||||
|
| Ended |
|
| Ended |
|
| Ended |
|
| Ended |
| ||||
|
| March 31, |
|
| March 31, |
|
| March 31, |
|
| March 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
| $ | 182 |
|
| $ | 155 |
|
| $ | 190 |
|
| $ | 182 |
|
Sales and marketing |
|
| 519 |
|
|
| 345 |
|
|
| 479 |
|
|
| 519 |
|
Research, development and engineering |
|
| 354 |
|
|
| 298 |
|
|
| 399 |
|
|
| 354 |
|
General and administrative |
|
| 912 |
|
|
| 801 |
|
|
| 1,127 |
|
|
| 982 |
|
Intellectual property |
|
| 70 |
|
|
| 72 |
| ||||||||
Stock-based compensation expense |
|
| 2,037 |
|
|
| 1,671 |
|
|
| 2,195 |
|
|
| 2,037 |
|
Capitalized to software and patent costs |
|
| 41 |
|
|
| 44 |
|
|
| 35 |
|
|
| 41 |
|
Total stock-based compensation |
| $ | 2,078 |
|
| $ | 1,715 |
|
| $ | 2,230 |
|
| $ | 2,078 |
|
The following table sets forth total unrecognized compensation cost related to non-vested stock-based awards granted under all equity compensation plans:
| As of |
|
| As of |
| |||
|
| March 31, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Total unrecognized compensation costs |
| $ | 17,895 |
|
| $ | 14,055 |
|
|
| As of |
|
| As of |
| ||
|
| March 31, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Total unrecognized compensation costs |
| $ | 17,641 |
|
| $ | 13,535 |
|
Total unrecognized compensation costs will be adjusted for any future forfeitures if and when they occur.
The Company expects to recognize the total unrecognized compensation costs as of March 31, 20192020, for stock options and restricted stock over weighted average periods through March 31, 20232024, as follows:
As of March 31, 2019,2020, under all of the Company’s stock-based compensation plans, equity awards to purchase an additional 1,3741,098 shares were authorized for future grants under the plans. The Company issues new shares upon option exercises.
The Company issues new shares upon option exercises.
The following table reconciles the outstanding balance of stock options:
|
|
|
|
| Weighted |
|
| Weighted |
|
|
|
|
| |||
|
|
|
|
|
| Average |
|
| Average |
|
| Aggregate |
| |||
|
|
|
|
|
| Exercise |
|
| Grant Date |
|
| Intrinsic |
| |||
Three months ended March 31, 2019: |
| Options |
|
| Price |
|
| Fair Value |
|
| Value |
| ||||
Outstanding at December 31, 2018 |
|
| 513 |
|
| $ | 28.52 |
|
| $ | 13.10 |
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
Exercised |
|
| (10 | ) |
|
| 9.91 |
|
|
| 5.13 |
|
|
|
|
|
Forfeited or expired |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
Outstanding at March 31, 2019 |
|
| 503 |
|
| $ | 28.89 |
|
| $ | 13.26 |
|
| $ | 1,251 |
|
Exercisable at March 31, 2019 |
|
| 320 |
|
| $ | 28.22 |
|
|
|
|
|
| $ | 1,010 |
|
Unvested at March 31, 2019 |
|
| 183 |
|
| $ | 30.07 |
|
|
|
|
|
| $ | 241 |
|
|
|
|
|
|
| Weighted |
|
| Weighted |
|
|
|
|
| ||
|
|
|
|
|
| Average |
|
| Average |
|
| Aggregate |
| |||
|
|
|
|
|
| Exercise |
|
| Grant Date |
|
| Intrinsic |
| |||
Three months ended March 31, 2020: |
| Options |
|
| Price |
|
| Fair Value |
|
| Value |
| ||||
Outstanding at December 31, 2019 |
|
| 558 |
|
| $ | 31.22 |
|
| $ | 14.03 |
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
Exercised |
|
| (8 | ) |
|
| 18.01 |
|
|
| 8.85 |
|
|
|
|
|
Forfeited or expired |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
Outstanding at March 31, 2020 |
|
| 550 |
|
| $ | 31.40 |
|
| $ | 14.10 |
|
| $ | — |
|
Exercisable at March 31, 2020 |
|
| 383 |
|
| $ | 29.95 |
|
|
|
|
|
| $ | — |
|
Unvested at March 31, 2020 |
|
| 167 |
|
| $ | 34.73 |
|
|
|
|
|
| $ | — |
|
The aggregate intrinsic value is based on the closing price of $31.38$13.05 per share of Digimarc common stock on March 31, 2019,2020, which would have been received by the optionees had all of the options with exercise prices less than $31.38$13.05 per share been exercised on that date.
Restricted Stock Activity
The following table reconciles the unvested balance of restricted stock:
|
|
|
|
| Weighted |
|
|
|
|
|
| Weighted |
| |||
|
|
|
|
|
| Average |
|
|
|
|
|
| Average |
| ||
|
| Number of |
|
| Grant Date |
|
| Number of |
|
| Grant Date |
| ||||
Three months ended March 31, 2019: |
| Shares |
|
| Fair Value |
| ||||||||||
Unvested balance, December 31, 2018 |
|
| 426 |
|
| $ | 28.85 |
| ||||||||
Three months ended March 31, 2020: |
| Shares |
|
| Fair Value |
| ||||||||||
Unvested balance, December 31, 2019 |
|
| 435 |
|
| $ | 27.05 |
| ||||||||
Granted |
|
| 255 |
|
| $ | 23.28 |
|
|
| 186 |
|
| $ | 34.05 |
|
Vested |
|
| (52 | ) |
| $ | 28.90 |
|
|
| (55 | ) |
| $ | 27.50 |
|
Forfeited |
|
| (1 | ) |
| $ | 27.71 |
|
|
| — |
|
| $ | — |
|
Unvested balance, March 31, 2019 |
|
| 628 |
|
| $ | 26.59 |
| ||||||||
Unvested balance, March 31, 2020 |
|
| 566 |
|
| $ | 29.31 |
|
The following table indicates the fair value of all restricted stock awards that vested:
|
| Three |
|
| Three |
| ||
|
| Months |
|
| Months |
| ||
|
| Ended |
|
| Ended |
| ||
|
| March 31, |
|
| March 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Fair value of restricted stock awards vested |
| $ | 1,240 |
|
| $ | 1,256 |
|
|
| Three |
|
| Three |
| ||
|
| Months |
|
| Months |
| ||
|
| Ended |
|
| Ended |
| ||
|
| March 31, |
|
| March 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Fair value of restricted stock awards vested |
| $ | 1,811 |
|
| $ | 1,240 |
|
In May 2019, the Company entered into an Equity Distribution Agreement, whereby the Company may sell from time to time through Wells Fargo Securities, LLC, as its sales agent, the Company’s common stock having an aggregate offering price of up to $30,000. For the three months ended March 31, 2020, the Company sold 28 shares at an average price of $21.92 under this Equity Distribution Agreement totaling $611 of cash proceeds, less $14 of commissions and $23 of stock issuance costs, for net cash proceeds of $574.
67. Earnings Per Common Share
The Company calculates basic and diluted earnings per common share in accordance with ASC 260 “Earnings Per Share,” using the two-class method because the Company’s unvested restricted stock is a participating security since these awards contain non-forfeitable rights to receive dividends. Under the two-class method, earnings are allocated to each class of common stock and participating security as if all of the earnings for the period had been distributed.
Basic earnings per common share excludes dilution and is calculated by dividing earnings to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing earnings to common shares by the weighted-average number of common shares, as adjusted for the potentially dilutive effect of stock options. The dilutive effect of stock options is determined using the treasury stock method.
The following table reconciles earnings (loss) per common share:
| Three |
|
| Three |
| |||
|
| Months |
|
| Months |
| ||
|
| Ended |
|
| Ended |
| ||
|
| March 31, |
|
| March 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Basic Earnings (Loss) per Common Share: |
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss |
| $ | (8,463 | ) |
| $ | (8,112 | ) |
Distributed earnings to common shares |
|
| — |
|
|
| — |
|
Distributed earnings to participating securities |
|
| — |
|
|
| — |
|
Total distributed earnings |
|
| — |
|
|
| — |
|
Undistributed loss allocable to common shares |
|
| (8,463 | ) |
|
| (8,112 | ) |
Undistributed earnings allocable to participating securities |
|
| — |
|
|
| — |
|
Total undistributed loss |
|
| (8,463 | ) |
|
| (8,112 | ) |
Loss to common shares — basic |
| $ | (8,463 | ) |
| $ | (8,112 | ) |
Denominator |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic |
|
| 11,487 |
|
|
| 11,266 |
|
Basic earnings (loss) per common share |
| $ | (0.74 | ) |
| $ | (0.72 | ) |
|
| Three |
|
| Three |
| ||
|
| Months |
|
| Months |
| ||
|
| Ended |
|
| Ended |
| ||
|
| March 31, |
|
| March 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Basic Earnings (Loss) per Common Share: |
|
|
|
|
|
|
|
|
Loss to common shares — basic |
| $ | (8,908 | ) |
| $ | (8,463 | ) |
Weighted average common shares outstanding — basic |
|
| 12,037 |
|
|
| 11,487 |
|
Basic earnings (loss) per common share |
| $ | (0.74 | ) |
| $ | (0.74 | ) |
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Common Share: |
|
|
|
|
|
|
|
|
Loss to common shares — diluted |
| $ | (8,908 | ) |
| $ | (8,463 | ) |
Weighted average common shares outstanding — diluted |
|
| 12,037 |
|
|
| 11,487 |
|
Diluted earnings (loss) per common share |
| $ | (0.74 | ) |
| $ | (0.74 | ) |
| Three |
|
| Three |
| |||
|
| Months |
|
| Months |
| ||
|
| Ended |
|
| Ended |
| ||
|
| March 31, |
|
| March 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Diluted Earnings (Loss) per Common Share: |
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Loss to common shares — basic |
| $ | (8,463 | ) |
| $ | (8,112 | ) |
Undistributed earnings allocated to participating securities |
|
| — |
|
|
| — |
|
Undistributed earnings reallocated to participating securities |
|
| — |
|
|
| — |
|
Loss to common shares — diluted |
| $ | (8,463 | ) |
| $ | (8,112 | ) |
Denominator |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic |
|
| 11,487 |
|
|
| 11,266 |
|
Dilutive effect of stock options |
|
| — |
|
|
| — |
|
Weighted average common shares outstanding — diluted |
|
| 11,487 |
|
|
| 11,266 |
|
Diluted earnings (loss) per common share |
| $ | (0.74 | ) |
| $ | (0.72 | ) |
There were 475 and 0
The following table indicates the common stock equivalents related to stock options that were anti-dilutive and excluded from diluted earnings per common share calculations for the three months ended March 31, 2019 and 2018, respectively, because their exercise prices were higher than the average market price of the underlying common stock for the periods.
There were no common stock equivalents related to stock options that were anti-dilutive and excluded from diluted earnings per common share calculations for each of the three months ended March 31, 2019 and 2018, because the Company incurred a net loss for the periods.calculations:
|
| Three |
|
| Three |
| ||
|
| Months |
|
| Months |
| ||
|
| Ended |
|
| Ended |
| ||
|
| March 31, |
|
| March 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Anti-dilutive shares due to: |
|
|
|
|
|
|
|
|
Exercise prices higher than the average market price |
|
| 550 |
|
|
| 475 |
|
Net loss |
|
| — |
|
|
| — |
|
7
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount.
|
| March 31, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Trade accounts receivable |
| $ | 3,742 |
|
| $ | 3,903 |
|
| $ | 3,984 |
|
| $ | 4,036 |
|
Allowance for doubtful accounts |
|
| (15 | ) |
|
| (15 | ) |
|
| (25 | ) |
|
| (15 | ) |
Trade accounts receivable, net |
| $ | 3,727 |
|
| $ | 3,888 |
|
| $ | 3,959 |
|
| $ | 4,021 |
|
Unpaid deferred revenue included in trade accounts receivable |
| $ | 746 |
|
| $ | 2,030 |
|
| $ | 909 |
|
| $ | 2,015 |
|
Allowance for Doubtful Accounts
The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing trade accounts receivable. The Company determines the allowance based on historical write-off experience and current information. The Company reviews its allowance for doubtful accounts each reporting period. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Unpaid Deferred Revenue
The unpaid deferred revenue that is included in trade accounts receivable is billed in accordance with the provisions of the contracts with the Company’s customers. Unpaid deferred revenue from the Company’s cash-basis customers is not included in trade accounts receivable nor deferred revenue.
Major Customers
The following customers accounted for 10% or more of trade accounts receivable, net:
|
| March 31, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Central Banks |
|
| 62 | % |
|
| 48 | % |
Customer A |
|
| 10 | % |
| * |
|
|
| March 31, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Central Banks |
|
| 66 | % |
|
| 69 | % |
__________________
* Less than 10%
89. Property and Equipment
Property and equipment are stated at cost. Repairs and maintenance are charged to expense when incurred.
Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, generally two to ten years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the lease term.
|
| March 31, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| |||||
Office furniture and fixtures |
| $ | 1,636 |
|
| $ | 1,626 |
|
| $ | 1,650 |
|
| $ | 1,650 |
|
Software |
|
| 3,833 |
|
|
| 3,686 |
|
|
| 4,530 |
|
|
| 4,379 |
|
Equipment |
|
| 4,868 |
|
|
| 4,814 |
|
|
| 5,133 |
|
|
| 5,041 |
|
Leasehold improvements |
|
| 1,721 |
|
|
| 1,721 |
|
|
| 1,721 |
|
|
| 1,721 |
|
Gross property and equipment |
|
| 12,058 |
|
|
| 11,847 |
|
|
| 13,034 |
|
|
| 12,791 |
|
Less accumulated depreciation and amortization |
|
| (8,250 | ) |
|
| (7,892 | ) |
|
| (9,495 | ) |
|
| (9,141 | ) |
Property and equipment, net |
| $ | 3,808 |
|
| $ | 3,955 |
|
| $ | 3,539 |
|
| $ | 3,650 |
|
910. Intangibles
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment charges were recorded for the three months ended March 31, 20192020 and 2018.2019.
Amortization of capitalized patentPatent costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at the award date, which varies depending on the pendency period of the application, generally approximating 17 years.
Amortization of intangible assets acquired is calculated using the straight-line method over the estimated useful lives of the assets.
|
| Estimated Life |
| March 31, |
|
| December 31, |
|
| Estimated Life |
| March 31, |
|
| December 31, |
| ||||
|
| (years) |
| 2019 |
|
| 2018 |
|
| (years) |
| 2020 |
|
| 2019 |
| ||||
Capitalized patent costs |
| 17-20 |
| $ | 8,892 |
|
| $ | 8,757 |
|
| 17-20 |
| $ | 9,341 |
|
| $ | 9,245 |
|
Intangible assets acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased patents and intellectual property |
| 3-10 |
|
| 250 |
|
|
| 250 |
|
| 3-10 |
|
| 250 |
|
|
| 250 |
|
Existing technology |
| 5 |
|
| 1,560 |
|
|
| 1,560 |
|
| 5 |
|
| 1,560 |
|
|
| 1,560 |
|
Customer relationships |
| 7 |
|
| 290 |
|
|
| 290 |
|
| 7 |
|
| 290 |
|
|
| 290 |
|
Backlog |
| 2 |
|
| 760 |
|
|
| 760 |
|
| 2 |
|
| 760 |
|
|
| 760 |
|
Tradenames |
| 3 |
|
| 290 |
|
|
| 290 |
|
| 3 |
|
| 290 |
|
|
| 290 |
|
Non-solicitation agreements |
| 1 |
|
| 120 |
|
|
| 120 |
|
| 1 |
|
| 120 |
|
|
| 120 |
|
Gross intangible assets |
|
|
|
| 12,162 |
|
|
| 12,027 |
|
|
|
|
| 12,611 |
|
|
| 12,515 |
|
Accumulated amortization |
|
|
|
| (5,513 | ) |
|
| (5,378 | ) |
|
|
|
| (5,982 | ) |
|
| (5,845 | ) |
Intangibles, net |
|
|
| $ | 6,649 |
|
| $ | 6,649 |
|
|
|
| $ | 6,629 |
|
| $ | 6,670 |
|
1011. Leases
WeThe Company adopted ASC 842, “Leases,” as amended, as of January 1, 2019, using the retrospective approach. The retrospective approach provides a method for recording existing leases at adoption and recording the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. In addition, wethe Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed usthe Company to carry forward the historical lease classification.classification, its assessment of whether a contract was or contains a lease, and its initial direct costs for any leases that existed prior to January 1, 2019. In addition, the Company elected the short-term lease exception as a practical expedient and elected to combine lease and non-lease components.
The Company leases its corporate office spaces in Beaverton, Oregon and San Mateo, California.Oregon. In July 2015, the Company entered into an amendment with the landlord of its corporate offices in Beaverton, Oregonoffice to extend the lease term through March 2024, with remaining rent payments as of March 31, 20192020, totaling $4,054, payable in monthly installments. In February 2015, the Company entered into a new facilities lease agreement in San Mateo, California with a lease term through March 2020, with remaining rent payments as of March 31, 2019 totaling $234,$3,291, payable in monthly installments. The Company currently subleases this facility to a third party with ahad leased office space in San Mateo, California, until March 31, 2020, when the lease term through March 2020.expired.
All of the Company’s leases are operating leases. The following table provides additional details of leases presented in the consolidated balance sheets:
|
| March 31, |
|
| March 31, |
|
| December 31, |
| |||
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||
Right of use assets |
| $ | 2,598 |
|
| $ | 2,146 |
|
| $ | 2,263 |
|
Lease liabilities, current |
| $ | 693 |
|
| $ | 624 |
|
| $ | 663 |
|
Lease liabilities, long-term |
| $ | 2,900 |
|
| $ | 2,276 |
|
| $ | 2,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining life |
| 4.7 years |
|
| 4.0 years |
|
| 4.1 years |
| |||
Weighted-average discount rate |
|
| 8.20 | % |
|
| 8.20 | % |
|
| 8.20 | % |
The carrying value of the right of use assets is included in “Other assets” and the current and long-term lease liabilities are included in “Accounts payable and other accrued liabilities” and “Lease liability and other long-term liabilities,” respectively, in the consolidated balance sheets.
Operating lease expense is included in cost of revenue and operating expenses in the consolidated statementstatements of operations and in cash flows from operating activities on the statementconsolidated statements of cash flows. OurThe operating leases include variable lease costs which are not material and are included in operating lease costs. Additional details of ourthe Company’s operating leases are presented in the following table:
|
| Three |
|
| Three |
|
| Three |
| |||
|
| Months |
|
| Months |
|
| Months |
| |||
|
| Ended |
|
| Year Ended |
|
| Ended |
| |||
|
| March 31, |
|
| March 31, |
|
| March 31, |
| |||
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||
Operating lease expense |
| $ | 261 |
|
| $ | 263 |
|
| $ | 261 |
|
Cash paid for operating leases |
| $ | 372 |
|
| $ | 327 |
|
| $ | 372 |
|
The table below reconciles the undiscounted cash payment obligations for the first five years and total of the reminingremaining years for the operating lease liability recorded in the consolidated balance sheet as of March 31, 2019:2020:
|
| Cash |
|
| Cash |
| ||
|
| Payment |
|
| Payment |
| ||
Year ending December 31: |
| Obligations |
|
| Obligations |
| ||
Remaining in 2019 |
| $ | 776 |
| ||||
2020 |
|
| 858 |
| ||||
Remaining in 2020 |
| $ | 631 |
| ||||
2021 |
|
| 804 |
|
|
| 838 |
|
2022 |
|
| 828 |
|
|
| 862 |
|
2023 |
|
| 853 |
|
|
| 867 |
|
2024 |
|
| 218 |
| ||||
Thereafter |
|
| 218 |
|
|
| — |
|
Total lease payments |
|
| 4,337 |
|
|
| 3,416 |
|
Imputed interest |
|
| (744 | ) |
|
| (516 | ) |
Total minimum lease payments |
| $ | 3,593 |
|
| $ | 2,900 |
|
1112. Income Taxes
The provision for income taxes for the three months ended March 31, 20192020 and 20182019 reflects current taxes, deferred taxes, and withholding taxes. The effective tax ratesrate for each of the three months ended March 31, 2020 and 2019 and 2018 werewas 0% and 0%, respectively.. The valuation allowance against net deferred tax assets as of March 31, 20192020, was $44,614,$50,145, an increase of $2,265$2,336 from $42,349$47,809 as of December 31, 2018.2019.
Excess tax benefits of $191$255 and $525$191 were recognized in the provision for income taxes for the three months ended March 31, 20192020 and 2018,2019, respectively, which were offset by $191$255 and $525$191 of valuation allowance, respectively.
1213. Commitments and Contingencies
Certain of the Company’s product license and services agreementscontracts include an indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with ASC 450 “Contingencies.” To date, there have been no claims made under such indemnification provisions.
The Company is subject from time to time to other legal proceedings and claims arising in the ordinary course of business. At this time, the Company 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 flows.
14. Subsequent Events
Loan under the Paycheck Protection Program
On April 16, 2020, the Company entered into a loan with Stearns Bank, N.A. in an aggregate principal amount of $5,032 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The Loan is evidenced by a promissory note (the “Note”) dated April 16, 2020, which is attached as Exhibit 10.1 to this Form 10-Q. The Loan matures two years from the disbursement date and bears interest at a rate of 1.000% per annum, with the first six months of interest deferred. Principal and interest are payable monthly commencing six months after the disbursement date and may be prepaid by the Company at any time prior to maturity with no prepayment penalties.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. The Loan is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the PPP. The Company intends to use a significant majority of the Loan amount for Qualifying Expenses. However, no assurance is provided that the Company will obtain forgiveness of the Loan in whole or in part.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of Digimarc that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Please seeSee the discussion regarding forward-looking statements included in this Quarterly Report on Form 10-Q under the caption “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.”
The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Readers are also urged to carefully review and consider the disclosures made in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and in the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 20182019 filed on February 22, 201927, 2020 (our “2018“2019 Annual Report”), and other reports and filings we have made with the U.S. Securities and Exchange Commission (“SEC”).
Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to “Company,” “Digimarc,” “we,” “our” and “us” refer to Digimarc Corporation.
All dollar amounts are in thousands except per share amounts or unless otherwise noted. The percentages within the tables may not sum to 100% due to rounding.
Digimarc, Digimarc Barcode and Digimarc Discover and Guardian are registered trademarks of Digimarc Corporation.
Overview
Digimarc Corporation, an Oregon corporation incorporated in 2008, enables governments, banks, retailers, consumer brands, and other businesses around the world to automatically and reliably identify and interact with virtually any form of media. We have pioneered the Digimarc Intuitive Computing Platform, (ICP)featuring three core functions for the identification, discovery and verification of digitally enhanced media. Digimarc provides objects with an indelible, imperceptible data carrier: Digimarc Barcode. Data in the carrier uniquely identifies the object. The Digimarc Platform also provides software for relevant devices to “discover” objects (i.e., decode data from that carrier) using Digimarc software, known as Digimarc Discover. Digimarc Verify, a comprehensive setsuite of technologies for identifying, discoveringverification and interacting with digitally-enhanced media. The platform includesquality control tools, assesses signal quality and validates data at critical stages of production when the Digimarc Barcode a proprietary method for imperceptibly enhancing packaging, print, images, thermal labels, audiois applied to an object. Together, these core functions enable organizations, application developers, and other solution providers to build new features, functionality and additional value on the Digimarc Platform.
The Digimarc Platform provides many benefits for connected objects, with data that is detected by enabled devices,including:
Security: An imperceptible and indestructible digital watermark encoded in the object provides a singularly unique identification, whether in a digital image, video or audio file, on paper or cardboard or etched within material substrates such as smart phones, computers, barcode scannersplastic and machine-vision equipment. Digimarc Discover software enables an ecosystem of connected devices to easily identify content or materials and deliver information.
Quality management tools, specifications, education and training resources support ICP and enable a growing ecosystem of alliances and developers to build a variety of applications including solutions that:
Improve the speed of retail checkout;other materials. Among other things, this identification supports strong authentication.
Provide simpleProtection: A unique identifier (“ID”) enables fraud deterrence across many use cases, from preventing “barcode swapping” and intuitive mobile customer engagement experiences in storescounterfeiting of currency, media and at home;goods to copyright detection of digital images and e-publications.
Improve inspection ratesTraceability: The ID can carry serial numbers for easier tracking of individual items or entire lots. This has many uses, from ensuring product legitimacy to preventing product pirating to easily identifying products for recall based on manufacturing lines for quality control processes;source provenance and sales destination.
ProvideSustainability: The ID can contain information specific to packaging content as an aid to broader and more efficient recycling. For example, a microscopic pattern embossed in plastic packaging can identify the materials used and reliable identification of consumer-packaged goods by retail associates in storestheir composition as an aid for inventory managementsorting and restocking;recapture. Similarly, enhanced labels for fresh foods can be used to dynamically adjust pricing and thereby reduce food waste.
QuicklyEngagement: Consumers can directly interact with enhanced objects simply by scanning the item with their smartphones. Brands can share additional product information online including recipes, instructions, information about ingredients and reliably identifysources, how-to videos, coupons and effectively manage music, movies, television programming, digital images, e-publications, documents and other printed materials, especially in light of non-linear distribution over the Internet;more.
Deter counterfeiting of money, mediaEfficiency: Connected items, reliably scanned by machines and goods,mobile devices, enhance supply chain efficiencies, from parts matching in manufacturing to faster and piracy of e-publications, moviesmore accurate inventory scanning and music;faster and easier front-of-store checkout experiences.
Support new digital media distribution models and methods to monetize media content;
Provide consumers with more choice and access to media content when, where and how they want it;
Enhance imagery and video by associating metadata or authenticating media content for government and commercial uses; and
Better secure identity documents to enhance national security and combat identity theft and fraud.
Our inventions allow our business partners and customers to provide persistent digital identities for virtually any media content that is digitally processed at some point during its lifecycle. Our technology can be applied to images, video, and audio to supply a wide range of consumer engagement, media management and security solutions across multiple consumer and government industry
sectors. Over the years our enabling software and business processes, and associated intellectual property portfolio, have grown to encompass many related technologies.
We provide our solutions directly and through our business partners. Our inventions provide a powerful element of document security, giving rise to a long-term relationship with a consortium of central banks (the “Central Banks”), and many leading companies in the information technology industry. We and our business partners have successfully propagated the use of our technology in music, movies, television broadcasts, digital images, e-publications and printed materials. Digimarc Barcodes have been used in these applications to improve media rights and asset management, reduce piracy and counterfeiting losses, improve marketing programs, permit more efficient and effective distribution of valuable media content and enhance consumer entertainment and commercial experiences.
Digimarc Barcodes can be used to enhance all forms of media and are generally imperceptible to human senses, but quickly detected by computers, networks or other digital devices like smartphones and tablets. Unlike traditional barcodes and tags, our solution does not require content owners to give up valuable visual space on their media content; nor does it affect the overall layout or aesthetics of their media content. Digimarc Barcodes are generally imperceptible in normal use and do all that visible barcodes do, but perform better. Our Digimarc Discover platform delivers a range of rich media experiences to its readers on their smartphones or tablets across multiple media formats, including print, audio video and packaging.video. Unique to the Digimarc Discover platform is its seamless multi-modal use of various content identification technologies as needed, including Digimarc Barcode when present.
Banknote counterfeit deterrence was the first commercially successful large scalelarge-scale use of our technologies. Innovations based on our existing digital watermarking technology and experience have been leveraged to create new products to deter counterfeiting and tampering of driver licenses and other government-issued secure credentials. In parallel, our business partners, under patent or technology licenses from us, are delivering digital watermarking solutions to track and monitor the distribution of music, images, television and movies to consumers.
In January 2014, we introducedApril 2019, Digimarc Barcodespledged a commitment to improve the reliability and efficiency of plastic waste sorting. Most notably, Digimarc signed the Ellen MacArthur Foundation’s New Plastics Economy Global Commitment, which focuses on building a Circular Economy for useplastics. Digimarc participated in consumer product packaging. Thesethe Ellen MacArthur Foundation’s Pioneer Project HolyGrail, where Digimarc Barcodes can contain the sameBarcode was shown in testing to overcome many current limitations in plastic sorting technology. Digimarc Barcode proved effective in technical trials at more accurately identifying recyclable plastics, which could prevent their unnecessary disposal into landfills or even more information found in traditional universal product codes (“UPC”). The UPC information is nearly imperceptible and repeated multiple times over the entire package surface making checkout faster and easier for both customers and cashiers. We partnered with Datalogic, a global leader in automatic data capture and industrial automation markets and producerincinerators.
In September 2019, Digimarc announced expanded capabilities of barcode readers, in introducing the Digimarc Barcode to the consumer product packaging market. Since then, additional scanner vendors and other alliance partners have announced support for Digimarc Barcode. Digimarc Barcodes can also connect mobile-enabled consumers directly from packaging to engaging mobile experiences such as additional product information, special offers, recommendations, reviews, social networks and more.
In January 2016, Digimarc and GS1 US, the U.S. operation of the organization that maintains the global standards for barcodes, announced a broad collaboration to help the industries served by GS1 to make effective use of Digimarc Barcode. GS1 US educates, trains and provides access to services to their 300,000 member businesses. Among other things, Digimarc and GS1 US are working to improve product identification for retailers and consumersPlatform with brand-certified, accurate product information via Digimarc Barcodes. In September 2016, Digimarc announced a similar collaboration with GS1 Germany.
In January 2018, we introducedseveral leading brands employing Digimarc Barcode for usepackaging and Digimarc Discover software in thermal labels for fresh food products. These Digimarc Barcodes contain GS1 Application Identifiers for fresh foods, allowing retailershigh-speed inspection systems to dynamically adjust pricing on soon-to-be-expired fresh foods or sell items at a discount, instead of discarding them. Retail thermal labels withcatch mislabeling problems before products ship to consumers. Digimarc Barcode scan even when ripped, creased, smudged or damaged, making checkout faster and easier for both customers and cashiers. We have partnered with multiple industry leading retail scale label manufacturers to introduce thermal labels enabled with Digimarc Barcode toprovides data redundancy on product packaging without marring the retail industry. Thermal labels enabled with Digimarc Barcode can also provide consumers an engaging mobile experience similar toappearance of the design. Consumer brands that use Digimarc Barcode for consumer product packaging.packaging, combined with high-speed inspection system scanning equipment from Cognex or Datalogic, can improve matching of front and back labels, cartons and lids, and other multi-component packages.
In April 2018,November 2019, Digimarc announced a new 15-year partnership with Microsoft. The partnership includesdelivered scan technology to Walmart’s Toy Catalog, making it easier than ever for customers to buy gifts or create wish lists for family and friends using the integration of Digimarc scanning software into Windows, as part of the Windows 10 update. The two companies have a history of working together to improve retailer operational efficiency and increase consumer engagement with products.
In May 2018, Digimarc announced its support of SmartLabel and the availability of Digimarc Barcode scanning capabilities within the SmartLabelWalmart app. The SmartLabel programScan & Shop powered by Digimarc was developed by the Grocery Manufacturers Association and the Food Marketing Institute to give consumers a way to digitally access more detailed product information than could fit on a package. Most recently, Digimarc Barcode has been adopted by theprominently promoted in 35 million printed catalogs that were direct mailed as well as available in Walmart’s nearly 4,800 U.S. Department of Agricultureas an approved digital disclosure method for products and packaging containing bioengineered food, commonly referred to as “GMOs.” The National Bioengineered Food Disclosure Standard was published in December 2018 after a review and comment period lasting more than two years. The regulations include provisions for label disclosure of food products containing genetically modified organisms, which went into effect on February 19, 2019.Consumer goods manufacturers and private label retailers can use Digimarc Barcode as a one-source solution to satisfy both their voluntary SmartLabel program participation and mandatory bioengineering disclosures.
In October 2018, Digimarc previewed Signal Rich™ Art at the Adobe Max Creativity Conference. The Signal Rich™ Art tools under development employ breakthrough advances in imaging science, machine vision and artificial intelligence to create artwork where machine-readable codes become native, inherent in, and inseparable from the design.stores.
Our intellectual property contains many innovations in digital watermarking, content recognition (sometimes referred to as “fingerprinting”), digital rights management and related fields. To protect our inventions, we have implemented an extensive intellectual property protection program that relies on a combination of patent, copyright, trademark and trade secret laws, and nondisclosure agreements and other contracts. As a result, we believe we have one of the world’s most extensive patent portfolios in digital watermarking and related fields, with over 1,100 U.S. and foreign patents granted and applications pending as of March 31, 2019.2020. We continue to develop and broaden our portfolio in the fields of mediaautomatic identification and management technology and related applications and systems. We devote significant resources to developing and protecting our inventions and continuously seek to identify and evaluate potential licensees for our patents. The patents in our portfolio each have a life of approximately 20 years from the effective filing date of the patent, and up to 17 years after the patent has been granted.
The market for patent licensing has become more challenging in recent years. As a result, we have shifted our focus from direct monetization through enforcement and licensing to facilitating progress toward the realization of our vision to enrich everyday living via pervasive, intuitive computing by:
encouraging large scale adoption of our technologies by industry leaders;
increasing the scale and rate of growth of our products and services business; and
laying a foundation for continuing innovation.
For a discussion of activities and costs related to our research and development, see “Results of Operations – Summary – Research, development and engineering.”
COVID-19 Pandemic
The coronavirus disease 2019 (COVID-19) pandemic may pose significant risks to our business. The ongoing public health actions attempting to reduce the spread of COVID-19 are creating and may continue to create significant disruptions to consumer demand, customer and supplier relationships, sales and support processes, and general economic conditions. Accordingly, Company management is evaluating the Company’s business operations, communicating with and monitoring the actions of our customers and partners, and reviewing our near-term financial performance as we manage the Company through the uncertainty related to COVID-19 pandemic. We expect that some of our projects with retail customers and partners may be delayed as a result of the COVID-19 pandemic. Delays in these projects could affect our ability to fund our business through near-term revenue growth. To help ensure adequate liquidity during this period and in light of uncertainties posed by the COVID-19 pandemic, the Company applied for and has received a loan under the U.S. government Paycheck Protection Program.
Critical Accounting Policies and Estimates
Detailed information about our critical accounting policies and estimates is set forth in Part III, Item 15 of our 20182019 Annual Report (“Exhibits and Financial Statement Schedules”), in “Note 1: Description of Business and Summary of Significant Accounting Policies,” which is incorporated by reference into this Quarterly Report on Form 10-Q.
Effective January 1, 2019, we adopted Accounting Standards Codification (“ASC”) 842, “Leases.” Additional information is included in “Note 10: Leases” of our Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
The following table presents statements of operations data for the periods indicated as a percentage of total revenue. Unless otherwise indicated, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to the three monthsmonth period ended March 31, 20192020, and all changes discussed with respect to such periods reflect changes compared to the three monthsmonth period ended March 31, 2018.2019.
| Three |
|
| Three |
|
| Three |
|
| Three |
| |||||
|
| Months |
|
| Months |
|
| Months |
|
| Months |
| ||||
|
| Ended |
|
| Ended |
|
| Ended |
|
| Ended |
| ||||
|
| March 31, |
|
| March 31, |
|
| March 31, |
|
| March 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
|
| Percentages are percent of total revenue |
|
| Percentages are percent of total revenue |
| ||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service |
|
| 64 | % |
|
| 62 | % |
|
| 60 | % |
|
| 67 | % |
Subscription |
|
| 28 |
|
|
| 28 |
|
|
| 40 |
|
|
| 33 |
|
License |
|
| 8 |
|
|
| 9 |
| ||||||||
Total revenue |
|
| 100 |
|
|
| 100 |
|
|
| 100 |
|
|
| 100 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service |
|
| 27 |
|
|
| 28 |
|
|
| 27 |
|
|
| 29 |
|
Subscription |
|
| 8 |
|
|
| 9 |
|
|
| 8 |
|
|
| 9 |
|
License |
|
| 3 |
|
|
| 2 |
| ||||||||
Total cost of revenue |
|
| 38 |
|
|
| 39 |
|
|
| 36 |
|
|
| 38 |
|
Gross profit |
|
| 62 |
|
|
| 61 |
|
|
| 64 |
|
|
| 62 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
| 87 |
|
|
| 87 |
|
|
| 85 |
|
|
| 87 |
|
Research, development and engineering |
|
| 71 |
|
|
| 70 |
|
|
| 72 |
|
|
| 71 |
|
General and administrative |
|
| 50 |
|
|
| 47 |
|
|
| 54 |
|
|
| 57 |
|
Intellectual property |
|
| 6 |
|
|
| 6 |
| ||||||||
Total operating expenses |
|
| 216 |
|
|
| 210 |
|
|
| 211 |
|
|
| 216 |
|
Operating loss |
|
| (153 | ) |
|
| (149 | ) |
|
| (146 | ) |
|
| (153 | ) |
Other income, net |
|
| 4 |
|
|
| 4 |
|
|
| 2 |
|
|
| 4 |
|
Loss before income taxes |
|
| (149 | ) |
|
| (144 | ) |
|
| (144 | ) |
|
| (149 | ) |
Provision for income taxes |
|
| (0 | ) |
|
| (0 | ) | ||||||||
Benefit (provision) for income taxes |
|
| 0 |
|
|
| (0 | ) | ||||||||
Net loss |
|
| (150 | %) |
|
| (145 | %) |
|
| (144 | %) |
|
| (150 | %) |
Summary
Total revenue for the three month period ended March 31, 20192020 increased 1%9% to $5.7$6.2 million, compared to the corresponding three month period ended March 31, 2018,2019, primarily as a result of higher service revenue.subscription revenue from Retail customers.
Total operating expenses for the three month period ended March 31, 20192020 increased 4%7% to $12.2$13.0 million, compared to the corresponding three month period ended March 31, 2018,2019, primarily due to higher headcount and routine annual compensation adjustments for our employees.
| Three |
|
| Three |
|
|
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|
|
|
|
|
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| Three |
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| Three |
|
|
|
|
|
|
|
|
| |||||
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
| ||||
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
| ||||||||
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
| ||||||||
|
| 2019 |
|
| 2018 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2020 |
|
| 2019 |
|
| (Decrease) |
|
| (Decrease) |
| ||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service |
| $ | 3,635 |
|
| $ | 3,507 |
|
| $ | 128 |
|
|
| 4 | % |
| $ | 3,738 |
|
| $ | 3,814 |
|
| $ | (76 | ) |
|
| (2 | )% |
Subscription |
|
| 1,563 |
|
|
| 1,578 |
|
|
| (15 | ) |
|
| (1 | )% |
|
| 2,451 |
|
|
| 1,846 |
|
|
| 605 |
|
|
| 33 | % |
License |
|
| 462 |
|
|
| 528 |
|
|
| (66 | ) |
|
| (13 | )% | ||||||||||||||||
Total |
| $ | 5,660 |
|
| $ | 5,613 |
|
| $ | 47 |
|
|
| 1 | % |
| $ | 6,189 |
|
| $ | 5,660 |
|
| $ | 529 |
|
|
| 9 | % |
Revenue (as % of total revenue): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service |
|
| 64 | % |
|
| 62 | % |
|
|
|
|
|
|
|
|
|
| 60 | % |
|
| 67 | % |
|
|
|
|
|
|
|
|
Subscription |
|
| 28 | % |
|
| 28 | % |
|
|
|
|
|
|
|
|
|
| 40 | % |
|
| 33 | % |
|
|
|
|
|
|
|
|
License |
|
| 8 | % |
|
| 9 | % |
|
|
|
|
|
|
|
| ||||||||||||||||
Total |
|
| 100 | % |
|
| 100 | % |
|
|
|
|
|
|
|
|
|
| 100 | % |
|
| 100 | % |
|
|
|
|
|
|
|
|
Service. Service revenue consists primarily of revenue derivedearned from the saleperformance of software development and consulting services. The majority of service revenue arrangementscontracts are structured as time and materials consulting agreements. Most of our service revenueRevenue for services is derivedrecognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided. Service contracts can range from contractsdays to several years in length. Our long-term contract with the Central Banks, and government agency contractors. The agreements range from several months to several years in length, and our longer term contracts arewhich accounts for the majority of service revenue, is subject to work plans that are reviewed and agreed upon at least annually. These contracts generally providequarterly. The contract provides for predetermined billing hours worked at predetermined rates, and, to a lesser extent, reimbursement for third party costs and services. Increases or decreases in the services provided under these contractswhich are generally subject to both volume and price changes. The volume of work is generally negotiated at leastadjusted annually and can be modified as the customer’s needs change. We also have provisions in our longer term contracts that allow for specific rate price increases on an annual basis to account for cost of living variables. Contracts with government agency contractors are generally shorter term in nature, less linear in billingsvariables, and less predictable than our longer term contracts becauseprovides for the contracts with government agency contractors are subjectreimbursement of third party costs incurred to government budgets and funding.support the work plans.
The increasedecrease in service revenue for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, was primarily due to the timing of program work with the Central Banks.insignificant.
Subscription. Subscription revenue includesconsists primarily of revenue derivedearned from the sale of Digimarc Discover, Digimarc Barcode and Digimarc Guardiansoftware products and services, and is generallyto a lesser extent the licensing of intellectual property. The majority of subscription contracts are recurring, in nature, paid in advance and recognized over the term of the subscription.subscription, which is typically one to three years.
The decreaseincrease in subscription revenue for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, was due to lower Digimarc Guardian revenue, offsetgrowth in software subscriptions to Retail customers.
Revenue by higher Digimarc Discover and Digimarc Barcode revenue.
License. License revenue includes revenue from licensing our intellectual property where we receive license fees and/or royalties.
The decrease in license revenue for the three month period ended March 31, 2019, compared to the corresponding three month period ended March 31, 2018, was primarily due to lower reported royalties from licensees.Geography
| Three |
|
| Three |
|
|
|
|
|
|
|
|
|
| Three |
|
| Three |
|
|
|
|
|
|
|
|
| |||||
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
| ||||
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
| ||||||||
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
| ||||||||
|
| 2019 |
|
| 2018 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2020 |
|
| 2019 |
|
| (Decrease) |
|
| (Decrease) |
| ||||||||
Revenue by geography: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 1,317 |
|
| $ | 1,451 |
|
| $ | (134 | ) |
|
| (9 | )% |
| $ | 1,759 |
|
| $ | 1,317 |
|
| $ | 442 |
|
|
| 34 | % |
International |
|
| 4,343 |
|
|
| 4,162 |
|
|
| 181 |
|
|
| 4 | % |
|
| 4,430 |
|
|
| 4,343 |
|
|
| 87 |
|
|
| 2 | % |
Total |
| $ | 5,660 |
|
| $ | 5,613 |
|
| $ | 47 |
|
|
| 1 | % |
| $ | 6,189 |
|
| $ | 5,660 |
|
| $ | 529 |
|
|
| 9 | % |
Revenue (as % of total revenue): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
| 23 | % |
|
| 26 | % |
|
|
|
|
|
|
|
|
|
| 28 | % |
|
| 23 | % |
|
|
|
|
|
|
|
|
International |
|
| 77 | % |
|
| 74 | % |
|
|
|
|
|
|
|
|
|
| 72 | % |
|
| 77 | % |
|
|
|
|
|
|
|
|
Total |
|
| 100 | % |
|
| 100 | % |
|
|
|
|
|
|
|
|
|
| 100 | % |
|
| 100 | % |
|
|
|
|
|
|
|
|
The decreaseincrease in domestic revenue for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, was primarily due to higher subscription revenue, partially offset by lower Digimarc Guardian and licenseservice revenue, from our domestic customers.
The increase in international revenue for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, was primarily due to the timing of program work with the Central Banks.insignificant.
Service. Cost of service revenue primarily includes costs that are allocated from research, development and engineering, sales and marketing and intellectual property that relate directly to performing services under our customer contracts and direct costs of program delivery. Costs include:includes:
compensation, benefits, incentive compensation in the form of stock-based compensation and related costs of our software developers, quality assurance personnel, design professionals, product managers, business development managers and other personnel where we bill our customers for time and materials costs;
payments to outside contractors that are billed to customers;
charges for equipment directly used by customers;
depreciation for machinery, equipment and software directly used by customers; and
travel costs directly attributable to service andsoftware development contracts; and
charges for infrastructure and centralized costs of facilities and information technology.contracts.
Subscription. Cost of subscription revenue primarily includes:
compensation, benefits, incentive compensation in the form of stock-based compensation and related costs of operations personnel;
cost of outside contractors that provide operational support; andsupport for our subscription products;
Internet service provider connectivity charges and image search data fees to support the services offered to our subscription customers.products; and
License. Cost of license revenue primarily includes:
amortization of capitalized patent costs;costs and
amortization of patent maintenance fees.
| Three |
|
| Three |
|
|
|
|
|
|
|
|
|
| Three |
|
| Three |
|
|
|
|
|
|
|
|
| |||||
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
| ||||
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
| ||||||||
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
| ||||||||
|
| 2019 |
|
| 2018 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2020 |
|
| 2019 |
|
| (Decrease) |
|
| (Decrease) |
| ||||||||
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service |
| $ | 2,104 |
|
| $ | 1,944 |
|
| $ | 160 |
|
|
| 8 | % |
| $ | 2,054 |
|
| $ | 2,169 |
|
| $ | (115 | ) |
|
| (5 | )% |
Subscription |
|
| 1,118 |
|
|
| 1,096 |
|
|
| 22 |
|
|
| 2 | % |
|
| 1,937 |
|
|
| 1,357 |
|
|
| 580 |
|
|
| 43 | % |
License |
|
| 304 |
|
|
| 388 |
|
|
| (84 | ) |
|
| (22 | )% | ||||||||||||||||
Total |
| $ | 3,526 |
|
| $ | 3,428 |
|
| $ | 98 |
|
|
| 3 | % |
| $ | 3,991 |
|
| $ | 3,526 |
|
| $ | 465 |
|
|
| 13 | % |
Gross Profit (as % of related revenue components): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service |
|
| 58 | % |
|
| 55 | % |
|
|
|
|
|
|
|
|
|
| 55 | % |
|
| 57 | % |
|
|
|
|
|
|
|
|
Subscription |
|
| 72 | % |
|
| 69 | % |
|
|
|
|
|
|
|
|
|
| 79 | % |
|
| 74 | % |
|
|
|
|
|
|
|
|
License |
|
| 66 | % |
|
| 73 | % |
|
|
|
|
|
|
|
| ||||||||||||||||
Total |
|
| 62 | % |
|
| 61 | % |
|
|
|
|
|
|
|
|
|
| 64 | % |
|
| 62 | % |
|
|
|
|
|
|
|
|
The increase in total gross profit for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, was primarily due to higher service revenue and lower associated costs.subscription revenue.
The increasedecrease in service gross profit as a percentage of service revenue for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, was primarily due to higher service revenue and lower associatedthe mix of labor versus non-labor costs.
The increase in subscription gross profit as a percentage of subscription revenue for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, was primarily due to lower operational costs.higher subscription revenue.
The decrease in license gross profit as a percentage of license revenue for the three month period ended March 31, 2019, compared to the corresponding three month period ended March 31, 2018, was primarily due to lower license revenue and higher patent amortization cost.
We allocate certain costs of research, development and engineering, sales and marketing, and intellectual property to cost of revenue when they relate directly to our customer contracts. We record all remaining, or “residual,” costs as sales and marketing, research, development and engineering, general and administrative, and intellectual property expenses.
Sales and marketing
| Three |
|
| Three |
|
|
|
|
|
|
|
|
|
| Three |
|
| Three |
|
|
|
|
|
|
|
|
| |||||
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
| ||||
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
| ||||||||
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
| ||||||||
|
| 2019 |
|
| 2018 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2020 |
|
| 2019 |
|
| (Decrease) |
|
| (Decrease) |
| ||||||||
Sales and marketing |
| $ | 4,950 |
|
| $ | 4,887 |
|
| $ | 63 |
|
|
| 1 | % |
| $ | 5,246 |
|
| $ | 4,950 |
|
| $ | 296 |
|
|
| 6 | % |
Sales and marketing (as % of total revenue) |
|
| 87 | % |
|
| 87 | % |
|
|
|
|
|
|
|
|
|
| 85 | % |
|
| 87 | % |
|
|
|
|
|
|
|
|
Sales and marketing expenses consist primarily of:
compensation, benefits, incentive compensation in the form of stock-based compensation and related costs of sales and marketing employees and product managers;
travel and market research costs, and costs associated with marketing programs, such as trade shows, public relations and new product launches;
professional services and outside contractor costs for product and marketing initiatives; and
charges for infrastructure and centralized costs of facilities and information technology.
The increase in sales and marketing expenses for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, was insignificant.primarily due to increased headcount and routine annual compensation adjustments for our employees.
Research, development and engineering
| Three |
|
| Three |
|
|
|
|
|
|
|
|
|
| Three |
|
| Three |
|
|
|
|
|
|
|
|
| |||||
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
| ||||
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
| ||||||||
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
| ||||||||
|
| 2019 |
|
| 2018 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2020 |
|
| 2019 |
|
| (Decrease) |
|
| (Decrease) |
| ||||||||
Research, development and engineering |
| $ | 4,038 |
|
| $ | 3,947 |
|
| $ | 91 |
|
|
| 2 | % |
| $ | 4,433 |
|
| $ | 4,038 |
|
| $ | 395 |
|
|
| 10 | % |
Research, development and engineering (as % of total revenue) |
|
| 71 | % |
|
| 70 | % |
|
|
|
|
|
|
|
|
|
| 72 | % |
|
| 71 | % |
|
|
|
|
|
|
|
|
Research, development and engineering expenses consist primarily of:
compensation, benefits, incentive compensation in the form of stock-based compensation and related costs of software and hardware developers and quality assurance personnel;
charges for infrastructure and centralized costs of facilities and information technology
payments to outside contractors; and
the purchase of materials and services for product development.development; and
charges for infrastructure and centralized costs of facilities and information technology.
The increase in research, development and engineering expenses for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, was insignificant.primarily due to increased headcount and routine annual compensation adjustments for our employees.
| Three |
|
| Three |
|
|
|
|
|
|
|
|
|
| Three |
|
| Three |
|
|
|
|
|
|
|
|
| |||||
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
| ||||
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
| ||||||||
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
| ||||||||
|
| 2019 |
|
| 2018 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2020 |
|
| 2019 |
|
| (Decrease) |
|
| (Decrease) |
| ||||||||
General and administrative |
| $ | 2,852 |
|
| $ | 2,632 |
|
| $ | 220 |
|
|
| 8 | % |
| $ | 3,367 |
|
| $ | 3,210 |
|
| $ | 157 |
|
|
| 5 | % |
General and administrative (as % of total revenue) |
|
| 50 | % |
|
| 47 | % |
|
|
|
|
|
|
|
|
|
| 54 | % |
|
| 57 | % |
|
|
|
|
|
|
|
|
We incur general and administrative costs in the functional areas of finance, legal, human resources, intellectual property, executive and board of directors. Costs for facilities and information technology are also managed as part of the general and administrative processes and are allocated to this area as well as each of the areas in cost of revenue, sales and marketing and research, development and engineering and intellectual property.engineering.
General and administrative expenses consist primarily of:
compensation, benefits and incentive compensation in the form of stock-based compensation and related costs of general and administrative personnel;
third party and professional fees associated with legal, accounting and human resources functions;
costs associated with being a public company; and
charges for infrastructure and centralized costs of facilities and information technology.
The increase in general and administrative expenses for the three month period ended March 31, 2019, compared to the corresponding three month period ended March 31, 2018, was primarily due to:
increased infrastructure and centralized costs of $0.1 million; and
increased headcount and compensation-related expenses of $0.1 million.
Intellectual property
| Three |
|
| Three |
|
|
|
|
|
|
|
|
| |||
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
| ||
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
| ||||
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
| ||||
|
| 2019 |
|
| 2018 |
|
| (Decrease) |
|
| (Decrease) |
| ||||
Intellectual property |
| $ | 358 |
|
| $ | 315 |
|
| $ | 43 |
|
|
| 14 | % |
Intellectual property (as % of total revenue) |
|
| 6 | % |
|
| 6 | % |
|
|
|
|
|
|
|
|
We incur intellectual property expenses that arise primarily from costs associated with documenting, applying for, and maintaining domestic and international patents and trademarks.
Gross expenditures for intellectual property costs, before reflecting the effect of capitalized patent costs, primarily consist of:
compensation, benefits and incentive compensation in the form of stock-based compensation and related costs of attorneys and legal assistants;
third party costs, including filing and governmental regulatory fees and fees for outside legal counsel and translation costs, each incurred inrelated to the patent process;filing and maintenance of our intellectual property;
charges to write off previously capitalized patent costs for patent assets we abandon; and
charges for infrastructure and centralized costs of facilities and information technology.
Intellectual property expenses can vary from period to period based on the level of capitalized patent activity.
The increase in intellectual propertygeneral and administrative expenses for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, was primarily due to higher write-offs of abandoned patent costs.increased headcount and routine annual compensation adjustments for our employees.
Stock-based compensation
| Three |
|
| Three |
|
|
|
|
|
|
|
|
|
| Three |
|
| Three |
|
|
|
|
|
|
|
|
| |||||
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
| ||||
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
| ||||||||
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
| ||||||||
|
| 2019 |
|
| 2018 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2020 |
|
| 2019 |
|
| (Decrease) |
|
| (Decrease) |
| ||||||||
Cost of revenue |
| $ | 182 |
|
| $ | 155 |
|
| $ | 27 |
|
|
| 17 | % |
| $ | 190 |
|
| $ | 182 |
|
| $ | 8 |
|
|
| 4 | % |
Sales and marketing |
|
| 519 |
|
|
| 345 |
|
|
| 174 |
|
|
| 50 | % |
|
| 479 |
|
|
| 519 |
|
|
| (40 | ) |
|
| (8 | )% |
Research, development and engineering |
|
| 354 |
|
|
| 298 |
|
|
| 56 |
|
|
| 19 | % |
|
| 399 |
|
|
| 354 |
|
|
| 45 |
|
|
| 13 | % |
General and administrative |
|
| 912 |
|
|
| 801 |
|
|
| 111 |
|
|
| 14 | % |
|
| 1,127 |
|
|
| 982 |
|
|
| 145 |
|
|
| 15 | % |
Intellectual property |
|
| 70 |
|
|
| 72 |
|
|
| (2 | ) |
|
| (3 | )% | ||||||||||||||||
Total |
| $ | 2,037 |
|
| $ | 1,671 |
|
| $ | 366 |
|
|
| 22 | % |
| $ | 2,195 |
|
| $ | 2,037 |
|
| $ | 158 |
|
|
| 8 | % |
The increasechanges in stock-based compensation expense for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018, was2019, were primarily due to timing and amount ofmore stock awards.awards granted in the current year than prior years.
We anticipate incurring an additional $17,895$17,641 in stock-based compensation expense through March 31, 20232024, for awards outstanding as of March 31, 2019.2020.
| Three |
|
| Three |
|
|
|
|
|
|
|
|
|
| Three |
|
| Three |
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| |||||
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| Months |
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| Months |
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| Months |
|
| Months |
|
|
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| ||||
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
| ||||||||
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
| ||||||||
|
| 2019 |
|
| 2018 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2020 |
|
| 2019 |
|
| (Decrease) |
|
| (Decrease) |
| ||||||||
Other income, net |
| $ | 237 |
|
| $ | 252 |
|
| $ | (15 | ) |
|
| (6 | )% |
| $ | 142 |
|
| $ | 237 |
|
| $ | (95 | ) |
|
| (40 | )% |
Other income, net (as % of total revenue) |
|
| 4 | % |
|
| 4 | % |
|
|
|
|
|
|
|
|
|
| 2 | % |
|
| 4 | % |
|
|
|
|
|
|
|
|
The decrease in other income, net for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, was primarily due to changes in foreign currency exchange rates.lower interest income as a result of lower interest rates and lower investment balances.
Income Taxes
The provision for income taxes for the three month periods ended March 31, 2019 and 2018 reflects current taxes, deferred taxes, and withholding taxes. The effective tax ratesrate for each of the three month periods ended March 31, 2020 and 2019 and 2018 werewas 0% and 0%, respectively, because we have a full valuation allowance recorded against our deferred tax assets.
The valuation allowance against deferred tax assets as of March 31, 20192020, was $44,614,$50,145, an increase of $2,265$2,336 from $42,349$47,809 as of December 31, 2018.2019.
We continually assess the applicability of a valuation allowance against our deferred tax assets. Based upon the positive and negative evidence available as of March 31, 2019,2020, and largely due to the cumulative loss incurred by us over the last several years, which is considered a significant piece of negative evidence when assessing the realizability of deferred tax assets, a full valuation allowance is recorded against our deferred tax assets. We will not record tax benefits on any future losses until it is determined that those tax benefits will be realized. All future reversals of the valuation allowance would result in a tax benefit in the period recognized.
Liquidity and Capital Resources
|
| March 31, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| |||||
Working capital |
| $ | 38,184 |
|
| $ | 45,326 |
|
| $ | 31,283 |
|
| $ | 37,850 |
|
Current ratio (1) |
| 8.6:1 |
|
| 11.5:1 |
|
| 6.8:1 |
|
| 8.0:1 |
| ||||
Cash, cash equivalents and short-term marketable securities |
| $ | 37,468 |
|
| $ | 43,656 |
|
| $ | 30,570 |
|
| $ | 36,817 |
|
Long-term marketable securities |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Total cash, cash equivalents and marketable securities |
| $ | 37,468 |
|
| $ | 43,656 |
|
| $ | 30,570 |
|
| $ | 36,817 |
|
(1) | The current (liquidity) ratio is calculated by dividing total current assets by total current liabilities. |
The $6.2 million$6,247 decrease in cash, cash equivalents and marketable securities at March 31, 20192020, from December 31, 20182019, resulted primarily from:
cash used in operations;
purchases of common stock related to tax withholding in connection with the vesting of restricted stock; and
purchases of property and equipment and capitalized patent costs; partially offset by
net proceeds from the issuance of common stock; and
proceeds from stock option exercises.
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and trade accounts receivable. We place our cash and cash equivalents with major banks and financial institutions and at times deposits may exceed insured limits. Marketable securities primarily include commercial paper and corporate notes. Our investment policy requires our portfolio to be invested to ensure that the greater of $3 million$3,000 or 7% of the invested funds will be available within 30 days’ notice.
Other than cash used for operating needs, which may include short-term marketable securities, our investment policy limits our credit exposure to any one financial institution or type of financial instrument by limiting the maximum of 5% of our cash and cash equivalents and marketable securities or $1 million,$1,000, whichever is greater, to be invested in any one issuer except for the U.S. government, U.S. federal agencies and U.S. backed securities, which have no limits, at the time of purchase. Our investment policy also limits our credit exposure by limiting to a maximum of 40% of our cash and cash equivalents and marketable securities, or $15 million,$15,000, whichever is greater, to be invested in any one industry category (e.g., financial or energy industries) at the time of purchase. As a result, we believe our credit risk associated with cash and investments to be minimal. A decline in the market value of any security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. To determine whether an impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and evidence indicating that the cost of the investment is recoverable outweighs evidence to the contrary. There have been no other-than-temporary impairments identified or recorded by us in the three monthsmonth periods ended March 31, 2020 and 2019.
Operating Cash Flow
The components of operating cash flows were:
| Three |
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| Three |
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|
| Three |
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| Three |
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| |||||
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| Months |
|
| Months |
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|
|
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|
| Months |
|
| Months |
|
|
|
|
|
|
|
|
| ||||
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
|
| Ended |
|
| Ended |
|
| Dollar |
|
| Percent |
| ||||||||
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
|
| March 31, |
|
| March 31, |
|
| Increase |
|
| Increase |
| ||||||||
|
| 2019 |
|
| 2018 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2020 |
|
| 2019 |
|
| (Decrease) |
|
| (Decrease) |
| ||||||||
Net loss |
| $ | (8,463 | ) |
| $ | (8,112 | ) |
| $ | (351 | ) |
|
| (4 | )% |
| $ | (8,908 | ) |
| $ | (8,463 | ) |
| $ | (445 | ) |
|
| (5 | )% |
Non-cash items |
|
| 2,574 |
|
|
| 2,197 |
|
|
| 377 |
|
|
| 17 | % |
|
| 2,770 |
|
|
| 2,574 |
|
|
| 196 |
|
|
| 8 | % |
Changes in operating assets and liabilities |
|
| 435 |
|
|
| 2,323 |
|
|
| (1,888 | ) |
|
| 81 | % |
|
| 292 |
|
|
| 435 |
|
|
| (143 | ) |
|
| (33 | )% |
Net cash used in operating activities |
| $ | (5,454 | ) |
| $ | (3,592 | ) |
| $ | (1,862 | ) |
|
| (52 | )% |
| $ | (5,846 | ) |
| $ | (5,454 | ) |
| $ | (392 | ) |
|
| (7 | )% |
Cash flows used in operating activities for the three month period ended March 31, 20192020, increased by $1.9 million,$392, compared to the corresponding three month period ended March 31, 2018,2019, primarily as a result of changesa higher net loss, partially offset by higher non-cash items. The increase in operating assets and liabilities. The changes in operating assets and liabilitiesnon-cash items was primarily due to the collection of a $1.75 million upfront license fee received in January 2018.higher stock-based compensation.
Cash flows provided by investing activities for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018, decreased2019, increased by $8.4 million$2,074 from $11.2 million$2,838 to $2.8 million,$4,912, primarily as a result of lowerhigher net maturities of marketable securities.
Cash flows fromused in financing activities for the three month period ended March 31, 2019,2020, compared to the corresponding three month period ended March 31, 2018,2019, decreased by $0.4 million$358 from $0.0 million$387 to $0.4 million used,$29, primarily as a result of lower exercisethe issuance of our common stock, options.partially offset by higher purchases of our common stock due to a higher share price and more shares required to be purchased in satisfaction of required withholding tax liability in connection with the vesting of restricted shares.
Future Cash Expectations
We believe that our current cash, cash equivalents, and short-term marketable securities balances will satisfy our projected working capital and capital expenditure requirements for at least the next 12 months.
In May 2019, we entered into an Equity Distribution Agreement, whereby we may sell from time to time through Wells Fargo Securities, LLC, as our sales agent, our common stock having an aggregate offering price of up to $30 million. Wells Fargo Securities, LLC will receive from us a commission equal to 2.50% of the gross sales price per share of common stock for shares having an aggregate offering price of up to $10 million, and a commission of 2.25% of the gross sales price per share of common stock thereafter, for shares sold under the Equity Distribution Agreement. As of March 31, 2020, we had sold 364 thousand shares at an average price of $57.64 under this Equity Distribution Agreement, totaling $21.0 million of cash proceeds, less $0.5 million of commissions and $0.3 million of stock issuance costs, for net cash proceeds of $20.2 million.
We have a $100 million shelf registration statement in place, of which $17.8 million and $12.0 million were allocated for sales of our common stock in connection with our registered direct offerings in June 2017 and November 2017, respectively. ThisWe have also allocated up to $30 million of the shelf registration statement for the sale of our common stock under the Equity Distribution Agreement with Wells Fargo Securities, LLC, of which $21.0 million has $70.2been sold. As of March 31, 2020, $49.2 million remainingremains available for future issuance andissuances under this shelf registration statement, which expires in June 2020.
We may sell shares under the Equity Distribution Agreement and/or use similar or other financing means to raise working capital in the future, if necessary, to support continued investment in our growth initiatives. We may also raise capital in the future to fund acquisitions and/or investments in complementary businesses, technologies or product lines. If it becomes necessary to obtain
additional financing, we may not be able to do so, or if these funds are available, they may not be available on satisfactory terms. The COVID-19 pandemic has created substantial uncertainty and volatility in the stock market, particularly in the small cap sector in which our stock is traded, and has negatively impacted our share price. These factors may inhibit our near-term ability to obtain financing through the sale of shares under the Equity Distribution Agreement. After the end of the quarter, as described below, we received a loan pursuant to the Paycheck Protection Program that will give us more time to observe financial market trends and assess the effects of the pandemic on our prospects to determine the best course of action concerning financing the business.
COVID-19 Pandemic
We are continuously reviewing our liquidity and anticipated capital requirements in light of the uncertainty created by the COVID-19 pandemic. As described in Part I, Item 1, Note 14 “Subsequent Events,” to help ensure adequate liquidity during this period and in light of uncertainties posed by the COVID-19 pandemic, the Company entered into a loan with Stearns Bank, N.A. on April 16, 2020 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act. The Loan has an aggregate principal amount of $5,032. Subject to the terms and limitations of the PPP, the Loan may be forgiven in whole or in part. Our intent is that the entire loan amount will be used to fund our payroll, rent and utilities.
Off-Balance Sheet Arrangements
We have recorded the operating leases that were disclosed in our 2018 Annual Report upon adoption of ASC 842, “Leases,” on January 1, 2019.
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
We are party to an operating lease for our corporate office in Beaverton, Oregon. In July 2015, we entered into an amendment with the landlord of our corporate office in Beaverton, Oregon, to extend the lease term through March 2024, with remaining rent payments totaling $3.3 million, payable in monthly installments.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933. Words such as “may,” “might,” “plan,” “should,” “could,” “expect,” “anticipate,” “intend,” “believe,” “project,” “forecast,” “estimate,” “continue,” and variations of such terms or similar expressions are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us, and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements, and investors are cautioned not to place undue reliance on such statements. We believe that the following factors, among others (including those described in Item 1A. “Risk Factors” of our 20182019 Annual Report), could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us. Forward-looking statements include but are not limited to statements relating to:
our beliefs regarding the possible effects of the COVID-19 pandemic on general economic conditions, public health, and consumer demand, and the Company’s results of operations, liquidity, capital resources, and general performance in the future;
the possible impact of COVID-19 on our ability to obtain financing through our Equity Distribution Agreement and the availability of any alternative sources of financing;
our expectations regarding the use of funds from the Company’s PPP Loan and the potential for forgiveness of the PPP Loan under the terms of the PPP;
the potential impact of COVID-19 on projects with our retail customers and partners;
concentration of revenue with few customers comprising a large majority of the revenue;
revenue trends and expectations, including our belief that international revenue could represent a growing percentage of total revenue in the future;expectations;
anticipated successful advocacy of our technology by our channel partners;
our belief regarding the global deployment of our products;
our future level of investment in our business, including investment in research, development and engineering of products and technology, development of our intellectual property, sales growth initiatives and development of new market opportunities;
anticipated expenses, costs, margins, provision for income taxes and investment activities in the foreseeable future;
our assumptions and expectations related to stock awards;
our belief that we have one of the world’s most extensive patent portfolios in digital watermarking and related fields;
anticipated effect of our adoption of accounting pronouncements;
our beliefs regarding our critical accounting policies;
our expectations regarding the impact of accounting pronouncements issued but not yet adopted;
anticipated revenue to be generated from current contracts, renewals, and as a result of new programs;
our estimates, judgements and assumptions related to impairment testing;
variability of contracted arrangements;
business opportunities that could require that we seek additional financing and our ability to do so;
the size and growth of our markets and our assumptions and beliefs related to those markets;
the existence of international growth opportunities and our future investment in such opportunities;
the sources of our future revenue;
our expected short-term and long-term liquidity positions;
our capital expenditure and working capital requirements and our ability to fund our capital expenditure and working capital needs through cash flow from operations or financing;
the effect of computerized trading on our stock price;
capital market conditions, our expectations regarding credit risk exposure, interest rate volatility and other limitations on the availability of capital, which could have an impact on our cost of capital and our ability to access the capital markets;
our use of cash, cash equivalents and marketable securities in upcoming quarters and the possibility that our deposits of cash and cash equivalents with major banks and financial institutions may exceed insured limits;
the adoption of our technology and success of our products, including Digimarc Discover, Digimarc Barcode and Digimarc Guardian;products;
our ability to innovate and enhance our competitive differentiation;
our beliefs related to our existing facilities;
protection, development and monetization of our intellectual property portfolio;
our beliefs related to our relationship with our employees;
our beliefs regarding cybersecurity incidents;
our beliefs related to certain provisions in our bylaws and articles of incorporation; and
our beliefs related to legal proceedings and claims arising in the ordinary course of business.
We believe that the risk factors specified above and the risk factors contained in Part I, Item 1A. “Risk Factors” of our 20182019 Annual Report, among others, could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf. Investors should understand that it is not possible to predict or identify all risk factors and that there may be other factors that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements made by us or by persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of the filing of this Quarterly Report on Form 10-Q.
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’sour disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. These disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that theseour disclosure controls and procedures, were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.10-Q, were effective.
Changes in Controls
Effective January 1, 2019, we adopted ASC 842, “Leases.”We implemented certain changes to our internal control activities over operating leases to address the accounting and disclosure requirements of the new lease standard. There were no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three month period ended March 31, 20192020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are subject from time to time to legal proceedings and claims arising in the ordinary course of business. At this time, we do not believe that the resolution of any such matters will have a material adverse effect on our financial position, results of operations or cash flows.
Our business, financial condition, results of operations and cash flows may be affected by a number of factors. Detailed information about risk factors that may affect Digimarc’s actual results are set forth in Part I, Item 1A.1A: “Risk Factors” of our 20182019 Annual Report. The risks and uncertainties described in our 20182019 Annual Report are those risks of which we are aware and that we consider to be material to our business. If any of those risks and uncertainties develop into actual events, our business, financial condition, results of operations or cash flows could be materially adversely affected. In that case, the trading price of our common stock could decline. As of March 31, 2019,Except as set forth below, there have been no material changes to the risk factors set forthpreviously disclosed in our 20182019 Annual Report.
Paycheck Protection Program Loan
On April 16, 2020, we entered into a loan with Stearns Bank, N.A. in an aggregate principal amount of approximately $5 million pursuant to the Paycheck Protection Program, or the PPP, under the CARES Act. On April 23, 2020, the Small Business Administration issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP. Subsequently, on April 28, 2020 the Secretary of the Treasury and Small Business Administrator announced that the government will review all PPP loans of more than $2 million for which the borrower applies for forgiveness. Should we be audited or reviewed by the U.S. Department of the Treasury as a result of filing an application for forgiveness or otherwise, such audit or review could result in the diversion of management’s time and attention and legal and reputational costs. If we were to be audited and receive an adverse finding in such audit, we could be required to return the full amount of the PPP loan, which could reduce our liquidity, and potentially subject us to fines and penalties.
COVID-19 Pandemic
The emergence of the COVID-19 pandemic around the world, and particularly in the United States, presents significant risks to the Company, not all of which we are able to fully evaluate or foresee. Some of the effects that could directly or indirectly result from the COVID-19 pandemic include, without limitation, possible impacts on the health of the Company’s management and employees, impairment of the Company’s administrative, research, and development operations, disruption in supplier and customer relationships, changes in demand for our services and subscriptions, and the collectability of accounts receivables. We expect some of our projects with retail customers and partners may be delayed as a result of the COVID-19 pandemic, thereby potentially affecting our ability to fund our business through near-term revenue growth. The scope and nature of these impacts, most of which are beyond our control, continue to evolve and the outcomes remain uncertain.
These short-term effects may change over the long term depending on the duration and severity of the COVID-19 pandemic, the length of time before normal economic and operating conditions resume, the additional governmental actions that may be taken, the extensions of social restrictions that have been imposed to date, and many other factors. Due to the above circumstances and as described generally in this Quarterly Report, the Company’s results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the remainder of the fiscal year.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchases
We repurchase shares of common stock in satisfaction of required withholding tax liability in connection with the vesting of restricted shares.
The following table sets forth information regarding purchases of our equity securities during the three month period ended March 31, 2019:2020:
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| (d) |
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| (c) |
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| Approximate |
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| (c) |
|
| Approximate |
| ||||
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| Total number |
|
| dollar value |
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| Total number |
|
| dollar value |
| ||||
|
|
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|
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|
|
|
| of shares |
|
| of shares that |
|
|
|
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|
|
|
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| of shares |
|
| of shares that |
| ||||
|
| (a) |
|
| (b) |
|
| purchased as |
|
| may yet be |
|
| (a) |
|
| (b) |
|
| purchased as |
|
| may yet be |
| ||||||||
|
| Total number |
|
| Average price |
|
| part of publicly |
|
| purchased |
|
| Total number |
|
| Average price |
|
| part of publicly |
|
| purchased |
| ||||||||
|
| of shares |
|
| paid per |
|
| announced plans |
|
| under the plans |
|
| of shares |
|
| paid per |
|
| announced plans |
|
| under the plans |
| ||||||||
Period |
| purchased (1) |
|
| share (1) |
|
| or programs |
|
| or programs |
|
| purchased (1) |
|
| share (1) |
|
| or programs |
|
| or programs |
| ||||||||
Month 1 |
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|
|
January 1, 2019 to January 31, 2019 |
|
| 488 |
|
| $ | 18.76 |
|
|
| — |
|
| $ | — |
| ||||||||||||||||
January 1, 2020 to January 31, 2020 |
|
| 216 |
|
| $ | 34.97 |
|
|
| — |
|
| $ | — |
| ||||||||||||||||
Month 2 |
|
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|
|
February 1, 2019 to February 28, 2019 |
|
| 18,307 |
|
| $ | 23.28 |
|
|
| — |
|
| $ | — |
| ||||||||||||||||
February 1, 2020 to February 29, 2020 |
|
| 20,072 |
|
| $ | 34.05 |
|
|
| — |
|
| $ | — |
| ||||||||||||||||
Month 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1, 2019 to March 31, 2019 |
|
| 1,665 |
|
| $ | 30.91 |
|
|
| — |
|
| $ | — |
| ||||||||||||||||
March 1, 2020 to March 31, 2020 |
|
| 2,365 |
|
| $ | 20.00 |
|
|
| — |
|
| $ | — |
| ||||||||||||||||
Total |
|
| 20,460 |
|
| $ | 23.79 |
|
|
| — |
|
| $ | — |
|
|
| 22,653 |
|
| $ | 32.59 |
|
|
| — |
|
| $ | — |
|
(1) | Fully vested shares of common stock withheld (purchased) by us in satisfaction of required withholding tax liability upon vesting of restricted stock. |
Exhibit Number |
| Exhibit Description |
|
|
|
| ||
10.1 |
| |
|
|
|
31.1 |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
|
31.2 |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|
|
|
32.1 |
| |
|
|
|
32.2 |
| |
|
|
|
101.INS |
| XBRL Instance Document |
|
|
|
101.SCH |
| XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
|
| |
104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: |
| DIGIMARC CORPORATION | |
|
|
|
|
|
| By: | /s/ CHARLES BECK |
|
|
| CHARLES BECK |
|
|
| Chief Financial Officer |
|
|
| (Duly Authorized Officer and Principal Financial and Accounting Officer) |
3233