10-Q 1 dmrc-10q_20200331.htm 10-Q dmrc-10q_20200331.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 March 31, 2020

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

 

 

 

 

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 April 24, 2020, there were 12,642,344 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 March 31, 2020 and December 31, 2019

3

 

Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019

4

 

Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2020 and 2019

5

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

6

 

Notes to Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 4.

Controls and Procedures

29

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 6.

Exhibits

32

SIGNATURES

33

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements.

DIGIMARC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(UNAUDITED)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,250

 

 

$

11,213

 

Marketable securities

 

 

20,320

 

 

 

25,604

 

Trade accounts receivable, net

 

 

3,959

 

 

 

4,021

 

Other current assets

 

 

2,118

 

 

 

2,456

 

Total current assets

 

 

36,647

 

 

 

43,294

 

Property and equipment, net

 

 

3,539

 

 

 

3,650

 

Intangibles, net

 

 

6,629

 

 

 

6,670

 

Goodwill

 

 

1,114

 

 

 

1,114

 

Other assets

 

 

2,524

 

 

 

2,660

 

Total assets

 

$

50,453

 

 

$

57,388

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

2,349

 

 

$

2,272

 

Deferred revenue

 

 

3,015

 

 

 

3,172

 

Total current liabilities

 

 

5,364

 

 

 

5,444

 

Lease liability and other long-term liabilities

 

 

2,346

 

 

 

2,494

 

Total liabilities

 

 

7,710

 

 

 

7,938

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

190,303

 

 

 

188,103

 

Accumulated deficit

 

 

(147,623

)

 

 

(138,715

)

Total shareholders’ equity

 

 

42,743

 

 

 

49,450

 

Total liabilities and shareholders’ equity

 

$

50,453

 

 

$

57,388

 

 

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

 

 

3


 

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(UNAUDITED)

 

 

 

Three

 

 

Three

 

 

 

 

Months

 

 

Months

 

 

 

 

Ended

 

 

Ended

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

2020

 

 

2019

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Service

 

$

3,738

 

 

$

3,814

 

 

Subscription

 

 

2,451

 

 

 

1,846

 

 

Total revenue

 

 

6,189

 

 

 

5,660

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Service

 

 

1,684

 

 

 

1,645

 

 

Subscription

 

 

514

 

 

 

489

 

 

Total cost of revenue

 

 

2,198

 

 

 

2,134

 

 

Gross profit

 

 

3,991

 

 

 

3,526

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

5,246

 

 

 

4,950

 

 

Research, development and engineering

 

 

4,433

 

 

 

4,038

 

 

General and administrative

 

 

3,367

 

 

 

3,210

 

 

Total operating expenses

 

 

13,046

 

 

 

12,198

 

 

Operating loss

 

 

(9,055

)

 

 

(8,672

)

 

Other income, net

 

 

142

 

 

 

237

 

 

Loss before income taxes

 

 

(8,913

)

 

 

(8,435

)

 

Benefit (provision) for income taxes

 

 

5

 

 

 

(28

)

 

Net loss

 

$

(8,908

)

 

$

(8,463

)

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Loss per common share — basic

 

$

(0.74

)

 

$

(0.74

)

 

Loss per common share — diluted

 

$

(0.74

)

 

$

(0.74

)

 

Weighted average common shares outstanding — basic

 

 

12,037

 

 

 

11,487

 

 

Weighted average common shares outstanding — diluted

 

 

12,037

 

 

 

11,487

 

 

 

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

 

 

4


 

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 March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

135

 

 

 

 

 

 

135

 

Issuance of restricted common stock

 

 

 

 

 

 

 

 

186

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase and retirement of common stock

 

 

 

 

 

 

 

 

(23

)

 

 

 

 

 

(738

)

 

 

 

 

 

(738

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,230

 

 

 

 

 

 

2,230

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,908

)

 

 

(8,908

)

BALANCE AT MARCH 31, 2020

 

 

10

 

 

$

50

 

 

 

12,645

 

 

$

13

 

 

$

190,303

 

 

$

(147,623

)

 

$

42,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2018

 

 

10

 

 

$

50

 

 

 

11,891

 

 

$

12

 

 

$

162,428

 

 

$

(105,875

)

 

$

56,615

 

Exercise of stock options

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

99

 

 

 

 

 

 

99

 

Issuance of restricted common stock

 

 

 

 

 

 

 

 

255

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted common stock

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

Purchase and retirement of common stock

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

(486

)

 

 

 

 

 

(486

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,078

 

 

 

 

 

 

2,078

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,463

)

 

 

(8,463

)

BALANCE AT MARCH 31, 2019

 

 

10

 

 

$

50

 

 

 

12,135

 

 

$

12

 

 

$

164,119

 

 

$

(114,338

)

 

$

49,843

 

 

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

 

 

5


 

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)

 

 

 

Three

 

 

Three

 

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(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

 

 

374

 

 

 

357

 

Amortization and write-off of intangibles

 

 

201

 

 

 

180

 

Stock-based compensation

 

 

2,195

 

 

 

2,037

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

62

 

 

 

161

 

Other current assets

 

 

338

 

 

 

74

 

Other assets

 

 

136

 

 

 

(33

)

Accounts payable and other accrued liabilities

 

 

61

 

 

 

800

 

Deferred revenue

 

 

(146

)

 

 

(393

)

Lease liability and other long-term liabilities

 

 

(159

)

 

 

(174

)

Net cash used in operating activities

 

 

(5,846

)

 

 

(5,454

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(235

)

 

 

(194

)

Capitalized patent costs

 

 

(137

)

 

 

(153

)

Maturity of marketable securities

 

 

11,691

 

 

 

6,744

 

Purchase of marketable securities

 

 

(6,407

)

 

 

(3,559

)

Net cash provided by investing activities

 

 

4,912

 

 

 

2,838

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Issuance of common stock, net of issuance costs

 

 

574

 

 

 

 

Exercise of stock options

 

 

135

 

 

 

99

 

Purchase of common stock

 

 

(738

)

 

 

(486

)

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

 

 

11,213

 

 

 

27,278

 

Cash and cash equivalents at end of period

 

$

10,250

 

 

$

24,275

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash received (paid) for income taxes, net

 

$

16

 

 

$

(3

)

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

 

 

Property and equipment and patent costs in accounts payable

 

$

16

 

 

$

2

 

Stock-based compensation capitalized to software and patent costs

 

$

35

 

 

$

41

 

Right of use assets obtained in exchange for lease obligations

 

$

 

 

$

2,709

 

 

 

 

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

 

 

6


 

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 Platform, 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 suite of verification and quality control tools, assesses signal quality and validates data at critical stages of production when the Digimarc Barcode is 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.

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, 2019. 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, 2019, which was filed with the SEC on February 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, 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.

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 required 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 were 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, “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 permitted 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

7


 

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 11 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, 2020

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Money market securities

 

$

5,016

 

 

$

 

 

$

 

 

$

5,016

 

Commercial paper

 

 

 

 

 

20,066

 

 

 

 

 

 

20,066

 

Corporate notes

 

 

 

 

 

5,043

 

 

 

 

 

 

5,043

 

Total

 

$

5,016

 

 

$

25,109

 

 

$

 

 

$

30,125

 

 

December 31, 2019

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Money market securities

 

$

746

 

 

$

 

 

$

 

 

$

746

 

Commercial paper

 

 

 

 

 

25,481

 

 

 

 

 

 

25,481

 

Corporate notes

 

 

 

 

 

5,773

 

 

 

 

 

 

5,773

 

U.S. treasuries

 

 

 

 

 

4,040

 

 

 

 

 

 

4,040

 

Total

 

$

746

 

 

$

35,294

 

 

$

 

 

$

36,040

 

 

The fair value maturities of the Company’s cash equivalents and marketable securities as of March 31, 2020, 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

 

$

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 money market funds and commercial paper totaling $9,805 and $10,436 at March 31, 2020, and December 31, 2019, respectively. Cash equivalents are carried at either cost or amortized cost, depending on the type of security, which approximates fair value.

 

8


 

3. Revenue Recognition

The Company derives its revenue primarily from software development services and software subscriptions.  Applicable revenue recognition criteria are considered separately for each performance obligation as follows:

 

Service revenue consists primarily of revenue earned from the performance of software development services. The majority of service contracts are structured as time and materials agreements.  Revenue for services is recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided.

 

Subscription revenue consists primarily of revenue earned from the sale of software products and to 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.

Customer arrangements may contain multiple performance obligations such as software 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.  Products and services that are not capable of being distinct are combined with other products or services until a distinct performance obligation is identified. The revenue associated with this performance obligation is typically recognized over the term of the contract as the customer simultaneously receives and consumes the products and 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 market category in the Company’s single reporting segment:

 

 

Three

 

 

Three

 

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Government

 

 

 

 

 

 

 

 

Service

 

$

3,652

 

 

$

3,634

 

Subscription

 

 

391

 

 

 

428

 

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

 

$

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 8.  

9


 

The Company has contract liabilities from contracts with customers that are classified as “deferred revenue.”  Deferred revenue consists of billings in advance for services and subscriptions 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,

 

 

 

2020

 

 

2019

 

Deferred revenue, current

 

$

3,015

 

 

$

3,172

 

Deferred revenue, long-term

 

 

70

 

 

 

59

 

Total

 

$

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 prices from contractual obligations that are unsatisfied or partially unsatisfied was $17,454 and $17,759 as of March 31, 2020 and December 31, 2019, respectively.

 

4. Segment Information

Geographic Information

The Company derives its revenue from a single reporting segment: automatic identification solutions. Revenue is generated in this segment primarily through software development services and software subscriptions. The Company markets its products in the U.S. and in non-U.S. countries through its sales personnel and partners.

Revenue by geographic area, based upon the “bill-to” location, was as follows:

 

 

 

Three

 

 

Three

 

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Domestic

 

$

1,759

 

 

$

1,317

 

International (1)

 

 

4,430

 

 

 

4,343

 

Total

 

$

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,

 

 

 

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.

10


 

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 stock option awards on a straight-line basis over the vesting period of the 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, 2020 and 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

 

 

 

Months

 

 

Months

 

 

 

Ended

 

 

Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Stock-based compensation:

 

 

 

 

 

 

 

 

Cost of revenue

 

$

190

 

 

$

182

 

Sales and marketing

 

 

479

 

 

 

519

 

Research, development and engineering

 

 

399

 

 

 

354

 

General and administrative

 

 

1,127

 

 

 

982

 

Stock-based compensation expense

 

 

2,195

 

 

 

2,037

 

Capitalized to software and patent costs

 

 

35

 

 

 

41

 

Total stock-based compensation

 

$

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,

 

 

 

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.

11


 

The Company expects to recognize the total unrecognized compensation costs as of March 31, 2020, for stock options and restricted stock over weighted average periods through March 31, 2024, as follows:

 

 

 

Stock

 

Restricted

 

 

Options

 

Stock

Weighted average period

 

1.03 years

 

1.57 years

 

As of March 31, 2020, under all of the Company’s stock-based compensation plans, equity awards to purchase an additional 1,098 shares were authorized for future grants under the plans. The Company issues new shares upon option exercises.

Stock Option Activity

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, 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