8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 2, 2023

DIGIMARC CORPORATION

(Exact name of registrant as specified in its charter)

Oregon	001-34108	26-2828185
(State or other jurisdiction of incorporation)	(Commission File No.)	(IRS Employer Identification No.)

8500 SW Creekside Place, Beaverton Oregon 97008

(Address of principal executive offices) (Zip Code)

(503) 469-4800

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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 is an emerging growth company as defined in Rule 405 of the Securities Act (17 CFR 230.405) or Rule 12b-2 of the Exchange Act of 1934 (17 CFR 240.12b-2).

Emerging growth company                ☐

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.☐

Item 2.02. Results of Operations and Financial Condition

On August 2, 2023, Digimarc Corporation issued a press release announcing its financial results for the quarter-ended June 30, 2023. The full text of the press release is attached hereto as Exhibit 99.1.

Attached hereto as Exhibit 99.2 is the script from the Company’s conference call on August 2, 2023 announcing its financial results for the quarter-ended June 30, 2023, as posted on the Company’s website at https://www.digimarc.com/investors/quarterly-earnings.

Item 9.01. Financial Statements and Exhibits

(d) Exhibits

ExhibitNo.	Description
99.1	Press Release issued by Digimarc Corporation, dated August 2, 2023 (furnished pursuant to Item 2.02 hereof).
99.2	Script of Digimarc Corporation conference call, dated August 2, 2023 (furnished pursuant to Item 2.02 hereof).
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

SIGNATURE

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 hereunto duly authorized.

Date:    August 2, 2023

By:	/s/ Charles Beck
	Charles Beck
	Chief Financial Officer and Treasurer

EX-99.1

Exhibit 99.1

Digimarc Reports Second Quarter 2023 Financial Results

Subscription Revenue Increases 59% on Current Products

Subscription Gross Profit Margin Reaches 84%

Beaverton, Ore. – August 2, 2023 –Digimarc Corporation (NASDAQ: DMRC) reported financial results for the second quarter ended June 30, 2023.

"Q2 was a strong quarter on many fronts, a testament to our focus on being easy to begin doing business with and excellent at guiding customers along their product digitization journey," said Digimarc CEO Riley McCormack. "A combination of our adding new customers as well as expanding our relationships with existing customers drove a 59% year-over-year increase in subscription revenue from current products, and that, along with our continuing platform unification work, drove a 1,100 basis point year-over-year increase in subscription gross profit margin to 84%. The results of our transformation are beginning to become obvious, and we are excited and energized by what's ahead."

Second Quarter 2023 Financial Results

Subscription revenue for the second quarter of 2023 increased 44% to $4.7 million compared to $3.2 million in the second quarter of 2022, primarily reflecting higher subscription revenue from new commercial contracts, partially offset by $0.3 million of lower subscription revenue as a result of sunsetting our Piracy Intelligence product last year.

Service revenue for the second quarter of 2023 decreased 10% to $4.1 million compared to $4.5 million in the second quarter of 2022, primarily reflecting $0.7 million of lower service revenue from HolyGrail recycling projects, partially offset by $0.3 million of higher service revenue from the Central Banks.

Total revenue for the second quarter of 2023 increased 13% to $8.7 million compared to $7.7 million in the second quarter of 2022.

Gross profit margin for the second quarter of 2023 increased to 56% compared to 52% in the second quarter of 2022. Excluding amortization expense on acquired intangible assets, subscription gross profit margin improved to 84% from 73% while service gross profit margin decreased to 51% from 61% in the second quarter of 2023 compared to the second quarter of 2022. 

Non-GAAP gross profit margin for the second quarter of 2023 increased to 74% compared to 71% in the second quarter of 2022.

Operating expenses for the second quarter of 2023 decreased $2.8 million, or 15%, to $16.1 million compared to $18.9 million in the second quarter of 2022, primarily reflecting $2.3 million of lower compensation costs due to lower headcount, partially offset by annual compensation adjustments, and $0.5 million of lower contractor and consulting expenses.

Non-GAAP operating expenses for the second quarter of 2023 decreased $2.1 million, or 14%, to $12.9 million compared to $15.0 million in the second quarter of 2022.

Net loss for the second quarter of 2023 was $10.6 million or $(0.53) per share compared to $14.6 million or $(0.75)per share in the second quarter of 2022.

Non-GAAP net loss for the second quarter of 2023 was $5.8 million or $(0.29) per share compared to $9.2 million or $(0.47) per share in the second quarter of 2022.

At June 30, 2023, cash, cash equivalents and marketable securities totaled $34.5 million compared to $52.5 million at December 31, 2022. 

Conference Call

Digimarc will hold a conference call today (Wednesday, August 2, 2023) to discuss these financial results and to provide a business update. CEO Riley McCormack, CFO Charles Beck and CLO Joel Meyer will host the call starting at 5:00 p.m. Eastern time (2:00 p.m. Pacific time). A question and answer session will follow management’s prepared remarks.

The conference call will be broadcast live and available for replay here and in the investor section of the company's website. The conference call script will also be posted to the company's website shortly before the call.

For those who wish to call in via telephone to ask a question, please dial the number below at least five minutes before the scheduled start time:

Toll-Free Number: 877-407-0832
International Number: 201-689-8433
Conference ID: 13737194

Company Contact:

Charles Beck

Chief Financial Officer
Charles.Beck@digimarc.com

+1 503-469-4721

###

About Digimarc

Digimarc Corporation (NASDAQ: DMRC) is a global leader in product digitization. A pioneer in digital watermarks, Digimarc connects every physical and digital item to a digital twin that captures product data, records events and interactions, and enables powerful new automations. Trusted to deter counterfeiting of global currency for more than 20 years, Digimarc is also recognized for ensuring product authenticity, improving plastics recycling, and more, with a commitment to promoting a prosperous, safer, and more sustainable world. See more at Digimarc.com.

Forward-Looking Statements

Except for historical information contained in this release, the matters described in this release contain various “forward-looking statements.” These forward-looking statements include statements identified by terminology such as “will,” “should,” “expects,” “estimates,” “predicts” and “continue” or other derivations of these or other comparable terms. These forward-looking statements are statements of management's opinion and are subject to various assumptions, risks, uncertainties and changes in circumstances. Actual results may vary materially from those expressed or implied from the statements in this release as a result of changes in economic, business and regulatory factors. More detailed information about risk factors that may affect actual results are outlined in the company's Form 10-K for the year ended December 31, 2022, and in subsequent periodic reports filed with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date of this release. Except as required by law, Digimarc undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this release.

Non-GAAP Financial Measures

This release contains the following non-GAAP financial measures: Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per share (diluted). See below for a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. These non-GAAP financial measures are an important measure of our operating performance because they allow management, investors and analysts to evaluate and assess our core operating results from period-to-period after removing non-cash and non-recurring activities that affect comparability.  Our management uses these non-GAAP financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparisons.

Digimarc believes that providing these non-GAAP financial measures, together with the reconciliation to GAAP, helps management and investors make comparisons between us and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measures and the corresponding GAAP measures provided by each company under applicable SEC rules. These non-GAAP financial measures are not measurements of financial performance or liquidity under GAAP. In order to facilitate a clear understanding of its consolidated historical operating results, investors should examine Digimarc’s non-GAAP financial measures in conjunction with its historical GAAP financial information, and investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP.  Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to, GAAP financial measures. Non-GAAP financial measures may not be indicative of the historical operating results of the Company nor are they intended to be predictive of potential future results.

Digimarc Corporation

Consolidated Income Statement Information

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Revenue:
Subscription	$	4,678		$	3,244		$	8,563		$	7,035
Service		4,052			4,503			8,010			8,123
Total revenue		8,730			7,747			16,573			15,158
Cost of revenue:
Subscription (1)		771			886			1,566			1,928
Service (1)		1,968			1,744			3,683			3,575
Amortization expense on acquired intangible assets		1,122			1,120			2,211			2,314
Total cost of revenue		3,861			3,750			7,460			7,817
Gross profit:
Subscription (1)		3,907			2,358			6,997			5,107
Service (1)		2,084			2,759			4,327			4,548
Amortization expense on acquired intangible assets		(1,122	)		(1,120	)		(2,211	)		(2,314	)
Total gross profit		4,869			3,997			9,113			7,341
Gross profit margin:
Subscription (1)		84	%		73	%		82	%		73	%
Service (1)		51	%		61	%		54	%		56	%
Total gross profit margin		56	%		52	%		55	%		48	%
Operating expenses:
Sales and marketing		5,106			8,073			11,404			16,018
Research, development and engineering		6,161			6,065			13,987			12,156
General and administrative		4,352			4,487			8,979			10,895
Amortization expense on acquired intangible assets		268			321			528			663
Impairment of lease right of use assets and leasehold improvements		250			-			250			574
Total operating expenses		16,137			18,946			35,148			40,306
Operating loss		(11,268	)		(14,949	)		(26,035	)		(32,965	)
Other income, net		647			93			1,392			89
Loss before income taxes		(10,621	)		(14,856	)		(24,643	)		(32,876	)
(Provision) benefit for income taxes		(2	)		217			(20	)		456
Net loss	$	(10,623	)	$	(14,639	)	$	(24,663	)	$	(32,420	)
Loss per share:
Loss per share — basic	$	(0.53	)	$	(0.75	)	$	(1.23	)	$	(1.76	)
Loss per share — diluted	$	(0.53	)	$	(0.75	)	$	(1.23	)	$	(1.76	)
Weighted average shares outstanding — basic		20,162			19,539			20,128			18,448
Weighted average shares outstanding — diluted		20,162			19,539			20,128			18,448

⁽¹⁾ Cost of revenue, Gross profit and Gross profit margin for Subscription and Service excludes amortization expense on acquired intangible assets.

Digimarc Corporation

Reconciliation of GAAP to Non-GAAP Financial Measures

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
GAAP gross profit	$	4,869		$	3,997		$	9,113		$	7,341
Amortization of acquired intangible assets		1,122			1,120			2,211			2,314
Amortization and write-off of other intangible assets		146			144			290			285
Stock-based compensation		318			265			556			466
Non-GAAP gross profit	$	6,455		$	5,526		$	12,170		$	10,406
Non-GAAP gross profit margin		74	%		71	%		73	%		69	%
GAAP operating expenses	$	16,137		$	18,946		$	35,148		$	40,306
Depreciation and write-off of property and equipment		(260	)		(330	)		(688	)		(720	)
Amortization of acquired intangible assets		(268	)		(321	)		(528	)		(663	)
Amortization and write-off of other intangible assets		(9	)		(29	)		(48	)		(59	)
Amortization of lease right of use assets under operating leases		(166	)		(249	)		(332	)		(520	)
Stock-based compensation		(2,260	)		(3,009	)		(4,898	)		(5,276	)
Impairment of lease right of use assets and leasehold improvements		(250	)		—			(250	)		(574	)
Acquisition-related expenses		—			(3	)		—			(447	)
Non-GAAP operating expenses	$	12,924		$	15,005		$	28,404		$	32,047
GAAP net loss	$	(10,623	)	$	(14,639	)	$	(24,663	)	$	(32,420	)
Total adjustments to gross profit		1,586			1,529			3,057			3,065
Total adjustments to operating expenses		3,213			3,941			6,744			8,259
Non-GAAP net loss	$	(5,824	)	$	(9,169	)	$	(14,862	)	$	(21,096	)
GAAP loss per share (diluted)	$	(0.53	)	$	(0.75	)	$	(1.23	)	$	(1.76	)
Non-GAAP net loss	$	(5,824	)	$	(9,169	)	$	(14,862	)	$	(21,096	)
Non-GAAP loss per share (diluted)	$	(0.29	)	$	(0.47	)	$	(0.74	)	$	(1.14	)

Digimarc Corporation

Consolidated Balance Sheet Information

(in thousands)

(Unaudited)

	June 30,			December 31,
	2023			2022
ASSETS
Current assets:
Cash and cash equivalents (1)	$	26,825		$	33,598
Marketable securities (1)		7,717			18,944
Trade accounts receivable, net		11,981			5,427
Other current assets		4,445			6,172
Total current assets		50,968			64,141
Property and equipment, net		1,775			2,390
Intangibles, net		31,421			33,170
Goodwill		8,568			8,229
Lease right of use assets		4,202			4,720
Other assets		1,388			1,127
Total assets	$	98,322		$	113,777
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$	5,162		$	5,989
Deferred revenue		8,101			4,145
Total current liabilities		13,263			10,134
Long-term lease liabilities		6,066			5,977
Other long-term liabilities		355			76
Total liabilities		19,684			16,187
Shareholders’ equity:
Preferred stock		50			50
Common stock		20			20
Additional paid-in capital		371,893			367,692
Accumulated deficit		(290,472	)		(265,809	)
Accumulated other comprehensive loss		(2,853	)		(4,363	)
Total shareholders’ equity		78,638			97,590
Total liabilities and shareholders’ equity	$	98,322		$	113,777

⁽¹⁾ Aggregate cash, cash equivalents, and marketable securities was $34,542 and $52,542 at June 30, 2023 and December 31, 2022, respectively.

Digimarc Corporation

Consolidated Cash Flow Information

(in thousands)

(Unaudited)

	Six Months Ended June 30,
	2023			2022
Cash flows from operating activities:
Net loss	$	(24,663	)	$	(32,420	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and write-off of property and equipment		688			720
Amortization of acquired intangible assets		2,739			2,977
Amortization and write-off of other intangible assets		338			344
Amortization of lease right of use assets under operating leases		332			520
Stock-based compensation		5,454			5,742
Impairment of lease right of use assets and leasehold improvements		250			574
Changes in operating assets and liabilities:
Trade accounts receivable		(6,492	)		1,776
Other current assets		1,827			(600	)
Other assets		(268	)		(568	)
Accounts payable and other accrued liabilities		(839	)		(2,881	)
Deferred revenue		4,106			(1,043	)
Lease liability and other long-term liabilities		38			(808	)
Net cash used in operating activities		(16,490	)		(25,667	)
Cash flows from investing activities:
Net cash paid for acquisition		—			(3,512	)
Purchase of property and equipment		(121	)		(716	)
Capitalized patent costs		(198	)		(271	)
Proceeds from maturities of marketable securities		19,984			11,148
Purchases of marketable securities		(8,664	)		(4,908	)
Net cash provided by investing activities		11,001			1,741
Cash flows from financing activities:
Issuance of common stock, net of issuance costs		—			58,220
Purchase of common stock		(1,280	)		(974	)
Repayment of loans		(16	)		(17	)
Net cash (used in) provided by financing activities		(1,296	)		57,229
Effect of exchange rate on cash		12			(41	)
Net (decrease) increase in cash and cash equivalents (2)	$	(6,773	)	$	33,262
Cash, cash equivalents and marketable securities at beginning of period		52,542			41,618
Cash, cash equivalents and marketable securities at end of period		34,542			68,390
(2) Net (decrease) increase in cash, cash equivalents and marketable securities	$	(18,000	)	$	26,772

###

EX-99.2

Exhibit 99.2

Digimarc Corporation (DMRC) Conference Call

Second Quarter 2023 Financial Results

August 2, 2023

Joel Meyer – Chief Legal Officer

Welcome to our Q2 conference call. Riley McCormack, our CEO, and Charles Beck, our CFO, are with me on the call. On the call today, we will provide a business update and discuss Q2 2023 financial results. This will be followed by a question and answer forum. We have posted our prepared remarks in the investor relations section of our website and will archive this webcast there.

Safe Harbor Statement

Before we begin, let me remind everyone that today's discussion contains forward-looking statements that have risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

Riley will now provide a business update.

Business Update

Thank you Joel, and hello everyone.

Q2 was a strong quarter on many fronts, a testament to our maniacal focus on being easy to begin doing business with and excellent at guiding customers along their product digitization journey.   

Starting with the “easy to begin doing business with” portion of our mantra, I want to highlight a few wins on the direct side of our business.  We added two large, new customers in the pharmaceutical vertical, and we are hard at work expanding this flywheel to help this industry combat the massive -- and massively important -- issue of counterfeit products.   

We also closed deals with two separate divisions of a top-25 global CPG for a sandboxed version of our platform involving factory automation, and are working to pull together the ecosystem partners necessary to provide a quickly scalable and low-touch solution to the 100s if not 1000s of other companies that would benefit from the same.  Based not just on these two initial wins, nor just on our internal research, but very importantly also on our growing pipeline of opportunity as the word gets out, we are confident we have a truly differentiated and high value factory automation solution that we can’t wait to provide to many others.  

On the channel side, we added two new VARs, including the large $32 million plus contract we announced a few months ago.  We have high expectations that both relationships will grow as we prove Digimarc Illuminate’s value in allowing our VARs to provide unique and differentiated solutions to their end customers.    

In addition, the public announcement of our large VAR deal has put us squarely on the security printing industry’s radar. We are in early conversations with two new prospects, each of which represent a sizeable opportunity.  This further validates the unique position we enjoy in this space, based not just on Illuminate’s capabilities as the world’s best product digitization hyperscaler, but also Digimarc’s hard-earned and well-deserved reputation with this industry, gained by over two decades of delivering value to the world’s central banks. 

In addition to the opportunities opening to us in the security printing space, the day after we issued that press release, we received an invite to a full day planning session for a proposed Deposit Return Systems (DRS) program in a major country.  We are focused on expanding our opportunities in the DRS market as we believe our Illuminate platform provides our VARs the ability to offer a DRS solution that is easier, more comprehensive and more cost-effective than the status quo. 

As for the “excellent at guiding customers along their product digitization journey” portion of our mantra, we signed multi-year extensions with six important customers in Q2, five of which resulted in a meaningful increase in annual recurring revenue, a testament to the power of our technology and our team.  Four of these renewals were with direct customers, and the other two were with VARs.  In addition to these contract renewals, we also had two customers whose contracts were structured under the legacy pay-as-you-go model significantly ramp up their usage in Q2, including a top five global CPG that is also a key supplier to Walmart. 

All of the above helped contribute to strong results in the two key financial metrics about which we obsess.  While Charles will elaborate more in a moment, I want to highlight subscription revenue was up 44% year-over-year, and 59% when adjusting for the end-of-life of Piracy Intelligence.  In addition to strong subscription revenue growth, subscription gross margin expanded 400 basis points sequentially to a near best-in-class 84%, with further expansion ahead as we continue to remove costs from our platform and add high-incremental-margin subscription revenue.   

Before I turn the call over to Charles, I want to take this opportunity to answer a question I know is front of mind for many of our investors. 

Yes, our technology does have a significant role to play as the world grapples with both the opportunities and dangers of generative AI, and as we’ve been busy preparing our soon-to-launch offering, informed by all the learnings and knowledge that comes from being the pioneer and widely-recognized vanguard of digital watermarking, it has been wonderful to see some of the world’s largest companies and governments conclude the same. 

We also applaud the various governments and GenAI companies who are moving to act on this conclusion, including most recently the seven leading AI companies who convened at the request of the White House and voluntarily committed to take specific steps.  The world seems to be coalescing around the view that safely and securely unlocking the transformational power of GenAI will require addressing its biggest dangers head-on, a view we not only share, but one we are uniquely positioned – and excited – to help achieve. 

And no bigger problems need solving in the world of GenAI than how to ensure the authenticity of digital media, and how to provide for the safety and fairness of the input to the models themselves.  We believe there’s an obvious need for a single robust, secure, and easy-to-adopt solution that can accomplish both, while also adding additional value to stakeholders in the world of GenAI and beyond, and are anxious to begin telling that story more broadly, but today, I want to focus more specifically on each of these two potentially show-stopping problems in turn. 

Regarding the need to ensure the authenticity of digital media in a world where digital asset creation is easy, fast and cheap, while the current proposal of tagging all GenAI-created output is a solid first step if for no other reason than it shows that the GenAI companies are serious about taking action, it won’t solve the problem of how to ensure the authenticity of digital media for the following four reasons. 

First, unless every GenAI company applies digital watermarks to its output, which is an impossibility for many reasons, simply tagging the GenAI-created content of some will do as little to prove authenticity as if it were done by none.  Intuitively, no one would suggest that the system we have built alongside the world’s central banks to help protect the authenticity of currency should rely on every potential counterfeiter, current and future, printing the word “FAKE” on their counterfeit currency.  The same logic applies here.

Second, a solution that rests solely on digitally watermarking GenAI output assumes that there are only nefarious or frivolous uses of GenAI, an assumption with which we (along with many others) disagree.  An incredible amount of legitimate content is already being produced with the help of GenAI, and the value-creation potential of GenAI is still in its infancy.  Similar to how the output of copy editors improved with the advent of spell check, the work of professional creatives will improve by incorporating GenAI.  GenAI is a generational productivity tool that should and will be used by legitimate creators of digital assets, and what truly matters is whether a digital asset was created by the source one believes it was, not the method or tools used in its creation.

Third, authentic content used in an inauthentic context is often worse than just lacking certainty about a digital asset’s native authenticity because this scenario provides a false sense of comfort.  Context about when and why authentic content was created and used matters, and it matters a great deal.  To wit, an authentic image of a medicine that appears in an inauthentic place, such as the website of an unauthorized or otherwise illegitimate reseller, will without doubt increase the odds a consumer mistakenly purchases a potentially dangerous item.  Content and context are two sides of the same authenticity coin.

And finally, many GenAI engines rely on open-source technology, which essentially gives anyone the keys to inspect, understand and potentially even edit lines of code, including those lines involving security.  There’s a reason network security companies don’t build their business around open-source technology, and the same logic applies when it comes to a system tasked with ensuring the authenticity of digital assets.

For these reasons, simply watermarking GenAI-created output will not adequately ensure the authenticity of digital content. Moreover, there’s another crucial issue that must be addressed. The world also needs safe and fair filtering of the content that trains these AI engines. Several groups have an immediate need for those safeguards.

First are the companies and creatives who have spent an incredible amount of talent, time, money, and effort to create their digital assets; this is why copyright law exists in countries around the world.  Without an automated “safe and fair” input filter, these assets have simply become free input to the training of GenAI engines, without the copyright owners having a say.  That isn’t fair, and in many cases, it isn’t legal. 

Second are the GenAI companies.  They need a solution that allows them to comply with copyright law or they risk the exponentially-growing avalanche of lawsuits overwhelming their legal teams as well as their balance sheets, and the only alternative being considered, unilaterally restricting the input needed to train their engines, will deprive the world of the productivity gains their useful and powerful technology will bring. In addition, the GenAI companies also face a second still-in-its-infancy avalanche of existential risk, namely model collapse, because without an automated way to filter the quality of input (along multiple different vectors), the models will suffer ever-decreasing quality of output until they asymptote to worthless; the universal law of GIGO (garbage in, garbage out) applies in the world of GenAI, too.  And finally, beyond these two “game over” risks, the current processes being applied to GenAI model training could be made much more efficient, in multiple ways, if a robust automated input filter that also allowed for identification were applied. 

And third is a group much larger than the first two combined, a group comprised of 8 billion people.  We’re all stakeholders in stopping our memories, such as the pictures of our children, from being used and monetized without our knowledge, let alone our permission. One of the statements coming out of the White House on this topic a few weeks ago was “…[the highest standards must be upheld] to ensure that [GenAI] innovation doesn’t come at the expense of Americans’ rights and safety.”  Extend that statement to all countries’ citizens, and we wholeheartedly agree.  A system that allows for an extensible and adaptable opt-in and/or opt-out filter benefits all, and we are excited to soon offer the world a single system that will allow for that, instilling confidence in content authenticity, and a whole lot more. 

In sum, some of the brightest minds in the world, spanning both the public and private sectors, have instinctually understood that, yes, our technology has a role to play in what will likely prove to be the most powerful technology advancement since the internet itself.  And importantly, they have shown a willingness to act to address the problems that must be addressed to unleash this power.  We applaud them and are excited to build upon the foundation they have set.  Due to our legacy, experience, and unrivaled expertise in digital watermarking, we have a meaningful role to play in solving the problems at hand. Digimarc will deliver a solution that provides for authenticity, security, safety, and protection of rights. A system that benefits all. 

As we finish up the work we have been doing ahead of launch, we are thankful for the positive reception we are already receiving with some incredibly important stakeholders, and are excited to unveil more soon. 

I will now turn the call over to Charles to discuss our financial results.

Financial Results

Thank you Riley, and hello everyone. 

Before I dive deeper into our Q2 financial results, there are some financial highlights that are important to emphasize.  

● We closed $8.8 million in first year commercial bookings, up more than 300% year-over-year; 

● We delivered 59% year-over-year subscription revenue growth from current products; 

● We achieved 84% subscription gross profit margin; and 

● We significantly reduced our operating expenses and cash burn from last year.  

I highlight these areas as they are all critical drivers as we work hard to get the business to profitability. Now onto the details. 

First year commercial bookings were $8.8 million during the second quarter, a 4x increase when compared to the $2.2 million booked in Q2 last year.  

As Riley mentioned, one source of this growth was upsells to existing customers. These upsells are important to mention as we have some very large customers, and in most cases, we are in the earlier stages of account penetration, meaning we have a lot of runway to materially grow the revenue from these existing customers. These opportunities for revenue growth can come from adding new products and/or expanding usage of existing products. While not unexpected, it was an encouraging sign to see these customers not only renew their contracts but to do so at higher levels of commitment. 

It’s also important to highlight that many of the deals contributing to bookings this quarter were multi-year commitments. Because we only report first year bookings, the true impact of a multi-year contract is not captured. To further this point, if we sign a 3-year committed contract for instance, only the first year’s annual fees would ever be reflected in our reported bookings number. Years 2 and 3 would never show up. The impact of that contract, however, is committed revenue for the next three years.  I share this context because bookings would have been much higher this quarter if we included the total contract value for multi-year deals. 

Total revenue for the quarter was $8.7 million, an increase of $1.0 million or 13% from $7.7 million in Q2 last year. Excluding revenue from our end-of-life Piracy Intelligence product, revenue increased $1.3 million or 17% year-over-year.  As a reminder, Q2 last year was the last quarter of meaningful Piracy Intelligence revenue and so this optical headwind to year-over-year growth is now gone. 

Subscription revenue, which accounted for 54% of total revenue for the quarter, grew 44% from $3.2 million to $4.7 million. Our subscription revenue growth rate was 59% or $1.7 million when excluding Piracy Intelligence. Again, this headwind goes away starting in Q3. 

Service revenue declined 10% from $4.5 million to $4.1 million, reflecting the impact of HolyGrail recycling project work in Q2 last year of $700 thousand. Excluding this non-recurring project work, service revenue increased $300 thousand or 8%, reflecting the impact of a larger annual budget from the Central Banks for project work this year.  We still expect our currency business to deliver double digit growth this year.

Subscription gross profit margin improved from 73% in Q2 last year to 84% in Q2 this year. The large increase in margins year-over-year reflects two positive trends we foreshadowed on our Q4 earnings call that would start to occur this year and continue into next year and beyond. First, a more favorable mix of subscription revenue to our newer products, which carry higher gross profit margins on average than our legacy products. Second, our product infrastructure costs are declining, even with increased usage by customers on our platform. We expect these trends to continue resulting in further expansion over time to our subscription gross profit margins. This is an important development to note given our focus as a company on growing subscription revenue. 

Service gross profit margin decreased from 61% in Q2 last year to 51% in Q2 this year. The decrease reflects the impact of project work we realized from HolyGrail recycling projects in Q2 last year and some higher costs in Q2 this year, which are not expected to repeat.  We anticipate service gross profit margin to be in the mid-50’s on average going forward with some fluctuation quarter to quarter depending on labor mix. 

Operating expenses for the quarter were $16.1 million compared to $18.9 million in Q2 last year. The large decrease in operating costs largely reflects the impact of the reduction in force this past February along with other cost savings initiatives implemented in Q1 this year.  

Non-GAAP operating expenses for the quarter were $12.9 million compared to $15.0 million in Q2 last year.  

Net loss per share for the quarter was 53 cents versus 75 cents in Q2 last year. Non-GAAP net loss per share, which excludes non-cash and non-recurring items, was 29 cents versus 47 cents in Q2 last year. 

We ended the quarter with $34.5 million in cash and investments.  

We used $8.5 million of cash and investments during the quarter compared to $14.7 million in Q2 last year. Our cash usage for the quarter, while much lower than last year, reflecting higher revenues and lower costs, was negatively impacted by unfavorable timing of customer receipts. It was also much higher than we anticipate our quarterly results to be going forward. For the second half of 2023, we expect our total cash usage for the six-month period to be noticeably less than the amount of cash we used in the last three months alone. As we have stated before, we continue to be focused on building a sustainable business capable of extremely high cash flow generation. 

For further discussion of our financial results, and risks and prospects for our business, please see our Form 10-Q that will be filed with the SEC. 

I will now turn the call back over to Riley for final remarks. 

Final Remarks

Thanks Charles.   

Q2 was a strong quarter.  On both the direct and channel front, we were successful in not just being easy to begin doing business with, but also excellent at guiding customers along their product digitization journey.  As promised at the end of last quarter’s call, and continues today, we are seeing momentum across all areas of our business, and that strength is showing up in our income statement in the two key financial metrics about which we obsess, with 59% year-over-year subscription revenue growth from current products and the sequential addition of another 400 basis points of subscription gross margin to a near best-in-class 84%.   

But however strong Q2 was, what continues to excite us most is where we are going, because as we are beginning to show the results of our transformation to unlock the unparalleled power of our world-leading product digitization hyperscaler, we are also on the cusp of extending that opportunity more fully to the digital world, a domain in which the combination of our past and present will add to our delivery of a generational future.

Operator, we will now open up the call for questions.

XML

Document And Entity Information	Aug. 02, 2023
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