dmrc-10q_20190630.htm

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 June 30, 2019

☐	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	☒

Non-accelerated filer	☐	Smaller reporting company	☒

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. ☐

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 July 19, 2019, there were 12,433,246 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

Table of Contents

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):	3
	Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	3
	Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018	4
	Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2019 and 2018	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 4.	Controls and Procedures	31

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
SIGNATURES		34

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

DIGIMARC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(UNAUDITED)

	June 30,			December 31,
	2019			2018
ASSETS
Current assets:
Cash and cash equivalents	$	33,166		$	27,278
Marketable securities		16,792			16,378
Trade accounts receivable, net		4,239			3,888
Other current assets		2,140			2,100
Total current assets		56,337			49,644
Property and equipment, net		3,632			3,955
Intangibles, net		6,699			6,649
Goodwill		1,114			1,114
Other assets		3,057			425
Total assets	$	70,839		$	61,787
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$	2,660		$	1,092
Deferred revenue		2,824			3,226
Total current liabilities		5,484			4,318
Lease liability and other long-term liabilities		2,953			854
Total liabilities		8,437			5,172
Commitments and contingencies (Note 13)
Shareholders’ equity:
Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares issued and outstanding at June 30, 2019 and December 31, 2018)		50			50
Common stock (par value $0.001 per share, 50,000 authorized, 12,433 and 11,891 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively)		12			12
Additional paid-in capital		184,611			162,428
Accumulated deficit		(122,271	)		(105,875	)
Total shareholders’ equity		62,402			56,615
Total liabilities and shareholders’ equity	$	70,839		$	61,787

The accompanying notes are an integral part of these consolidated financial statements.

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(UNAUDITED)

	Three			Three			Six			Six
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2019			2018			2019			2018
Revenue:
Service	$	3,529		$	3,336		$	7,164		$	6,843
Subscription		2,088			1,444			3,651			3,022
License		563			658			1,025			1,186
Total revenue		6,180			5,438			11,840			11,051
Cost of revenue:
Service		1,553			1,548			3,084			3,111
Subscription		465			508			910			990
License		167			149			325			289
Total cost of revenue		2,185			2,205			4,319			4,390
Gross profit		3,995			3,233			7,521			6,661
Operating expenses:
Sales and marketing		5,087			4,757			10,037			9,644
Research, development and engineering		3,981			4,058			8,019			8,005
General and administrative		2,686			2,416			5,538			5,048
Intellectual property		393			305			751			620
Total operating expenses		12,147			11,536			24,345			23,317
Operating loss		(8,152	)		(8,303	)		(16,824	)		(16,656	)
Other income, net		231			274			468			526
Loss before income taxes		(7,921	)		(8,029	)		(16,356	)		(16,130	)
Provision for income taxes		(12	)		(9	)		(40	)		(20	)
Net loss	$	(7,933	)	$	(8,038	)	$	(16,396	)	$	(16,150	)
Earnings (loss) per common share:
Loss per common share — basic	$	(0.68	)	$	(0.71	)	$	(1.42	)	$	(1.43	)
Loss per common share — diluted	$	(0.68	)	$	(0.71	)	$	(1.42	)	$	(1.43	)
Weighted average common shares outstanding — basic		11,665			11,337			11,576			11,302
Weighted average common shares outstanding — diluted		11,665			11,337			11,576			11,302

The accompanying notes are an integral part of these consolidated financial statements.

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(UNAUDITED)


										Additional						Total
	Preferred Stock				Common Stock					Paid-in			Accumulated			Shareholders'
	Shares		Amount		Shares			Amount		Capital			Deficit			Equity
Three months ended June 30, 2018:
BALANCE AT MARCH 31, 2018		10	$	50		11,847		$	12	$	157,540		$	(81,481	)	$	76,121
Exercise of stock options		—		—		26			—		354			—			354
Issuance of restricted common stock		—		—		32			—		—			—			—
Forfeiture of restricted common stock		—		—		(9	)		—		—			—			—
Purchase and retirement of common stock		—		—		(20	)		—		(592	)		—			(592	)
Stock-based compensation		—		—		—			—		1,858			—			1,858
Net loss		—		—		—			—		—			(8,038	)		(8,038	)
BALANCE AT JUNE 30, 2018		10	$	50		11,876		$	12	$	159,160		$	(89,519	)	$	69,703

Six months ended June 30, 2018:
BALANCE AT DECEMBER 31, 2017		10	$	50		11,651		$	12	$	155,793		$	(73,508	)	$	82,347
Exercise of stock options		—		—		72			—		914			—			914
Issuance of restricted common stock		—		—		210			—		—			—			—
Forfeiture of restricted common stock		—		—		(19	)		—		—			—			—
Purchase and retirement of common stock		—		—		(38	)		—		(1,120	)		—			(1,120	)
Stock-based compensation		—		—		—			—		3,573			—			3,573
Cumulative effect of the adoption of the new revenue standard, net of tax		—		—		—			—		—			139			139
Net loss		—		—		—			—		—			(16,150	)		(16,150	)
BALANCE AT JUNE 30, 2018		10	$	50		11,876		$	12	$	159,160		$	(89,519	)	$	69,703


Three months ended June 30, 2019:
BALANCE AT MARCH 31, 2019		10	$	50		12,135		$	12	$	164,119		$	(114,338	)	$	49,843
Issuance of common stock, net of issuance costs		—		—		336			—		19,615			—			19,615
Exercise of stock options		—		—		13			—		194			—			194
Issuance of restricted common stock		—		—		18			—		—			—			—
Forfeiture of restricted common stock		—		—		(45	)		—		—			—			—
Purchase and retirement of common stock		—		—		(24	)		—		(1,382	)		—			(1,382	)
Stock-based compensation		—		—		—			—		2,065			—			2,065
Net loss		—		—		—			—		—			(7,933	)		(7,933	)
BALANCE AT JUNE 30, 2019		10	$	50		12,433		$	12	$	184,611		$	(122,271	)	$	62,402

Six months ended June 30, 2019:
BALANCE AT DECEMBER 31, 2018		10	$	50		11,891		$	12	$	162,428		$	(105,875	)	$	56,615
Issuance of common stock, net of issuance costs		—		—		336			—		19,615			—			19,615
Exercise of stock options		—		—		23			—		293			—			293
Issuance of restricted common stock		—		—		273			—		—			—			—
Forfeiture of restricted common stock		—		—		(46	)		—		—			—			—
Purchase and retirement of common stock		—		—		(44	)		—		(1,868	)		—			(1,868	)
Stock-based compensation		—		—		—			—		4,143			—			4,143
Net loss		—		—		—			—		—			(16,396	)		(16,396	)
BALANCE AT JUNE 30, 2019		10	$	50		12,433		$	12	$	184,611		$	(122,271	)	$	62,402

The accompanying notes are an integral part of these consolidated financial statements.

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)

	Six			Six
	Months			Months
	Ended			Ended
	June 30,			June 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(16,396	)	$	(16,150	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and write-off of property and equipment		747			764
Amortization and write-off of intangibles		372			287
Stock-based compensation		4,053			3,480
Changes in operating assets and liabilities:
Trade accounts receivable		(351	)		2,561
Other current assets		(40	)		210
Other assets		77			(35	)
Accounts payable and other accrued liabilities		1,132			(227	)
Deferred revenue		(244	)		(658	)
Lease liability and other long-term liabilities		(325	)		(21	)
Net cash used in operating activities		(10,975	)		(9,789	)
Cash flows from investing activities:
Purchase of property and equipment		(404	)		(557	)
Capitalized patent costs		(359	)		(402	)
Maturity of marketable securities		14,671			20,839
Purchase of marketable securities		(15,085	)		(15,637	)
Net cash provided by (used in) investing activities		(1,177	)		4,243
Cash flows from financing activities:
Issuance of common stock, net of issuance costs		19,615			—
Exercise of stock options		293			914
Purchase of common stock		(1,868	)		(1,120	)
Net cash provided by (used in) financing activities		18,040			(206	)
Net increase (decrease) in cash and cash equivalents		5,888			(5,752	)
Cash and cash equivalents at beginning of period		27,278			40,823
Cash and cash equivalents at end of period	$	33,166		$	35,071
Supplemental disclosure of cash flow information:
Cash received for income taxes, net	$	93		$	98
Supplemental schedule of non-cash activities:
Property and equipment and patent costs in accounts payable	$	(7	)	$	8
Stock-based compensation capitalized to software and patent costs	$	90		$	93
Right of use assets obtained in exchange for lease obligations	$	2,709		$	—

The accompanying notes are an integral part of these consolidated financial statements.

DIGIMARC CORPORATION

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”), a comprehensive set of technologies for identifying, discovering and interacting with digitally-enhanced media. The platform includes Digimarc Barcode, a proprietary method for imperceptibly enhancing packaging, print, images, thermal labels, audio and other objects with data that is detected by enabled devices, such as smart phones, computers, barcode scanners and machine-vision equipment. Digimarc Discover software enables an ecosystem of connected devices to easily identify content or materials and deliver information.

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. Significant changes to our accounting policies as a result of adopting Accounting Standards Codification (“ASC”) 842, “Leases,” effective January 1, 2019, are discussed in Note 11 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, which was filed with the SEC on February 22, 2019. 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. 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.

In connection with the Company’s annual impairment test of goodwill as of June 30, 2019 and 2018, it was concluded that there was no impairment to goodwill as the estimated fair value of the Company’s reporting unit substantially exceeded the carrying value.

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 requires 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 are effective for fiscal years beginning after December 31, 2018, and interim periods beginning in the first interim period within the year of adoption. In July 2018, the FASB issued ASU No. 2018-11, “