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 September 30, 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 October 23, 2020, there were 15,315,663 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 September 30, 2020 and December 31, 2019	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019	4
	Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2020 and 2019	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 4.	Controls and Procedures	33
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	36
SIGNATURES		37

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

DIGIMARC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(UNAUDITED)

	September 30,			December 31,
	2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	45,461		$	11,213
Marketable securities		17,194			25,604
Trade accounts receivable, net		3,022			4,021
Other current assets		2,396			2,456
Total current assets		68,073			43,294
Property and equipment, net		3,361			3,650
Intangibles, net		6,604			6,670
Goodwill		1,114			1,114
Other assets		2,353			2,660
Total assets	$	81,505		$	57,388
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$	2,469		$	2,272
Note payable, current		3,096			—
Deferred revenue		2,098			3,172
Total current liabilities		7,663			5,444
Lease liability and other long-term liabilities		2,712			2,494
Note payable, long-term		1,957			—
Total liabilities		12,332			7,938
Commitments and contingencies (Note 14)
Shareholders’ equity:
Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares issued and    outstanding at September 30, 2020 and December 31, 2019)		50			50
Common stock (par value $0.001 per share, 50,000 authorized, 15,316 and 12,446 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively)		15			12
Additional paid-in capital		232,544			188,103
Accumulated deficit		(163,436	)		(138,715	)
Total shareholders’ equity		69,173			49,450
Total liabilities and shareholders’ equity	$	81,505		$	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			Nine			Nine
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2020			2019			2020			2019
Revenue:
Service	$	3,352		$	3,160		$	10,982		$	10,549
Subscription		2,399			2,668			7,455			7,119
Total revenue		5,751			5,828			18,437			17,668
Cost of revenue:
Service		1,406			1,409			4,691			4,730
Subscription		522			509			1,548			1,507
Total cost of revenue		1,928			1,918			6,239			6,237
Gross profit		3,823			3,910			12,198			11,431
Operating expenses:
Sales and marketing		4,538			4,839			14,417			14,876
Research, development and engineering		4,662			4,105			13,303			12,124
General and administrative		3,009			2,998			9,457			9,287
Total operating expenses		12,209			11,942			37,177			36,287
Operating loss		(8,386	)		(8,032	)		(24,979	)		(24,856	)
Other income, net		36			259			257			727
Loss before income taxes		(8,350	)		(7,773	)		(24,722	)		(24,129	)
Benefit (provision) for income taxes		(2	)		12			1			(28	)
Net loss	$	(8,352	)	$	(7,761	)	$	(24,721	)	$	(24,157	)
Earnings (loss) per common share:
Loss per common share — basic	$	(0.68	)	$	(0.65	)	$	(2.04	)	$	(2.07	)
Loss per common share — diluted	$	(0.68	)	$	(0.65	)	$	(2.04	)	$	(2.07	)
Weighted average common shares outstanding — basic		12,241			11,924			12,129			11,693
Weighted average common shares outstanding — diluted		12,241			11,924			12,129			11,693

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 September 30, 2020:
BALANCE AT JUNE 30, 2020		10	$	50		12,659		$	13	$	192,298		$	(155,084	)	$	37,277
Issuance of common stock, net of issuance costs		—		—		2,676			2		38,027			—			38,029
Issuance of restricted common stock		—		—		13			—		—			—			—
Forfeiture of restricted common stock		—		—		(3	)		—		—			—			—
Purchase and retirement of common stock		—		—		(29	)		—		(448	)		—			(448	)
Stock-based compensation		—		—		—			—		2,667			—			2,667
Net loss		—		—		—			—		—			(8,352	)		(8,352	)
BALANCE AT SEPTEMBER 30, 2020		10	$	50		15,316		$	15	$	232,544		$	(163,436	)	$	69,173
Three months ended September 30, 2019:
BALANCE AT JUNE 30, 2019		10	$	50		12,433		$	12	$	184,611		$	(122,271	)	$	62,402
Issuance of restricted common stock		—		—		19			—		—			—			—
Forfeiture of restricted common stock		—		—		(1	)		—		—			—			—
Purchase and retirement of common stock		—		—		(22	)		—		(885	)		—			(885	)
Stock-based compensation		—		—		—			—		2,085			—			2,085
Net loss		—		—		—			—		—			(7,761	)		(7,761	)
BALANCE AT SEPTEMBER 30, 2019		10	$	50		12,429		$	12	$	185,811		$	(130,032	)	$	55,841
Nine months ended September 30, 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		—		—		2,704			3		38,600			—			38,603
Exercise of stock options		—		—		8			—		135			—			135
Issuance of restricted common stock		—		—		242			—		—			—			—
Forfeiture of restricted common stock		—		—		(7	)		—		—			—			—
Purchase and retirement of common stock		—		—		(77	)		—		(1,568	)		—			(1,568	)
Stock-based compensation		—		—		—			—		7,274			—			7,274
Net loss		—		—		—			—		—			(24,721	)		(24,721	)
BALANCE AT SEPTEMBER 30, 2020		10	$	50		15,316		$	15	$	232,544		$	(163,436	)	$	69,173
Nine months ended September 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		—		—		292			—		—			—			̵