DIGIMARC CORPORATION The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance ofDigimarc that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. See the discussion regarding forward-looking statements included in this Quarterly Report on Form 10-Q under the caption "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995." The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Readers are also urged to carefully review and consider the disclosures made in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and in the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed onMarch 4, 2022 (our "2021 Annual Report"), and other reports and filings we have made with theU.S. Securities and Exchange Commission ("SEC"). Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to "Company," "Digimarc ," "we," "our" and "us" refer toDigimarc Corporation . OnJanuary 3, 2022 , the Company completed the acquisition ofEVRYTHNG Limited and its subsidiaries ("EVRYTHNG"), aLondon -based product cloud company. Unless context otherwise requires, references to EVRYTHNG refer to our wholly owned subsidiary following the acquisition.
All dollar amounts are in thousands except per share amounts or unless otherwise noted. The percentages within the tables may not sum to 100% due to rounding.
Overview
The Digimarc Platform is a unique software as a service to manage digital identities, connect physical items using most existing data carriers, and provide a digital twin to help connected physical items interact with machines, devices, and applications. The Digimarc Platform is underpinned by:
• Digital Watermarks: Built on a patented foundation, these data carriers
provide an imperceptible digital identity and make scanning much more
efficient than traditional visual barcodes as they are repeated many times
throughout product packaging.
•
interfaces that recognizes and decodes
scans most digital identifiers.
•
offers detailed reports enabling printers and premedia professionals to
validate
• EVRYTHNG Product Cloud: The Product Cloud assigns products a unique
digital identity, making products trackable, intelligent, and interactive
by applying analytics and real-time intelligence to a company's data.
By enabling customers to create digital identities for physical and digital
media objects,
• Brand Integrity: Our technology can verify product authenticity, provide
more in-depth insight into products, and pinpoint the location of
counterfeit goods. Because
confirm the credibility of real products without attracting attention.
• Recycling Accuracy:
plastic or other packaging product that overcomes existing challenges in
sortation and gives products a "Digital Recycling Passport," linked to
virtually unlimited attributes in the cloud.
• Supply Chain Traceability: Our technology provides unique, serialized
identities on product packaging via digital printing, industrial inkjet
printers, and laser etching techniques to support consumer brand
traceability initiatives.
• Retail Operations & Consumer Experience: The digital identity can be
applied to product packaging, allowing for faster and more accurateinventory scanning, unique consumer experiences, and easier checkout.
22
--------------------------------------------------------------------------------We seek patent protection for our inventions to differentiate our products and technologies, mitigate infringement risks, and develop opportunities for licensing. Our broad patent portfolio covers a wide range of methods, applications, system architectures and processes.
Our intellectual property contains many innovations in digital watermarking, content and object recognition, digital rights management, and related fields. To protect our inventions, we have implemented an extensive intellectual property protection program that relies on a combination of patent, copyright, trademark and trade secret laws, and nondisclosure agreements and other contracts. As a result, we believe we have one of the world's most extensive patent portfolios in digital watermarking and related fields, with approximately 1,000U.S. and foreign patents granted and applications pending as ofMarch 31, 2022 . The patents in our portfolio each have a life of approximately 20 years from the patent's effective filing date. OnJanuary 3, 2022 , we completed the acquisition of EVRYTHNG. The EVRYTHNG product cloud allows the combined company to now offer a complete automatic identification solution to existing customers and prospective customers. The aggregate initial consideration for the acquisition was 772 thousand shares of common stock of the Company and warrants to purchase 231 thousand shares of common stock of the Company at the closing. A portion of the consideration was held back by us to secure any post-closing adjustments to the initial consideration and the indemnification obligations of the sellers. We also paid$4.0 million of closing costs on behalf of the EVRYTHNG sellers. The financial results of EVRYTHNG are consolidated withDigimarc's financial results for the post-acquisition period. COVID-19 Pandemic The coronavirus 2019 ("COVID-19") pandemic continues to pose significant risks to our business. The ongoing public health actions attempting to reduce the spread of COVID-19 created and may continue to create significant disruptions to consumer demand, customer and supplier relationships, sales and support processes, and general economic conditions. Accordingly, our management continuously evaluates our business operations, communicates with and monitors the actions of our customers and partners, and reviews our near-term financial performance as we manage the Company through the uncertainty related to the COVID-19 pandemic. Some of our projects with customers and partners have been delayed as a result of the COVID-19 pandemic. Delays in these projects have affected the timing of closing new business.
Critical Accounting Policies and Estimates
Detailed information about our critical accounting policies and estimates is set
forth in Part III, Item 15 of our 2021 Annual Report ("Exhibits and
Financial Statement Schedules"), in "Note 1: Description of Business and Summary
of Significant Accounting Policies," which is incorporated by reference into
this Quarterly Report on Form 10-Q. We also added a new critical accounting
policy for "Business Combinations" in Note 1 of this Quarterly Report on Form
10-Q.
23--------------------------------------------------------------------------------
Results of Operations
The following table presents statements of operations data for the periods indicated as a percentage of total revenue. The statements of operations for the three months endedMarch 31, 2022 reflect the operating results of EVRYTHNG fromJanuary 3, 2022 , the date the acquisition closed, throughMarch 31, 2022 . Unless stated otherwise, all references in this Management's Discussion and Analysis of Financial Condition and Results of Operations relate to the three month period endedMarch 31, 2022 , and all changes discussed with respect to such periods reflect changes compared to the three month period endedMarch 31, 2021 . Three Three Months Months Ended Ended March 31, March 31, 2022 2021 Percentages are percent of total revenue Revenue: Service 49 % 56 % Subscription 51 44 Total revenue 100 100 Cost of revenue: Service (1) 25 23 Subscription (1) 14 12 Amortization expense on acquired intangible assets 16 - Total cost of revenue 55 35 Gross profit 45 65 Operating expenses: Sales and marketing 107 74 Research, development and engineering 82 62 General and administrative 86 52 Amortization expense on acquired intangible assets 5 - Impairment of lease right of use assets and leasehold improvements 8 - Total operating expenses 288 188 Operating loss (243 ) (123 ) Other income (loss), net (0 ) 0 Loss before income taxes (243 ) (123 ) Benefit (provision) for income taxes 3 (-) Net loss (240 %) (123 %)
(1) Cost of revenue for Service and Subscription excludes amortization expense on acquired intangible assets.
Summary Total revenue for the three month period endedMarch 31, 2022 , increased$0.7 million , or 11%, to$7.4 million , compared to the corresponding three month period endedMarch 31, 2021 . The increase reflects EVRYTHNG revenue of$1.5 million for the three months endedMarch 31, 2022 , partially offset by lower service revenue, reflecting$0.3 million of less revenue due to timing of program work with the Central Banks, and lower subscription revenue due to$0.5 million of upfront revenue on a two-year contract signed in the three month period endedMarch 31, 2021 . Total operating expenses for the three month period endedMarch 31, 2022 , increased$8.8 million , or 70%, to$21.4 million , compared to the corresponding three month period endedMarch 31, 2021 . The increase reflects EVRYTHNG operating expenses of$4.6 million for the three months endedMarch 31, 2022 . The remaining increase of$4.2 million reflects$1.2 million of higher compensation costs due to higher headcount and annual compensation adjustments, higher legal, accounting and tax costs of$0.7 million related to the EVRYTHNG acquisition and financing activities, a$0.6 million non-cash impairment charge to write-down our lease right of use assets and leasehold improvements, higher consulting costs of$0.5 million for acquisition integration and other corporate initiatives, and higher travel and conference costs of$0.5 million . 24 -------------------------------------------------------------------------------- Revenue Three Three Months Months Ended Ended Dollar Percent March 31, March 31, Increase Increase 2022 2021 (Decrease) (Decrease) Revenue: Service$ 3,620 $ 3,784 $ (164 ) (4 )% Subscription 3,791 2,916 875 30 % Total$ 7,411 $ 6,700 $ 711 11 % Revenue (as % of total revenue): Service 49 % 56 % Subscription 51 % 44 % Total 100 % 100 % Service. Service revenue consists primarily of revenue earned from the performance of software development services and, to a lesser extent, professional services. The majority of software development contracts are structured as time and materials agreements. Revenue for services is generally recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided. Service contracts can range from days to several years in length. Our contract with the Central Banks, which accounts for the majority of our service revenue, has a contract term throughDecember 31, 2024 , with the option to extend the term for an additional five years by mutual agreement. The contract is subject to work plans that are reviewed and agreed upon quarterly. The contract provides for predetermined billing rates, which are adjusted annually to account for cost of living variables, and provides for the reimbursement of third party costs incurred to support the work plans. The$0.2 million decrease in service revenue for the three month period endedMarch 31, 2022 , compared to the corresponding three month period endedMarch 31, 2021 , included$0.3 million of service revenue from EVRYTHNG for the three months endedMarch 31, 2022 . Excluding the service revenue from EVRYTHNG, service revenue decreased$0.5 million due to timing of program work with the Central Banks, which accounted for$0.3 million of the decrease, and lower revenue from professional services work. Subscription. Subscription revenue consists primarily of revenue earned from the licensing of software products and, to a lesser extent, the licensing and sale 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. The$0.9 million increase in subscription revenue for the three month period endedMarch 31, 2022 , compared to the corresponding three month period endedMarch 31, 2021 , included$1.2 million of subscription revenue from EVRYTHNG for the three months endedMarch 31, 2022 . Excluding the subscription revenue from EVRYTHNG, subscription revenue decreased$0.3 million due to$0.5 million of upfront revenue on a two-year contract signed in the three month period endedMarch 31, 2021 , partially offset by revenue from new customer contracts. Revenue by geography Three Three Months Months Ended Ended Dollar Percent March 31, March 31, Increase Increase 2022 2021 (Decrease) (Decrease) Revenue by geography: Domestic$ 2,363 $ 1,722 $ 641 37 % International 5,048 4,978 70 1 % Total$ 7,411 $ 6,700 $ 711 11 % Revenue (as % of total revenue): Domestic 32 % 26 % International 68 % 74 % Total 100 % 100 %
Domestic. The increase in domestic revenue for the three month period ended
25
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International. The increase in international revenue for the three month period
ended March 31, 2022 , compared to the corresponding three month period ended
March 31, 2021 , included $0.8 million of international revenue from EVRYTHNG for
the three months ended March 31, 2022 . Excluding the international revenue from
EVRYTHNG, international revenue decreased $0.7 million reflecting $0.5 million
of upfront revenue on a two-year contract signed in the three month period ended
March 31, 2021 , timing of program work with the Central Banks, which accounted
for $0.3 million of the decrease, and lower revenue from professional services
work partially offset by revenue from new customer contracts.
Revenue by market
Three Three
Months Months
Ended Ended Dollar Percent
March 31, March 31, Increase Increase
2022 2021 (Decrease) (Decrease)
Government:
Service $ 3,272 $ 3,585 $ (313 ) (9 )%
Subscription 300 300 - - %
Total Government $ 3,572 $ 3,885 $ (313 ) (8 )%
Commercial:
Service $ 348 $ 199 $ 149 75 %
Subscription 3,491 2,616 875 33 %
Total Commercial $ 3,839 $ 2,815 $ 1,024 36 %
Total $ 7,411 $ 6,700 $ 711 11 %
Government. The $0.3 million decrease in government revenue for the three month
period ended March 31, 2022 , compared to the corresponding three month period
ended March 31, 2021 , was due to timing of program work with the Central Banks.
EVRYTHNG currently has no government revenue.
Commercial. The $1.0 million increase in commercial revenue for the three month
period ended March 31, 2022 , compared to the corresponding three month period
ended March 31, 2021 , included $1.5 million of commercial revenue from EVRYTHNG
for the three months ended March 31, 2022 . Excluding the commercial revenue from
EVRYTHNG, commercial revenue decreased $0.5 million due to $0.5 million of
upfront revenue on a two-year contract signed in the three month period ended
March 31, 2021 and lower revenue from professional services work, partially
offset by revenue from new customer contracts.
Cost of revenue
Service. Cost of service revenue primarily includes:
• compensation, benefits, incentive compensation in the form of stock-based
compensation and related costs of our software developers, quality
assurance personnel, professional services team and other personnel where
we bill our customers for time and materials costs;
• payments to outside contractors that are billed to customers;
• charges for equipment directly used by customers;
• depreciation for equipment and software directly used by customers; and
• travel costs that are billed to customers.
Subscription. Cost of subscription revenue primarily includes:
• cost of outside contractors that provide operational support for our
subscription products;
• internet cloud hosting costs and image search data fees to support our
subscription products;
• license fees paid to technology solution providers when we sell a combined
solution; and
• amortization of capitalized patent costs and patent maintenance fees.
Amortization expense on acquired intangible assets. Includes:
• amortization expense recognized on the developed technology intangible
asset acquired in the EVRYTHNG acquisition.
26
--------------------------------------------------------------------------------
Gross profit
Three Three
Months Months
Ended Ended Dollar Percent
March 31, March 31, Increase Increase
2022 2021 (Decrease) (Decrease)
Gross Profit:
Service (1) $ 1,789 $ 2,214 $ (425 ) (19 )%
Subscription (1) 2,749 2,125 624 29 %
Amortization expense on acquired
intangible assets (1,194 ) - (1,194 ) (100 )%
Total $ 3,344 $ 4,339 $ (995 ) (23 )%
Gross Profit Margin:
Total 45 % 65 %
Service (1) 49 % 59 %
Subscription (1) 73 % 73 %
(1)Gross Profit and Gross Profit Margin for Service and Subscription excludes amortization expense on acquired intangible assets.
The decrease of$1.0 million in total gross profit for the three month period endedMarch 31, 2022 , compared to the corresponding three month period endedMarch 31, 2021 , was primarily due to$1.2 million of amortization expense recognized on the developed technology intangible asset acquired in the EVRYTHNG acquisition. The decrease of$0.4 million in service gross profit, excluding amortization expense on acquired intangible assets, for the three month period endedMarch 31, 2022 , compared to the corresponding three month period endedMarch 31, 2021 , reflects$0.1 million of service gross profit from EVRYTHNG. Excluding the impact of EVRYTHNG, service gross profit decreased$0.5 million due to lower service revenue and incurring additional professional services hours above the hours that were billable on one service contract during the three month period endedMarch 31, 2022 . The increase of$0.6 million in subscription gross profit, excluding amortization expense on acquired intangible assets, for the three month period endedMarch 31, 2022 , compared to the corresponding three month period endedMarch 31, 2021 , reflects$0.8 million of subscription gross profit from EVRYTHNG. Excluding the impact of EVRYTHNG, subscription gross profit decreased$0.2 million due to lower subscription revenue. The decrease in service gross profit margin, excluding amortization expense on acquired intangible assets, for the three month period endedMarch 31, 2022 , compared to the corresponding three month period endedMarch 31, 2021 , was primarily due to incurring additional professional services hours above the hours that were billable on one service contract during the three month period endedMarch 31, 2022 . The change in subscription gross profit margin, excluding amortization expense on acquired intangible assets, for the three month period endedMarch 31, 2022 , compared to the corresponding three month period endedMarch 31, 2021 , was insignificant. Operating expenses Sales and marketing Three Three Months Months Ended Ended Dollar Percent March 31, March 31, Increase Increase 2022 2021 (Decrease) (Decrease) Sales and marketing$ 7,945 $ 4,941 $ 3,004 61 % Sales and marketing (as % of total revenue) 107 % 74 % 27
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Sales and marketing expenses consist primarily of:
• compensation, benefits, incentive compensation in the form of stock-based
compensation and related costs of our sales, marketing, product,
operations and customer support personnel;
• travel and market research costs, and costs associated with marketing
programs, such as trade shows, public relations and new product launches;
• professional services, consulting and outside contractor costs for sales
and marketing and product initiatives; and
• charges for infrastructure and centralized costs of facilities and
information technology.
The increase in sales and marketing expenses for the three month period endedMarch 31, 2022 , compared to the corresponding three month period endedMarch 31, 2021 , was primarily due to:
• EVRYTHNG sales and marketing expenses of
• increased travel and conference expenses of$0.5 million ; and • increased infrastructure and centralized costs of facilities and information technology of$0.2 million .
Research, development and engineering
Three Three
Months Months
Ended Ended Dollar Percent
March 31, March 31, Increase Increase
2022 2021 (Decrease) (Decrease)
Research, development and
engineering $ 6,091 $ 4,131 $ 1,960 47 %
Research, development and
engineering (as % of total
revenue) 82 % 62 %
Research, development and engineering expenses consist primarily of:
• compensation, benefits, incentive compensation in the form of stock-based
compensation and related costs of our software and hardware developers and
quality assurance personnel;
• payments to outside contractors;
• the purchase of materials and services for product development; and
• charges for infrastructure and centralized costs of facilities and
information technology.
The increase in research, development and engineering expenses for the three
month period ended March 31, 2022 , compared to the corresponding three month
period ended March 31, 2021 , was primarily due to:
• EVRYTHNG research, development and engineering expenses of
post acquisition;
• increased compensation costs of
and annual compensation adjustments; and
• increased infrastructure and centralized costs of facilities and
information technology of $0.4 million .
General and administrative
Three Three
Months Months
Ended Ended Dollar Percent
March 31, March 31, Increase Increase
2022 2021 (Decrease) (Decrease)
General and administrative $ 6,408 $ 3,493 $ 2,915 83 %
General and administrative
(as % of total revenue) 86 % 52 %
28-------------------------------------------------------------------------------- We incur general and administrative costs in the functional areas of finance, legal, human resources, intellectual property, executive and board of directors. Costs for facilities and information technology are also managed as part of the general and administrative processes and are allocated to this area as well as each of the areas in sales and marketing and research, development and engineering.
General and administrative expenses consist primarily of:
• compensation, benefits and incentive compensation in the form of
stock-based compensation and related costs of our general and
administrative personnel;
• third party and professional fees associated with legal, accounting and
human resources functions;
• costs associated with being a public company;
• third party costs, including filing and governmental regulatory fees and
outside legal fees and translation costs, related to the filing and
maintenance of our intellectual property;
• charges to write off previously capitalized patent costs for patent assets
we abandon; and
• charges for infrastructure and centralized costs of facilities and
information technology.
The increase in general and administrative expenses for the three month period endedMarch 31, 2022 , compared to the corresponding three month period endedMarch 31, 2021 , was primarily due to: • EVRYTHNG general and administrative expenses of$1.3 million post acquisition;
• increased legal, accounting and tax costs of
EVRYTHNG acquisition and financing activities;
• increased consulting costs of $0.5 million related to acquisition
integration and other corporate initiatives;
• increased compensation costs of $0.3 million reflecting annual
compensation increases and higher headcount;
• increased facilities costs of
expense on new corporate headquarters and office moving costs; and
• increased operating taxes of
the
• decreased infrastructure and centralized costs of facilities and
information technology of $0.6 million .
Amortization expense on acquired intangible assets
Three Three
Months Months
Ended Ended Dollar Percent
March 31, March 31, Increase Increase
2022 2021 (Decrease) (Decrease)
Amortization expense on acquired
intangible assets $ 342 $ - $ 342 > 100%
Amortization expense on acquired
intangible assets
(as % of total revenue) 5 % 0 %
29--------------------------------------------------------------------------------
Amortization expense on acquired intangible assets relates to amortization expense recognized on the customer relationships intangible asset acquired in the EVRYTHNG acquisition.
Impairment of lease right of use assets and leasehold improvements
Three Three
Months Months
Ended Ended Dollar Percent
March 31, March 31, Increase Increase
2022 2021 (Decrease) (Decrease)
Impairment of lease right of use
assets and leasehold improvements $ 574 $ - $ 574 > 100%
Impairment of lease right of use
assets and leasehold improvements
(as % of total revenue) 8 % 0 %
The impairment of lease right of use assets and leasehold improvements relates
to our prior corporate headquarters and was triggered upon moving to our new
corporate headquarters in March 2022 .
Stock-based compensation
Three Three
Months Months
Ended Ended Dollar Percent
March 31, March 31, Increase Increase
2022 2021 (Decrease) (Decrease)
Cost of revenue $ 201 $ 173 $ 28 16 %
Sales and marketing 744 440 304 69 %
Research, development and
engineering 507 396 111 28 %
General and administrative 1,016 1,001 15 1 %
Total $ 2,468 $ 2,010 $ 458 23 %
The increase of $0.5 million in stock-based compensation expense for the three
month period ended March 31, 2022 , compared to the corresponding three month
period ended March 31, 2021 , was primarily the result of additional stock awards
granted since March 31, 2021 , reflecting both stock award grants to new
employees, including employees from EVRYTHNG, and annual stock award grants to
existing employees.
We anticipate incurring an additional $20,967 in stock-based compensation
expense through March 31, 2026 , for awards outstanding as of March 31, 2022 .
Other income, net
Three Three
Months Months
Ended Ended Dollar Percent
March 31, March 31, Increase Increase
2022 2021 (Decrease) (Decrease)Other income, net$ (4 ) $ 10 $ (14 ) (140 )% Other income, net (as % of total revenue) 0 % 0 % The decrease in other income, net for the three month period endedMarch 31, 2022 , compared to the corresponding three month period endedMarch 31, 2021 , was not significant. Income Taxes
The provision for income taxes reflects current taxes, deferred taxes, and
withholding taxes. The effective tax rate for the three month periods ended
30
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statutory tax rate because we have a full valuation allowance recorded against
our deferred tax assets. The tax benefit for the three months ended March 31,
2022 reflects an estimated refundable tax credit to be filed for in the United
Kingdom for the 2022 tax year.
The valuation allowance against deferred tax assets as of
We continually assess the applicability of a valuation allowance against our deferred tax assets. Based upon the positive and negative evidence available as ofMarch 31, 2022 , and largely due to the cumulative loss incurred by us over the last several years, which is considered a significant piece of negative evidence when assessing the realizability of deferred tax assets, a full valuation allowance is recorded against our deferred tax assets. We will not record tax benefits on any future losses until it is determined that those tax benefits will be realized. All future reversals of the valuation allowance would result in a tax benefit in the period recognized.
Non-GAAP Financial Measures
The following discussion and analysis includes both financial measures in accordance withU.S. Generally Accepted Accounting Principles ("GAAP") as well as non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flows that exclude amounts that are not normally excluded in the most directly comparable measure calculated and presented 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. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP. Our management uses and relies on Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per common share (diluted), which are all non-GAAP financial measures. We believe that both management and shareholders benefit from referring to the following non-GAAP financial measures in planning, forecasting and analyzing future periods.
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. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the described excluded items.
We define Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per common share (diluted) excluding the adjustments in the table below. 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 can affect comparability.
We have included a reconciliation of our financial measures calculated in accordance with GAAP to the most comparable non-GAAP financial measures. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps 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 applicableSEC rules. 31 -------------------------------------------------------------------------------- The following table presents a reconciliation of Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per common share (diluted) for the three months endedMarch 31, 2022 and 2021: Three Three Months Months Ended Ended March 31, March 31, 2022 2021 GAAP gross profit$ 3,344 $ 4,339 Amortization of acquired intangible assets 1,194 - Amortization and write-off of other intangible assets 141 142 Stock-based compensation 201 173 Non-GAAP gross profit$ 4,880 $ 4,654 Non-GAAP gross profit margin 66 %
69 %
GAAP operating expenses$ 21,360 $ 12,565 Depreciation and write-off of property and equipment (390 ) (363 ) Amortization of acquired intangible assets (342 ) - Amortization and write-off of other intangible assets (30 ) (35 ) Amortization of lease right of use assets under operating leases (271 ) (118 ) Stock-based compensation (2,267 ) (1,837 ) Impairment of lease right of use assets and leasehold improvements (574 ) - Acquisition-related expenses (444 ) - Non-GAAP operating expenses$ 17,042 $ 10,212 GAAP net loss$ (17,781 ) $ (8,222 ) Total adjustments to gross profit 1,536
315
Total adjustments to operating expenses 4,318
2,353
Non-GAAP net loss$ (11,927 )
GAAP loss per common share (diluted)$ (1.03 ) $ (0.50 ) Non-GAAP net loss$ (11,927 ) $ (5,554 ) Non-GAAP loss per common share (diluted)$ (0.69 )
Non-GAAP gross profit for the three months endedMarch 31, 2022 , increased by$0.2 million compared to the three months endedMarch 31, 2021 . The increase reflects Non-GAAP gross profit from EVRYTHNG of$0.9 million , after excluding the EVRYTHNG portion of the adjustment above for amortization expense of$1.2 million on acquired intangible assets. Excluding the impact of EVRYTHNG, Non-GAAP gross profit decreased$0.7 million reflecting lower service and subscription revenue and incurring additional professional services hours above the hours that were billable on one service contract during the three month period endedMarch 31, 2022 . Non-GAAP operating expenses for the three months endedMarch 31, 2022 , increased by$6.8 million compared to the three months endedMarch 31, 2021 . The increase reflects Non-GAAP operating expenses from EVRYTHNG of$4.0 million , after excluding the EVRYTHNG portion of the adjustments above for amortization expense of$0.3 million on acquired intangible assets and$0.3 million of stock-based compensation, for the three months endedMarch 31, 2022 . Excluding the impact of EVRYTHNG, Non-GAAP operating expenses increased$2.8 million reflecting higher cash compensation costs due to higher headcount and annual compensation adjustments, higher legal and accounting costs related to financing activities, higher consulting costs for acquisition integration and other corporate initiatives and higher travel and conference expenses. 32 --------------------------------------------------------------------------------
Liquidity and Capital Resources
March 31, December 31,
2022 2021
Working capital $ 14,419 $ 36,295
Current ratio (1) 1.9:1 5.7:1
Cash, cash equivalents and short-term
marketable securities$ 19,186 $ 33,326
Long-term marketable securities
marketable securities$ 24,895 $ 41,618
(1) The current (liquidity) ratio is calculated by dividing total current assets
by total current liabilities.
The
• cash used in operations; • net cash paid for the acquisition of EVRYTHNG;
• purchases of common stock related to tax withholding in connection with
the vesting of restricted stock, restricted stock units, and performance
stock units; and
• purchases of property and equipment and capitalized patent costs.
Financial instruments that potentially subject us to concentrations of credit
risk consist primarily of cash and cash equivalents, marketable securities, and
trade accounts receivable. We place our cash and cash equivalents with major
banks and our marketable securities with major financial institutions. At times
deposits may exceed insured limits. Marketable securities primarily include
commercial paper, corporate notes, federal agency notes, and pre-refunded
municipals. Our investment policy requires our portfolio to be invested to
ensure that the greater of $3,000 or 7% of the invested funds will be available
within 30 days' notice.
Other than cash used for operating needs, which may include short-term
marketable securities, our investment policy limits our credit exposure to any
one financial institution or type of financial instrument by limiting the
maximum of 5% of our cash, cash equivalents, and marketable securities or
$1,000 , whichever is greater, to be invested in any one issuer except for the
U.S. government, U.S. federal agencies and U.S. backed securities, which have no
limits, at the time of purchase. Our investment policy also limits our credit
exposure by limiting to a maximum of 40% of our cash, cash equivalents, and
marketable securities, or $15,000 , whichever is greater, to be invested in any
one industry category (e.g., financial, energy, etc.) at the time of purchase.
As a result, we believe our credit risk associated with cash, cash equivalents,
and marketable securities to be minimal.
Operating Cash Flow
The components of cash flows used in operating activities were:
Three Three
Months Months
Ended Ended Dollar Percent
March 31, March 31, Increase Increase
2022 2021 (Decrease) (Decrease)
Net loss $ (17,781 ) $ (8,222 ) $ 9,559 116 %
Non-cash items 5,436 2,402 (3,034 ) (126 )%
Changes in operating assets and
liabilities 489 (168 ) (657 ) (391 )%
Net cash used in operating
activities $ (11,856 ) $ (5,988 ) $ 5,868 98 %
Cash flows used in operating activities for the three month period ended
March 31, 2022 , increased by $5,868 , compared to the corresponding three month
period ended March 31, 2021 , primarily as a result of a larger net loss,
partially offset by an increase in non-cash items included in the net loss.
Non-cash items increased reflecting higher amortization of acquired intangible
assets, the impairment on lease right of use assets and leasehold improvements,
and higher stock-based compensation.
Cash flows from investing activities for the three month period ended March 31,
2022 , compared to the corresponding three month period ended March 31, 2021 ,
improved by $10,025 , from $8,133 of cash used to $1,892 of cash provided,
primarily as a result of higher net maturities of marketable securities,
partially offset by net cash paid for the acquisition of EVRYTHNG.
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Cash flows used in financing activities for the three month period ended
March 31, 2022 , compared to the corresponding three month period ended March 31,
2021 , decreased by $272 , from $870 to $598 , primarily as a result of a lower
repurchases of shares of common stock in satisfaction of required withholding
tax liability on employee stock awards.
Future Cash Expectations
We believe that our current cash, cash equivalents, and marketable securities balances, after factoring in the$58,275 of gross cash proceeds raised from our registered direct offering inApril 2022 , will satisfy our projected working capital and capital expenditure requirements for at least the next 12 months. We continuously review our liquidity and anticipated capital requirements in light of the uncertainty created by the COVID-19 pandemic.
Registered Direct Offering
OnApril 5, 2022 , we entered into purchase agreements with certain investors providing for the issuance and sale by us of 2,250 common shares in a registered direct offering. The common shares were offered at a price of$25.90 per share, and the gross cash proceeds to us were$58,275 . We incurred$60 of legal costs related to the offering. The closing of the registered direct offering occurred onApril 7, 2022 . Equity Distribution Agreement OnMay 16, 2019 , we entered into an Equity Distribution Agreement, whereby we may sell from time to time throughWells Fargo Securities, LLC , as our sales agent, our common stock having an aggregate offering price of up to$30,000 .Wells Fargo Securities, LLC will receive from us a commission equal to 2.50% of the gross sales price per share of common stock for shares having an aggregate offering price of up to$10,000 , and a commission of 2.25% of the gross sales price per share of common stock thereafter, for shares sold under the Equity Distribution Agreement. We did not sell any shares under this Equity Distribution Agreement during the three months endedMarch 31, 2022 and 2021. As ofMarch 31, 2022 ,$6,932 remains available for future issuance under the Equity Distribution Agreement. Shelf Registration OnJune 5, 2020 , we filed a new shelf registration statement on Form S-3 that included$49,265 of unsold securities from our prior shelf registration statement filed onMay 26, 2017 that expired inJune 2020 . Under the new shelf registration statement, we may sell securities in one or more offerings up to$100,000 . As ofMarch 31, 2022 ,$39,617 remains available under the shelf registration. The new shelf registration statement will expire inJuly 2023 . We may sell shares under the shelf registration and/or use similar or other financing means to raise working capital in the future, if necessary, to support continued investment in our growth initiatives. We may also raise capital in the future to fund acquisitions and/or investments in complementary businesses, technologies or product lines. If it becomes necessary to obtain additional financing, we may not be able to do so, or if these funds are available, they may not be available on satisfactory terms. The COVID-19 pandemic has created substantial uncertainty and volatility in the stock market, particularly in the small-cap sector in which our stock is traded, and negatively impacted our share price. These factors may inhibit our near-term ability to obtain financing. 34 --------------------------------------------------------------------------------
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933. Words such as "may," "might," "plan," "should," "could," "expect," "anticipate," "intend," "believe," "project," "forecast," "estimate," "continue," and variations of such terms or similar expressions are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us, and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements, and investors are cautioned not to place undue reliance on such statements. We believe that the following factors, among others (including those described in Item 1A. "Risk Factors" of our 2021 Annual Report), could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us. Forward-looking statements include but are not limited to statements relating to:
• our expectations regarding the acquisition of EVRYTHNG and its impact on
our business, including our expectations regarding no additional shares
being issued in connection with the acquisition except any holdback
shares;
• our beliefs regarding the possible effects of the COVID-19 pandemic on
general economic conditions, public health, and consumer demand, and the
Company's results of operations, liquidity, capital resources, and general
performance in the future;
• the possible impact of COVID-19 on our ability to obtain financing through
our Equity Distribution Agreement and the availability of any alternative
sources of financing;
• our forgiven PPP loan;
• the potential impact of COVID-19 on projects with our Commercial customers
and partners;
• the concentration of most of our revenue among few customers;
• and the trends and sources of future revenue;
• anticipated successful advocacy of our technology by our partners;
• our belief regarding the global deployment of our products;
• our beliefs regarding potential outcomes of participating in the HolyGrail
2.0 initiative and the utility of our products in the recycling industry;
• our ESG projects and ESG Impact Report;
• our future level of investment in our business, including investment in
research, development and engineering of products and technology,
development of our intellectual property, sales growth initiatives and
development of new market opportunities;
• anticipated expenses, costs, margins, provision for income taxes and
investment activities in the foreseeable future;
• our assumptions and expectations related to stock awards;
• our belief that we have one of the world's most extensive patent
portfolios in digital watermarking and related fields;
• anticipated effect of our adoption of accounting pronouncements;
• our beliefs regarding our critical accounting policies;
• our expectations regarding the impact of accounting pronouncements issued
but not yet adopted;
• anticipated revenue to be generated from current contracts, renewals, and
as a result of new programs;
• our estimates, judgments and assumptions related to impairment testing;
• variability of contracted arrangements in response to changes in
circumstances underlying the original contractual arrangements;
• business opportunities that could require that we seek additional
financing and our ability to do so;
• the size and growth of our markets and our assumptions and beliefs related
to those markets;
• the existence of international growth opportunities and our future
investment in such opportunities;
35
--------------------------------------------------------------------------------• our expected short-term and long-term liquidity positions;
• our capital expenditure and working capital requirements and our ability
to fund our capital expenditure and working capital needs through cash
flow from operations or financing;
• our expectations regarding our ability to meet future financial
obligations as they become due within the coming fiscal year;
• the effect of computerized trading on our stock price;
• capital market conditions, our expectations regarding credit risk
exposure, interest rate volatility and other limitations on theavailability of capital, which could have an impact on our cost of capital
and our ability to access the capital markets;
• our use of cash, cash equivalents and marketable securities in upcoming
quarters and the possibility that our deposits of cash and cash
equivalents with major banks and financial institutions may exceed insured
limits;
• the strength of our competitive position and our ability to innovate and
enhance our competitive differentiation;
• our beliefs related to our existing facilities;
• protection, development and monetization of our intellectual property
portfolio;
• our beliefs related to our relationship with our employees and the effect
of increasing diversity within our workforce;
• our beliefs regarding cybersecurity incidents;
• our beliefs related to certain provisions in our bylaws and articles of
incorporation; and
• our beliefs related to legal proceedings and claims arising in the
ordinary course of business.
We believe that the risk factors specified above and the risk factors contained in 2021 Part I, Item 1A. "Risk Factors" of our 2021 Annual Report , among others, could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf. Investors should understand that it is not possible to predict or identify all risk factors and that there may be other factors that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements made by us or by persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of the filing of this Quarterly Report on Form 10-Q. Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. These disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective.
Changes in Controls
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three month period endedMarch 31, 2022 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We completed our acquisition of EVRYTHNG onJanuary 3, 2022 . We are working to integrate EVRYTHNG into our internal control over financial reporting, and management's evaluation of the effectiveness of our internal control over financial reporting. 36
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