ANNUAL
REPORT
2019
DIGIMARC DISCOVER®
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2019
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
(State or other jurisdiction of
incorporation or organization)
26-2828185
(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
Common Stock, $0.001 Par Value Per Share
Trading Symbol
DMRC
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
☒
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 the 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
Emerging growth company ☐
Smaller reporting 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 ☒
The aggregate market value of common stock, par value $0.001 per share, held by non-affiliates of the registrant, based on the closing
price of our common stock on the Nasdaq Global Market on the last business day of the registrant’s most recently completed fiscal second quarter
(June 28, 2019), was approximately $532 million. Shares of common stock beneficially held by each officer and director have been excluded
from this computation because these persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive
determination for any other purposes.
As of February 21, 2020, 12,611,569 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement pursuant to Regulation 14A (the “Proxy Statement”) for its 2020 annual meeting of
shareholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K. The registrant intends
to file the Proxy Statement not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
PART I
Table of Contents
Item 1.
Business .......................................................................................................................................
Item 1A.
Risk Factors .................................................................................................................................
Item 1B.
Unresolved Staff Comments........................................................................................................
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 7.
Item 8.
Item 9.
Properties .....................................................................................................................................
Legal Proceedings........................................................................................................................
Mine Safety Disclosures ..............................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations......
Financial Statements and Supplementary Data ...........................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .....
Item 9A.
Controls and Procedures ..............................................................................................................
Item 9B.
Other Information ........................................................................................................................
PART III
Item 10.
Directors, Executive Officers and Corporate Governance ..........................................................
Item 11.
Executive Compensation .............................................................................................................
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ....................................................................................................................................
Item 13.
Certain Relationships and Related Transactions, and Director Independence ............................
Item 14.
Principal Accountant Fees and Services......................................................................................
Item 15.
Exhibits and Financial Statement Schedules ...............................................................................
SIGNATURES...................................................................................................................................................
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PART I
Unless the context otherwise requires, references in this Annual Report on Form 10-K to “Company,”
“Digimarc,” “we,” “our” and “us” refer to Digimarc Corporation.
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.
Digimarc, Digimarc Barcode, Digimarc Discover and Guardian are registered trademarks of Digimarc
Corporation.
ITEM 1: BUSINESS
The following discussion of Digimarc’s business contains forward-looking statements relating to future events
or the future financial performance of Digimarc. Our actual results could differ materially from those anticipated in
these forward-looking statements. Please see the discussion regarding forward-looking statements included in this
Annual Report on Form 10-K in Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations, under the caption “Forward-Looking Statements.”
The following discussion of our business should be read in conjunction with our consolidated financial
statements and the related notes and other financial information appearing elsewhere in this Annual Report on
Form 10-K.
Overview
Digimarc Corporation, an Oregon corporation incorporated in 2008, 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. We have 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 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, is used to
assess signal quality and validate 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.
The Digimarc Platform provides many benefits for connected objects, including:
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Security: An imperceptible and indestructible digital watermark encoded in the object provides a
singularly unique identification, whether in a digital image, video or audio file, on paper, cardboard or
etched within material substrates as with plastics and other materials. Among other things, this helps
support strong authentication.
Protection: A unique identifier (“ID”) enables fraud deterrence across many use cases, from preventing
“barcode swapping” and counterfeiting of currency, media and goods to copyright detection of digital
images and e-publications.
Traceability: The ID can carry serial numbers for easier tracking of individual items or entire lots. This
has many uses, from ensuring product legitimacy to preventing product pirating to easily identifying
products for recall based on source provenance and sales destination.
Sustainability: The ID can contain information specific to packaging content as an aid to broader and
more efficient recycling. For example, a microscopic pattern embossed in the plastic can be used to
identify use of the materials and composition as an aid for sorting and recapture. Similarly, enhanced
labels for fresh foods can be used to dynamically adjust pricing and thereby reduce food waste.
Engagement: Consumers can directly interact with enhanced objects simply by scanning the item with
their smartphones. Brands can share additional product information online including recipes,
instructions, information about ingredients and sources, how-to videos, coupons and more.
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Efficiency: Connected items, reliably scanned by machines and mobile devices, enhance supply chain
efficiencies, from parts matching in manufacturing to faster and more accurate inventory scanning and
faster and easier front-of-store checkout experiences.
Our inventions allow our business partners and customers to provide persistent digital identities for virtually
any media content that is digitally processed at some point during its lifecycle. Our technology can be applied to
images, video and audio to supply a wide range of consumer engagement, media management and security solutions
across multiple consumer and government industry sectors. Over the years our enabling software and business
processes, and associated intellectual property portfolio, have grown to encompass many related technologies.
We provide our solutions directly and through our business partners. Our inventions provide a powerful
element of document security, giving rise to a long-term relationship with a consortium of central banks (the
“Central Banks”) and many leading companies in the information technology industry. We and our business partners
have successfully propagated the use of our technology in music, movies, television broadcasts, digital images, e-
publications and printed materials. Digimarc Barcodes have been used in these applications to improve media rights
and asset management, reduce piracy and counterfeiting losses, improve marketing programs, permit more efficient
and effective distribution of valuable media content and enhance consumer entertainment and commercial
experiences.
Digimarc Barcodes can be used to enhance all forms of media and are generally imperceptible to human
senses but quickly detected by computers, networks or other digital devices like smartphones and tablets. Unlike
traditional barcodes and tags, our solution does not require content owners to give up valuable visual space on their
media content; nor does it impact the overall layout or aesthetics of their media content. Digimarc Barcodes are
generally imperceptible in normal use and do all that visible barcodes do, but perform better. Our Digimarc Discover
platform delivers a range of rich media experiences to its readers on their smartphones or tablets across multiple
media formats, including print, audio and video. Unique to Digimarc Discover is its seamless multi-modal use of
various content identification technologies as needed, including Digimarc Barcode when present.
Banknote counterfeit deterrence was the first commercially successful large-scale use of our technologies.
Innovations based on our existing technology and experience have been leveraged to create new products to deter
counterfeiting and tampering of driver licenses and other government-issued secure credentials. In parallel, our
business partners, under patent or technology licenses from us, are delivering solutions to track and monitor the
distribution of music, images, television and movies to consumers.
In December 2012, we entered into a renewal and extension through December 2024 of the Counterfeit
Deterrence System Development and License Agreement with the Central Banks, with a 5-year extension option.
In January 2014, we introduced Digimarc Barcodes for use in consumer product packaging. These Digimarc
Barcodes can contain the same or even more information found in traditional universal product codes (“UPC”). The
UPC information contained in the Digimarc Barcode is nearly imperceptible and repeated multiple times over the
entire package surface, making checkout faster and easier for both customers and cashiers. We partnered with
Datalogic, a global leader in automatic data capture and industrial automation markets and producer of barcode
readers, in introducing the Digimarc Barcode to the consumer product packaging market. Since then, additional
scanner vendors and other alliance partners have announced support for Digimarc Barcode. Digimarc Barcodes can
also connect mobile-enabled consumers directly from packaging to engaging mobile experiences such as additional
product information, special offers, recommendations, reviews, social networks and more.
In January 2016, Digimarc and GS1 US, the U.S. operation of the organization that maintains the global
standards for barcodes, announced a broad collaboration to help the industries served by GS1 to make effective use
of Digimarc Barcode. GS1 US educates, trains and provides access to services to their 300,000 member businesses.
Among other things, Digimarc and GS1 US are working to improve product identification for retailers and
consumers with brand-certified, accurate product information via Digimarc Barcodes. In September 2016, Digimarc
announced a similar collaboration with GS1 Germany.
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In January 2018, we introduced Digimarc Barcode for use in thermal labels for fresh food products. These
Digimarc Barcodes contain GS1 Application Identifiers for fresh foods, allowing retailers to dynamically adjust
pricing on soon-to-be-expired fresh foods, instead of discarding them. Retail thermal labels with Digimarc Barcode
scan even when ripped, creased, smudged or damaged, making checkout faster and easier for both customers and
cashiers. We have partnered with multiple industry-leading retail-scale label manufacturers to introduce thermal
labels enabled with Digimarc Barcode to the retail industry. Thermal labels enabled with Digimarc Barcode can also
provide consumers an engaging mobile experience similar to Digimarc Barcode for consumer product packaging.
In April 2018, Digimarc announced a new 15-year partnership with Microsoft. The partnership included the
integration of Digimarc scanning software into Windows as part of the Windows 10 update. The two companies
have a history of working together to improve retailer operational efficiency and increase consumer engagement
with products.
In May 2018, Digimarc announced its support of SmartLabel and the availability of Digimarc Barcode
scanning capabilities within the SmartLabel app. The SmartLabel program was developed by the Grocery
Manufacturers Association and the Food Marketing Institute to give consumers a way to digitally access more
detailed product information than could fit on a package. Most recently, Digimarc Barcode has been adopted by the
U.S. Department of Agriculture as an approved digital disclosure method for products and packaging containing
bioengineered food, commonly referred to as “GMOs.” The National Bioengineered Food Disclosure Standard was
published in December 2018 after a review and comment period lasting more than two years. The regulations
include provisions for label disclosure of food products containing genetically modified organisms, which went into
effect in February 2019. Consumer goods manufacturers and private label retailers can use Digimarc Barcode as a
one-source solution to satisfy both their voluntary SmartLabel® program participation and mandatory
bioengineering disclosures.
In October 2018, Digimarc previewed Signal Rich™ Art at the Adobe Max Creativity Conference. The Signal
Rich™ Art tools under development employ breakthrough advances in imaging science, machine vision and
artificial intelligence to create artwork where machine-readable codes become native, inherent in, and inseparable
from the design.
In April 2019, Digimarc pledged a commitment to improve the reliability and efficiency of sorting plastic
waste, most notably signing the Ellen MacArthur Foundation’s New Plastics Economy Global Commitment, which
is focused on building a Circular Economy for plastics. Digimarc participated in the Ellen MacArthur Foundation’s
Pioneer Project HolyGrail, where Digimarc Barcode was shown in testing to overcome many current limitations in
plastic sorting technology. Digimarc Barcode proved effective in technical trials in more accurately identifying
recyclable plastics that could prevent their unnecessary disposal into landfills or incinerators.
In September 2019, Digimarc announced expanded capabilities of the Digimarc Platform with several leading
brands employing Digimarc Barcode for packaging and Digimarc Discover software in high-speed inspection
systems to catch mislabeling problems before products ship to consumers. Digimarc Barcode provides data
redundancy on product packaging without marring the appearance of the design. Consumer brands that use
Digimarc Barcode for packaging, combined with high-speed inspection system scanning equipment from Cognex or
Datalogic, can improve matching of front and back labels, cartons and lids, and other multi-component packages.
In November 2019, Digimarc delivered scan technology to Walmart’s Toy Catalog, making it easier than ever
for customers to buy gifts or create wish lists for family and friends using the Walmart app. The Scan & Shop
powered by Digimarc was prominently promoted in 35 million printed catalogs that were direct mailed as well as
available in Walmart’s nearly 4,800 U.S. stores.
Our Commitment
Digimarc is committed to sustainability and social responsibility in its product offerings, internal practices and
relationship to the community.
The Digimarc Platform features products that contribute to a more sustainable global economy. For example,
Digimarc Barcode on fresh food labels can help retail grocers reduce food waste. Digimarc has also joined the
HolyGrail 2.0 project, which is focused on how the use of Digimarc Barcode on packaging can improve plastic
sorting and help keep post-consumer recycled plastics out of landfills and incinerators.
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In 2019, Digimarc launched its “Reduce, Reuse, Recycle Program” to promote sustainability throughout the
organization. This employee-led initiative examines our “corporate footprint” and implements a range of initiatives
from reducing electricity usage, composting company food waste, reducing the use of single use plastics and
encouraging public transit use. Our Oregon facility also uses 100% renewable wind energy. Beyond our
environmental initiatives, Digimarc supports employee community engagement by providing volunteer time off.
Our teams have volunteered with and contributed to a wide range of local organizations. Finally, Digimarc proudly
partners with the Multiple Engineering Cooperative Program to provide real-world work experience to students at
Oregon’s engineering universities. We also volunteer with ChickTech, a Portland, Oregon non-profit organization
helping young girls discover an interest in science, technology, engineering and math.
More information on our commitment to sustainability and social responsibility can be found at
http://www.digimarc.com/about/company/our-commitment.
Customers and Business Partners
Our revenue is generated through commercial and government applications of our technology. We derive our
revenue primarily from software development services, subscriptions for products and related services, and licensing
of our patents. During 2019, we generated the majority of our revenue from software development services under a
long-term contract with the Central Banks and from subscriptions for our products and related services.
In 2019, revenue from government contracts accounted for 61% of our total revenue. The Central Banks
accounted for substantially all revenue generated under our government contracts. Our contract with the Central
Banks runs through December 2024, with a 5-year extension option.
Information about customers that accounted for 10% or more of revenue in the last two years is included in
Note 3 of our Notes to Consolidated Financial Statements.
Products and Services
We provide media identification and management solutions to government and commercial customers and
license our technology and patented inventions to solution providers. Our largest government customer is the
Central Banks, with whom we have been developing, deploying, supporting and enhancing a system to deter digital
counterfeiting of currency using personal computers and digital reprographics for the last 20 years. We sell our
products and related services to commercial customers for use in a wide range of applications providing for
improved auto-identification of media. For instance, we provide solutions to the retail and consumer package goods
industry that drive efficiency and reliability in product identification, and in the publishing industry we provide
solutions that reduce piracy of e-publications, images and other materials. We also license our technology and
inventions to providers of identification solutions to the media and entertainment industry. Many movie studios,
record labels, broadcasters, creative professionals and other customers rely on our technology as a cost-effective
means to:
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deter piracy and illegal use of movies, music and other media;
protect entertainment content from copyright infringement;
track and monitor entertainment content for rights usage and licensing compliance;
• monitor advertisements to verify ad placement and measure return on investment;
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enhance information access, search and provide marketing capabilities related to media content; and
enable authorized use of content by consumers.
The market for patent licensing has become more challenging in recent years. As a result, we have shifted our
focus from direct monetization through enforcement and licensing to facilitating progress toward the realization of
our vision to enrich everyday living via pervasive, intuitive computing by:
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encouraging large scale adoption of our technologies by industry leaders;
increasing the scale and rate of growth of our products and services business; and
laying a foundation for continuing innovation.
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Our current patent licensees include, among others, AlpVision SA, IV, Kantar SAS, NexGuard Labs B.V.,
Nielsen, OverDrive, Inc., Signum Technologies, Teletrax B.V., Verance Corporation and Verimatrix, Inc.
Technology and Intellectual Property
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.
Many of our patents relate to various methods for enhancing and reading digital information in packaging,
images, video, and audio, whether the content is rendered in analog or digital formats. The digital information is
generally embedded by making subtle modifications to the fundamental elements of the content itself, generally at a
signal processing level. The changes necessary to apply this information are so subtle that they are generally not
noticeable by people during normal use. Because the message is carried by the content itself, it is file-format
independent. The embedded digital information generally survives most normal content transformations, including
compression, edits, rotation, scaling, re-sampling, file-format transformations, copying, scanning and printing.
Our intellectual property contains many innovations in digital watermarking, content recognition (sometimes
referred to as “fingerprinting”), 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 over 1,100 U.S.
and foreign patents granted and applications pending as of December 31, 2019. We continue to develop and broaden
our portfolio in the fields of media identification and management technology and related applications and systems.
We devote significant resources to developing and protecting our inventions and continuously seek to identify and
evaluate potential licensees for our patents. The patents in our portfolio each have a life of approximately 20 years
from the effective filing date of the patent, and up to 17 years after the patent has been granted.
For a discussion of activities and costs related to our research and development in the last two years, please
read “Research, development and engineering” under Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
Markets
Our patented inventions are used in various media identification and management products and solutions
supporting a variety of media objects, from movies and music to banknotes, secure credentials and consumer
packaged goods. Each media object enabled by our inventions creates the potential for several applications, such as:
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retail point of sale transaction processing;
track and trace of products within the supply chain;
quality control in manufacturing processes;
inventory management and planogram compliance;
sorting of consumer packaged goods in recycling streams;
counterfeiting and piracy deterrence;
online e-publication piracy protection;
content identification and media management;
authentication and monitoring;
linking to networks and providing access to information; and
enhanced services in support of mobile commerce.
We believe the market for most of these applications is in the early stages of development and that existing
solutions represent only a small portion of the potential market for our products, services and technology.
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Competition
No single competitor or small number of competitors dominate our market. Our competitors vary depending
on the application of our products and services. We generally compete with non-digital watermarking technologies
for the security or marketing budgets of the producers and distributors of media objects, documents, products and
advertising. These alternatives include, among other things, encryption-based security systems and technologies and
solutions based on fingerprinting, pattern recognition, and traditional barcodes. Our competitive position in digital
watermarking applications is strong because of our large, high-quality, sophisticated patent portfolio and our
substantial and growing amount of intellectual property in related media security and management innovations that
span basic technologies, applications, system designs and business processes. Our intellectual property portfolio
allows us to use proprietary technologies that are well-regarded by our customers and partners, and not available to
our competitors without a license. We compete based on the variety of features we offer and a traditional
cost/benefit analysis against alternative technologies and solutions. We anticipate that our competitive position
within some markets may be affected by factors such as reluctance to adopt new technologies and by changes in
government regulations.
Backlog
Based on projected commitments we have for the periods under contract with our respective customers, we
anticipate our current contracts as of December 31, 2019 will generate a minimum of $31 million in revenue,
compared to $30 million as of December 31, 2018. We expect approximately $17 million of the $31 million to be
recognized as revenue during 2020.
Some factors that lead to increased backlog include:
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contracts with new customers;
renewals with current customers;
add-on orders with customers; and
contracts with longer contractual periods replacing contracts with shorter contractual periods.
Some factors that lead to decreased backlog include:
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recognition of revenue associated with existing backlog;
contracts with shorter contractual periods replacing contracts with longer contractual periods;
• modifications to existing contracts;
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contract minimum payments ending; and
expiration of contracts with existing customers.
The mix of these factors, among others, dictates whether our backlog increases or decreases for any given
period. Our backlog may not result in actual revenue in any particular period, because the orders, awards and
contracts included in our backlog may be subject to modification, cancellation or suspension. We may not realize
revenue on certain contracts, orders or awards included in our backlog, or the timing of any realization may change.
Employees
At December 31, 2019, we had 216 full-time employees, including 81 in sales, marketing, operations and
customer support; 102 in research, development and engineering, including intellectual property; and 33 in finance,
administration, information technology and legal.
Our employees are not covered by any collective bargaining agreement, and we have never experienced a
work stoppage. We believe that our relations with our employees are good.
Available Information
We make available free of charge through our website at www.digimarc.com our Annual Reports on Form 10-
K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these and other reports filed
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or furnished by us pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after we file these materials with the Securities and Exchange Commission (the “SEC”).
ITEM 1A: RISK FACTORS
Our business, financial condition, results of operations and cash flows may be affected by a number of factors.
The following risk factors identify risks of which we are aware and that we consider to be material to our business.
If any of the following risks and uncertainties develops into actual events, our business, financial condition, results
of operations or cash flows could be materially adversely affected. In that case, the trading price of our common
stock could decline.
RISKS RELATED TO OUR BUSINESS
(1) As a purveyor of disruptive technology, if our partners and potential customers defer or delay adopting and
implementing our technology, or if competitors or other market participants successfully engage in campaigns
to discredit our technology, our revenues will be negatively affected.
While the Company’s legacy business remains strong, our primary sources of revenue growth—Digimarc
Discover and Digimarc Barcode—are subject to the market forces and adoption curves common to other disruptive
technologies. The market is in its early stages of development. Our revenue model anticipates annual subscriptions
will be the primary source of our income. If widespread adoption of Digimarc Discover and Digimarc Barcode takes
longer than anticipated, we will continue to experience operating losses.
We expect companies marketing competing technologies to compete vigorously in the marketplace, and to
seek to preserve their market share. To the extent these companies succeed in defending their market position, our
ability to achieve profitable operations will be impeded.
With respect to anticipated sales growth and prospects for our Digimarc Discover and Digimarc Barcode
products and services, our three major avenues for revenue generation include direct sales, web sales, and partners.
Our growing direct sales force is relatively new, with an average tenure of less than three years with the Company.
The redesign of our website to facilitate web-based sales is evolving. Most of our partners are relatively new to our
products. Thus, the anticipated sources of revenue growth for Digimarc Discover and Digimarc Barcode are
unproven. We are executing strategies intended to make each of these means of revenue generation more effective,
but we provide no assurance that we will execute these strategies successfully.
(2) Our future growth will depend to a material extent on the successful advocacy of our technology by our
partners to their members and customers, and implementation of our technology in solutions propagated by
our partners and provided by third parties.
Our business has long relied on the success of business partners. Our continuing success is largely dependent
on a new generation of business partners supporting Digimarc Discover and Digimarc Barcode. We have entered
into agreements with numerous partners to propagate and support Digimarc Discover and Digimarc Barcode,
including brand deployment and pre-media service providers and consumer packaging solutions companies, all of
which offer Digimarc Barcode services to national and store brand owners and consumer products suppliers. We
have also entered into agreements with numerous scanner manufacturers to enable their devices to read Digimarc
Barcode as well as scale manufacturers to enable their devices to print Digimarc Barcode on thermal labels.
Digimarc and GS1 US, the U.S. operation of the organization that maintains the global standards for barcodes, are
collaborating to help the industries served by GS1 to make effective use of Digimarc Barcode. GS1 US educates,
trains and provides access to services to their 300,000 member businesses. Among other things, Digimarc and GS1
US are working to improve product identification for retailers and consumers with brand-certified, accurate product
information via Digimarc Barcodes. Digimarc has also entered into a similar collaboration with GS1 Germany. We
provide no assurance that these collaborations will successfully generate revenue for our business.
If our partners are not successful in advocating and deploying our technology, we may not be able to achieve
and sustain profitable operations. If other business partners who include our technology in their products or
otherwise license our intellectual property for use in their products cease to do so, or we fail to successfully
collaborate with third parties or to obtain other partners who will incorporate, embed, integrate or bundle our
technology, or these partners are unsuccessful in their efforts, expanding deployment of our technology will be
adversely affected. Consequently, our ability to increase revenue could be adversely affected and we may suffer
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other adverse effects to our business. In addition, if our technology does not perform according to market
expectations, our future sales would suffer as customers seek and employ alternative technologies.
(3) If leading companies in the retail and consumer products industries or standard-setting bodies or
institutions downplay, minimize or reject the use of our technology, our product deployment may be slowed
and we may be unable to achieve profitable operations.
Many of our business endeavors, including the Digimarc Barcode, can be impeded or frustrated by larger,
more influential companies or by standard-setting bodies or institutions downplaying, minimizing or rejecting the
value or use of our technology. A negative position by such companies, bodies or institutions could result in
obstacles for us that we would be incapable of overcoming and may block or impede the adoption of our technology.
In addition, potential customers may delay or reject initiatives that relate to deployment of our technology. Such
developments would make the achievement of our business objectives in this market difficult or impossible.
(4) We are subject to risks encountered by companies developing and relying upon new technologies, products
and services to achieve and sustain profitable operations.
Our business and prospects must be considered in light of the risks and uncertainties to which companies with
new and rapidly evolving technology, products and services are exposed. These risks include the following:
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we may be unable to develop sources of new revenue or sustainable growth in revenue because our
current and anticipated technologies, products and services may be inadequate or may be unable to
attract or retain customers;
intense competition from existing and new technologies and rapid technological change could adversely
affect the market’s acceptance of our existing and new products and services;
we may be unable to develop and maintain new technologies upon which our existing and new products
and services are dependent, which may cause our products and services to be less sustainable and
competitive or which could make it harder for us to expand our revenue and business; and
our licensees may not be able to successfully enter new markets or grow their businesses, limiting
royalties paid to us.
Some key technologies and solutions of our patent or technology licensees are in the development stage.
Consequently, products incorporating our technology and solutions are undergoing technological change and are in
the early stages of introduction in the marketplace. Delays in the adoption of these products or adverse competitive
developments may result in delays in the development of new revenue sources or the growth in our existing revenue
streams. We may be required to incur unanticipated expenditures if product changes or improvements are required.
Moreover, new industry standards might redefine the products that we or our licensees are able to sell, especially if
these products are only in the prototype stage of development. If product changes or improvements are required,
success in marketing these products by us or our licensees and achieving or sustaining profitability from these
products could be delayed or halted.
(5) A significant portion of our current and potential future revenue is subject to commercial and government
contracts and development of new markets that may involve unpredictable delays and other unexpected
changes. Such volatility and uncertainty might limit our actual revenue in any given quarter or year.
We derive a significant portion of our revenue from contracts tied to development schedules or development
of new markets, which could shift for months, quarters or years as the needs of our customers and the markets in
which they participate change. Government agencies and commercial customers also face budget pressures that
introduce added uncertainty. Any shift in development schedules, the markets in which we or our partners
participate, or customer procurement processes, which are outside our control and may not be predictable, could
result in delays in bookings/revenues forecasted for any particular period, could affect the predictability of our
quarterly and annual results, and might limit our actual revenue recognized in any given quarter or year, resulting in
reduced and less predictable revenue and adversely affecting profitability.
We are expanding into new markets, which involve inherent risk and unpredictability. With the proliferation
of smartphones and increased consumer demands for product information, we have investigated other technologies
that may provide attractive future opportunities. These generally include technologies that leverage our strength in
signal processing and support our vision for intuitive, pervasive computing. As we seek to expand outside our areas
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of historical expertise, we lack the history and insight that benefited us in the digital watermarking field. Although
we have extensive experience in the commercial application of digital watermarking, we are investing in but may
not be as well-positioned in these other opportunities. Accordingly, it may be difficult for us to achieve success in
other technologies we might pursue.
(6) A small number of customers account for a substantial portion of our revenue, and the loss of any large
contract could materially disrupt our business.
Historically, we have derived a significant portion of our revenue from a limited number of customers. Five
customers represented approximately 79% of our revenue for the year ended December 31, 2019. Most of our
revenue comes from our contract with the Central Banks, which expires in 2024 with the possibility of a five-year
extension. Other contracts we enter into may contain termination for convenience provisions. If we were to lose any
such contract for any reason, or if our relationship with these customers or the Central Banks were materially
modified, our financial results would be adversely affected.
We expect to continue to depend upon a small number of customers for a significant portion of our revenue
for the foreseeable future. The loss of, or decline in, orders or backlog from one or more major customers could
reduce our revenue and have a material adverse effect on our financial results.
(7) We were not profitable in 2019 or 2018 and may not be able to return to or sustain profitability in the
future, particularly if we were to lose large contracts or fail in our new market development initiatives.
Sustained lack of profitability could cause us to incur asset impairment charges for long-lived assets and/or
record valuation allowance against our deferred tax assets.
We incurred net losses in 2019 and 2018 largely due to increased levels of investments in our business to
support product development and sales growth initiatives.
Returning to and maintaining profitability in the future will depend upon a variety of factors, including our
ability to maintain and obtain more significant partnerships like we have with the Central Banks, and to acquire new
customers for Digimarc Discover, Digimarc Barcode and Digimarc Guardian. Profitability will also depend on our
efficiency in executing our business strategy and capitalizing on new opportunities. Various adverse developments,
including the loss of large contracts or cost overruns on our existing contracts, could adversely affect our revenue,
margins and profitability.
If we continue to incur operating losses, an impairment to the carrying value of our long-lived assets,
including goodwill, acquired intangible assets, patent assets and property and equipment could result. We test for
impairment of our long-lived assets when a triggering event occurs that would indicate that the carrying value may
not be recoverable. Our methodology for assessing impairment may require management to make judgments and
assumptions regarding future cash flows. Our projections of future cash flows are largely based on historical
experience, and these projections may not be achieved. Changes to these financial projections used in our
impairment analysis could lead to an impairment of all or a portion of our long-lived assets. Any such impairment
charge could adversely affect our results of operations and our stock price. We evaluated our long-lived assets for
impairment as of December 31, 2019 and 2018 and concluded there was no impairment for either period. We cannot
guarantee, however, that our long-lived assets will not become impaired in the future.
We record valuation allowances on our deferred tax assets if, based on available evidence, it is more-likely-
than-not that all or some portion of the assets will not be realized. The determination of whether our deferred tax
assets are realizable requires management to identify and weigh all available positive and negative evidence.
Management considers recent financial performance, projected future taxable income, scheduled reversals of
deferred tax liabilities, tax planning strategies and other evidence in assessing the realizability of our deferred tax
assets. Adjustments to our deferred tax assets could adversely affect our results of operations and our stock price. In
2014, we recorded a full valuation allowance against our deferred tax assets largely due to the cumulative loss we
had incurred over the previous three years, which is considered a significant piece of negative evidence in assessing
the realizability of deferred tax assets. As of December 31, 2019 and 2018, we determined a full valuation allowance
was still appropriate given continued losses. We will not record tax benefits on any future losses until it is
determined that those tax benefits will be realized.
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(8) We may be adversely affected by variability of contracted arrangements.
We periodically agree to modify the terms of contractual arrangements with our customers, partners and
licensees in response to changes in circumstances underlying the original contractual arrangements, and it is likely
that we will do so in the future. As a result of this practice, the terms of our contractual arrangements with our
customers, partners and licensees may vary over time and, depending on the particular modification, could have a
material adverse effect on our financial position, results of operations or cash flows.
Some of our customers and licensees report royalties to us based on their revenue and their interpretation and
allocation of contracted royalty obligations. It is possible that we may not agree with the judgments of our customers
on such matters, and such disagreement may lead to potential disputes and reduced revenue to us. These disputes
could result in a distraction to our management and may not result in increased revenues to us but may nevertheless
result in friction between us and our customers, and potentially the loss of customers, which may ultimately be
harmful to our business.
(9) The market for our products is highly competitive, and alternative technologies or larger companies that
compete with us may be more successful than us in gaining market share, which would decrease our revenue
and profits.
The markets in which we compete for business are intensely competitive and rapidly evolving. We expect
competition to continue from both existing competitors and new market entrants. We face competition from other
companies and from alternative technologies, including some of our customers and licensees. We also may face
competition from unexpected sources.
Alternative technologies that may directly or indirectly compete with particular applications of our
watermarking technologies include:
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Traditional anti-counterfeiting technologies—a number of solutions used by many government agencies
(that compete for budgetary outlays) designed to deter counterfeiting, including optically sensitive ink,
magnetic threads and other materials used in the printing of currencies;
Object and image recognition—one or several pre-specified or learned objects or object classes that can
be recognized, usually together with their two-dimensional positions in the image or three-dimensional
poses in the scene;
Radio frequency tags—embedding a chip that emits a signal when in close proximity with a receiver,
used in some photo identification credentials, labels and tags;
Internet technologies—numerous existing and potential Internet access and search methods are
competitive with Digimarc mobile systems and the searching capabilities of Digimarc Guardian;
Digital fingerprints and signatures—a metric, or metrics, computed solely from a source image or audio
or video track, that can be used to identify an image or track, or authenticate the image or track; and
Barcodes or QR codes—data-carrying codes, typically visible in nature (but may be invisible if printed
in ultraviolet- or infrared-responsive inks).
In the competitive environments in which we operate, product generation, development and marketing
processes relating to technology are uncertain and complex, and require accurate prediction of demand as well as
successful management of various risks inherent in technology development. In light of these uncertainties, it is
possible that our failure to successfully accommodate future changes in technologies related to our technology could
have a long-term negative effect on our growth and results of operations.
As we work to achieve market acceptance of our products and services, new developments are expected to
continue, and discoveries by others, including current and potential competitors, could render our services and
products uncompetitive. Moreover, because of rapid technological changes, we may be required to expend greater
amounts of time and money than anticipated to develop new products and services, which in turn may require
greater revenue streams from those products and services to cover developmental costs. Many of the companies that
compete with us for some of our business, as well as other companies with whom we may compete in the future, are
larger and may have stronger brand recognition and greater technical, financial, marketing and political resources
than we do. These attributes could enable these companies to have more success in the market than we have, either
by providing better products or better pricing than we can provide. We may be unable to compete successfully
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against current or future participants in our market or against alternative technologies, and the competitive pressures
we face may have a materially adverse effect on our financial position, results of operations or cash flows.
(10) An increase in our operations outside of the U.S. subjects us to risks additional to those to which we are
exposed in our domestic operations.
We believe that revenue from sales of products and services to commercial, governmental and other customers
outside the U.S. could represent a growing percentage of our total revenue in the future. Digimarc Discover is not
bounded geographically, and we believe Digimarc Barcode will see global deployment. As such, certain contracts
may be made and performed, in whole or in part, outside of the U.S. Similarly, for Digimarc Guardian, we perform
certain functions in various jurisdictions outside of the U.S. International operations are subject to a number of risks
that can adversely affect our sales of products and services to customers outside of the U.S., or expose us to
additional expense or liabilities, including the following:
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difficulties and costs of staffing, developing and managing foreign operations as a result of distance,
language and cultural differences;
the effect of laws governing our business, employee and contractor relationships, and the existence of
workers’ councils and labor unions in some jurisdictions;
changes in foreign government regulations and security requirements;
export license requirements, tariffs, retaliatory trade measures and domestic or foreign taxes;
trade barriers;
difficulty in protecting intellectual property;
longer payment cycles than those for customers in the U.S.;
difficulty in collecting accounts receivable;
currency fluctuations; and
political and economic uncertainty or instability.
We do not have an extensive operational infrastructure for international business. We generally depend on
local or international business partners and subcontractors for performance of substantial portions of our business. If
we fail to comply with the many international laws and regulations to which we may be subject, we may be subject
to significant fines, penalties or liabilities for noncompliance. These factors may result in greater risk of
performance problems or of reduced profitability with respect to our international programs in these markets. In
addition, if foreign customers, in particular foreign government authorities, terminate or delay the implementation of
our products and services, it may be difficult for us, or we may not be able, to recover our potential losses.
(11) We depend on our management and key employees for our future success. If we are not able to retain,
hire or integrate these employees, we may not be able to meet our commitments.
Our success depends to a significant extent on the performance and continued service of our management and
our intellectual property team. The loss of the services of any of these employees could limit our growth or
undermine customer relationships.
Due to the high level of technical expertise that our industry requires, our ability to successfully develop,
market, sell, license and support our products, services, and intellectual property depends to a significant degree
upon the continued contributions of our key personnel in engineering, sales, marketing, operations, legal and
licensing, many of whom would be difficult to replace. We believe our future success will depend in large part upon
our ability to retain our current key employees and our ability to attract, integrate and retain new personnel in the
future. It may not be practical for us to match the compensation some of our employees could be offered by other
employers. In addition, we may encounter difficulties in hiring and retaining employees because of concerns related
to our financial performance or operating results. These circumstances may have a negative effect on the market
price of our common stock, and employees and prospective employees may factor in the uncertainties relating to our
stability and the value of any equity-based incentives in their decisions regarding employment opportunities and
decide to leave our employ or decline employment offers. Moreover, our business is based in large part on patented
technology, that is a unique and sophisticated signal processing technology. New employees require substantial
training, involving significant resources and management attention. Competition for experienced personnel in our
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business can be intense. If we do not succeed in attracting new, qualified personnel or in integrating, retaining and
motivating our current personnel, our growth and ability to deliver products and services that our customers require
may be hampered. Although our employees generally have executed agreements containing non-competition
clauses, we do not assure you that a court would enforce all of the terms of these clauses or the agreements
generally. If these clauses were not fully enforced, our employees could freely join our competitors. Although we
generally attempt to control access to and distribution of our proprietary information by our employees, we do not
assure you that the confidential nature of our proprietary information will be maintained in the course of such future
employment. Any of these events could have a material adverse effect on our financial position, results of operations
or cash flows.
(12) We may acquire or invest in other companies or technologies in the future, which could divert
management’s attention, result in additional dilution to our shareholders, increase expenses, disrupt our
operations and harm our operating results.
We acquired Attributor Corporation in December 2012, and we may in the future acquire or invest in
businesses, products or technologies that we believe could complement or expand our current product and service
offerings, enhance our technical capabilities, expand our operations into new markets or otherwise offer growth
opportunities. The pursuit of potential acquisitions or other strategic transactions may divert the attention of
management and cause us to incur various expenses related to identifying, investigating and pursuing suitable
acquisitions or strategic transactions, whether or not they are consummated.
There are inherent risks in integrating and managing acquisitions. We may not be able to assimilate or
integrate the acquired personnel, operations and technologies successfully or effectively manage the combined
business following an acquisition. We also may not achieve the anticipated benefits from an acquired business due
to a number of factors, including:
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unanticipated costs or liabilities associated with the acquisition;
incurrence of acquisition-related costs;
inability to generate sufficient revenue to offset acquisition or investment costs;
the inability to maintain relationships with customers and partners of the acquired business;
the need to implement additional controls, procedures and policies;
entry into geographic markets in which we have little or no prior experience, and challenges caused by
distance, language and cultural differences;
differences in foreign labor and employment laws, including classification of employees and
contractors;
disruption of our ongoing business;
the potential loss of key employees; and
use of substantial portions of our available cash to consummate the acquisition.
Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could
adversely affect our financial position. In addition, if an acquired business fails to meet our expectations, our
operating results, business and financial condition may suffer.
(13) (a) We may not be able to adequately secure patent or other protection for our technologies.
Our business depends in part on securing protection for our proprietary technology and successfully licensing
our technology to third parties. To protect our intellectual property portfolio, we rely on a combination of patent,
copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements. Although we
regularly apply for patents to protect our intellectual property, there is no guarantee that we will secure patent
protection for any particular technology we develop.
Changes in the U.S. and foreign patent laws, or in the interpretation of existing laws, may adversely affect our
ability to secure or enforce patents. For example, the U.S. Supreme Court issued a decision in 2014 limiting patent
eligibility of computer implemented inventions. The Leahy-Smith America Invents Act of 2011 (the “America
Invents Act”) also codifies several changes to the U.S. patent laws, including the creation of a post-grant inter partes
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review process to challenge patents after they have issued. The America Invents Act allows third parties to petition
the U.S. Patent and Trademark Office or comparable government authorities in other jurisdictions to review and
reconsider the patentability of any of our inventions claimed in our issued patents. Any such proceeding may result
in one or more of our patent claims becoming limited, or being invalidated altogether. Additionally, certain foreign
jurisdictions may not recognize or enforce our patents in those jurisdictions. A limitation or invalidation of our
patent claims could adversely affect our financial position and our operating results.
Patents have finite lives, and our ability to continue to commercially exploit our patents is limited to the term
of the patents. Our earliest patents began expiring in July 2012, and the patents in our portfolio expire at various
times between 2020 and 2038. The size and strength of our portfolio depends on the number of patents that have
been granted, offset by the number of patents that expire, in any given year. We continue to develop our patent
portfolio, but we do not assure you that we will be able to exploit newer patents to the extent that we have exploited
our earlier patents.
As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our
employees, directors, consultants and corporate partners, and attempt to control access to and distribution of our
technology, solutions, documentation and other proprietary information. Despite these procedures, third parties
could copy or otherwise obtain and make unauthorized use of our technology, solutions or other proprietary
information or independently develop similar technologies, solutions or information. The steps that we have taken to
prevent misappropriation of our solutions, technology or other proprietary information may not succeed.
We do not assure you that the protection of our proprietary rights will be adequate or that our competitors will
not independently develop similar technologies, duplicate our services or design around any of our patents or other
intellectual property rights.
(b) We may not be successful in enforcing our intellectual property rights against third parties.
Unlicensed copying and use of our intellectual property or infringement of our intellectual property rights may
result in the loss of revenue to us and cause us other harm. If we encounter a company that we believe is infringing
our intellectual property rights, we may try to negotiate a license arrangement with such party. If we try and are
unable to negotiate a license or secure the agreement of such alleged infringing party to cease its activities, we must
make decisions as to how best to enforce our intellectual property rights, which may result in additional costs.
The process of negotiating a license with a third party can be lengthy, and may take months or even years in
some circumstances. It is possible that third parties who we believe are infringing our intellectual property rights are
unwilling to license our intellectual property from us on terms we can accept, or at all.
If we cannot persuade a third party who we believe is infringing our technology to enter into a license with us,
we may be required to consider other alternatives to enforce our rights, including commencing litigation. The
decision to commence litigation over infringement of a patent is complex and may lead to several risks to us,
including the following, among others:
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the time, significant expense and distraction to management of managing such litigation;
the uncertainty of litigation and its potential outcomes;
the possibility that in the course of such litigation, the defendant may challenge the validity of our
patents, which could result in a re-examination or post grant review of our patents and the possibility
that the claims in our patents may be limited in scope or invalidated altogether;
the potential that the defendant may successfully persuade a court that their technology or products do
not infringe our intellectual property rights;
the impact of such litigation on other licensing relationships we have or seek to establish, including the
timing of renewing or entering into such relationships, as applicable, as well as the terms of such
relationships; and
adverse publicity to us or harm to relationships we have with customers or others.
Also, enforcement of patent protection throughout the world is generally established on a country-by-country
basis and we may not be able to enforce our patents in foreign jurisdictions.
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If we fail to protect our intellectual property rights adequately, if there are adverse changes in applicable laws,
or if we become involved in litigation relating to our intellectual property rights or the intellectual property rights of
others, our business could be seriously harmed. In such cases, the value ascribed to our intellectual property could
diminish, we may incur significant legal expenses that could harm our results of operations and our patents or other
intellectual property rights may be limited or invalidated. Any of the foregoing could have a negative effect on the
value of our common stock.
(c) We may be subject to infringement claims and other litigation, which could adversely affect our business.
As more companies engage in business activities relating to digital watermarking, and develop corresponding
intellectual property rights, it is increasingly likely that claims may arise which assert that some of our products or
services infringe upon other parties’ intellectual property rights. These claims could subject us to costly litigation
and divert management resources. These claims may require us to pay significant damages, cease production of
infringing products, terminate our use of infringing technology or develop non-infringing technologies. In these
circumstances, continued use of our technology may require that we acquire licenses to the intellectual property that
is the subject of the alleged infringement, and we might not be able to obtain these licenses on commercially
reasonable terms or at all. Our use of protected technology may result in liability that threatens our continuing
operation.
Some of our contracts include indemnity and similar provisions regarding our non-infringement of third-party
intellectual property rights. As deployment of our technology increases, and more companies enter our markets, the
likelihood of a third party lawsuit resulting from these provisions increases. If an infringement arose in a context
governed by such a contract, we may have to refund to our customer amounts already paid to us or pay significant
damages, or we may be sued by the party whose intellectual property has allegedly been infringed upon.
(14) If our revenue models and pricing structures relating to products and services that are under development
do not gain market acceptance, the products and services may fail to attract or retain customers and we may
not be able to generate new revenue or sustain existing revenue.
Our revenues result from a combination of development, consulting, subscription and license fees from a
variety of media identification and management applications. We have not fully developed our revenue models for
some applications related to Digimarc Discover and Discover Barcode. Because some of our products and services
are not yet well-established in the marketplace, and because some of these products and services will not directly
displace existing solutions, we cannot be certain that the pricing structure for these products and services will gain
market acceptance or be sustainable over time or that the marketing for these products and services will be effective.
(15) If we are unable to respond to regulatory or industry standards effectively, or if we are unable to develop
and integrate new technologies effectively, our growth and the development of our products and services could
be delayed or limited.
Our future success will depend in part on our ability to enhance and improve the responsiveness, functionality
and features of our products and services, and those of our business partners, in accordance with regulatory or
industry standards. Our ability to remain competitive will depend in part on our ability to influence and respond to
emerging industry and governmental standards in a timely and cost-effective manner. If we are unable to influence
these or other standards or respond to these standards effectively, our growth and the development of various
products and services could be delayed or limited.
Our market is characterized by new and evolving technologies. The success of our business will depend on
our ability to develop and integrate new technologies effectively and address the increasingly sophisticated
technological needs of our customers in a timely and cost-effective manner. Our ability to compete in our markets
will depend in part on our ability to:
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enhance and improve the responsiveness, functionality and other features of the products and services
we offer or plan to offer;
continue to develop our technical expertise; and
develop and introduce new services, applications and technologies to meet changing customer needs and
preferences and to integrate new technologies.
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We do not assure you that we will be successful in responding to these technological and industry challenges
in a timely and cost-effective manner. If we are unable to develop or integrate new technologies effectively or
respond to these changing needs, our margins could decrease, and our release of new products and services and the
deployment of our technology could be adversely affected.
(16) We may need to retain additional employees or contract labor in the future in order to take advantage of
new business opportunities arising from increased demand, which could increase costs and impede our ability
to achieve or sustain profitability in the short term.
We have staffed our company with the intent of accelerating our product development and sales growth
initiatives while also focusing on achieving and sustaining profitability. Our current staffing levels could affect our
ability to respond to increased demand for our services. In addition, to meet any increased demand and take
advantage of new business opportunities in the future, we may need to increase our workforce through additional
employees or contract labor. Although we believe that increasing our workforce would potentially support
anticipated growth and profitability, it would increase our costs. If we experience such an increase in costs, we may
not succeed in achieving or sustaining profitability in the short term.
(17) The terms and conditions of our contracts could subject us to damages, losses and other expenses if we
fail to meet delivery and other performance requirements.
Our service contracts typically include provisions imposing:
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development, delivery and installation schedules;
customer acceptance and testing requirements; and
other performance requirements.
To the extent these provisions involve performance over extended periods of time, risks of noncompliance
may increase. From time to time we have experienced delays in system implementation, timely acceptance of
programs, concerns regarding program performance and other contractual disputes. If we fail to meet contractual
performance requirements as promised, or to successfully resolve customer disputes, we could incur liability for
damages, as well as increased costs, lower margins, or compensatory obligations in addition to other losses, such as
harm to our reputation. Any unexpected increases in costs to meet our contractual obligations or any other
requirements necessary to address claims and damages with regard to our customer contracts could have a material
adverse effect on our business and financial results.
(18) Products deploying our technology could have unknown defects or errors, which may give rise to claims
against us, divert application of our resources from other purposes or increase our project implementation and
support costs.
Products and services as complex as those we offer or develop may contain undetected defects or errors.
Furthermore, we often provide complex implementation, integration, customization, consulting and other technical
services in connection with the implementation and ongoing maintenance of our products. Despite testing, defects or
errors in our products and services may occur, which could result in delays in the development and implementation
of products and systems, inability to meet customer requirements or expectations in a timely manner, loss of revenue
or market share, increased implementation and support costs, failure to achieve market acceptance, diversion of
development resources, injury to our reputation, increased insurance costs, increased service and warranty costs and
warranty or breach of contract claims. Although we attempt to reduce the risk of losses resulting from warranty or
breach of contract claims through warranty disclaimers and liability limitation clauses in our sales agreements when
we can, these contractual provisions are sometimes limited and may not be enforceable in every instance. If a court
refuses to enforce the liability limiting provisions of our contracts for any reason, or if liabilities arise that were not
contractually limited or adequately covered by insurance, the expense associated with defending these actions or
paying the resultant claims could be significant.
(19) The security systems used in our business and our product and service offerings may be circumvented or
sabotaged by third parties, which could result in the disclosure of sensitive information or private personal
information or cause other business interruptions that could damage our reputation and disrupt our business.
Our business relies on computers and other information technologies, both internal and external. The
protective measures that we use may not prevent all security breaches, and failure to prevent security breaches may
disrupt our business, damage our reputation, and expose us to litigation and liability. A party who is able to
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circumvent security measures could misappropriate sensitive or proprietary information or materials or cause
interruptions or otherwise damage our products, services and reputation, and the property of our customers. If
unintended parties obtain sensitive data and information, or create bugs or viruses or otherwise sabotage the
functionality of our systems, we may receive negative publicity, incur liability to our customers or lose the
confidence of our customers, any of which may cause the termination or modification of our contracts. Further, our
insurance coverage may be insufficient to cover losses and liabilities that may result from these events.
In addition, we may be required to expend significant capital and other resources to protect ourselves against
the threat of security breaches or to alleviate problems caused by these breaches. Any protection or remedial
measures may not be available at a reasonable price or at all, or may not be entirely effective if commenced.
(20) We may experience outages and disruptions of our infrastructure that may harm our business, prospects,
financial condition and results of operations.
We may be subject to outages or disruptions of our infrastructure, including information technology system
failures and network disruptions. Substantially all of our owned computer and communications hardware is located
at a single facility. We also use third-party cloud service providers, which are also susceptible to outages and
disruptions. System redundancy may be ineffective or inadequate, and our disaster recovery planning may not be
sufficient for all eventualities.
If a natural disaster, cyber incident, weather event, power disruption, telecommunications failure, act of
terrorism or other event occurred that prevented us from using all or a significant portion of our facility and/or
damaged critical infrastructure, it could harm our ability to conduct normal business operations.
(21) We are periodically involved in the ordinary course of business in litigation, and an adverse resolution of
such litigation may adversely affect our business, financial condition, results of operations, and cash flows.
From time to time, in our normal course of business, we are a party to various legal claims, actions and
complaints. For example, as part of our patent licensing program, we may bring claims or counterclaims of patent
infringement to enforce our patent rights. Given the uncertain nature of litigation, we are not able to estimate the
amount or range of gain or loss that could result from an outcome of litigation. Litigation can be expensive, lengthy,
and disruptive to normal business operations. The results of complex legal proceedings are often uncertain and
difficult to predict. We could incur costs in excess of any established accruals and, to the extent available, excess
liability insurance. An unfavorable outcome in any legal proceedings could have a material adverse effect on our
business, financial condition, results of operations, and cash flows.
(22) Consolidation of consumer product companies and/or retailers, or other concentration of market share
among a few consumer products companies and/or retailers, may reduce the number of potential customers
for our technology and put pressure on our pricing structure.
The consumer products and retailer markets in some geographic regions are dominated by a few large
companies. These companies have in the past increased their market share and may continue to do so in the future
by expanding through acquisitions. In the future, if significant acquisitions were to occur there may be fewer
potential customers for our technology. Additionally, larger companies have strengthened purchasing power, which
could force a decline in our pricing structure and decrease the margins we can realize.
(23) Data breaches and cyber-attacks or cyber-fraud could compromise our intellectual property or other
sensitive information or result in losses.
We maintain sensitive data on our networks and the networks of our business partners and third-party
providers, including proprietary and confidential information relating to our intellectual property, personnel, and
business, and that of our customers and third-party providers. We believe that companies have been increasingly
subject to a wide variety of security incidents, cyber-attacks, hacking, phishing, and other attempts to gain
unauthorized access or engage in fraudulent behavior. Our policies and security measures cannot guarantee security,
and our information technology infrastructure, including our networks and systems, may be vulnerable to data
breaches, cyber-attacks or fraud. Third parties may attempt to penetrate and/or infect our network and systems with
malicious software and phishing attacks in an effort to gain access to our network and systems. We may be subject
to the risk of third parties falsifying invoices and similar fraud, frequently by obtaining unauthorized access to our
vendors’ and business partners’ networks.
16
In some circumstances, we may partner with third-party providers and provide them with certain sensitive
data. If these third parties fail to adopt or adhere to adequate data security practices, or in the event of a breach of
their networks, this sensitive data may be improperly accessed, used or disclosed. These data breaches and any
unauthorized access or disclosure of sensitive data could compromise our intellectual property, expose sensitive
business information and subject us to liability.
The increase in cyber-attacks has resulted in an increased focus on cybersecurity by various government
agencies. Cyber-attacks or any investigation or enforcement action related to cybersecurity could cause us to incur
significant remediation costs, disrupt key business operations, and divert attention of management and key
information technology resources. We may incur losses as a result of cyber-fraud, such as those experienced by
companies making unauthorized payments, irrespective of robust internal controls. Our reputation, brand, and
business could be harmed, and we could be subject to third-party claims in the event of such a security breach.
(24) Changes to financial accounting standards may affect our results of operations and could cause us to
change our business practices.
We prepare our consolidated financial statements to conform to generally accepted accounting principles in
the United States. These accounting principles are subject to interpretation by the American Institute of Certified
Public Accountants, the SEC and various bodies formed to interpret and create accounting rules and regulations.
Changes in these rules, or guidance relating to interpretation and adoption of these rules, could have a significant
effect on our financial results and could affect portions of our business differently.
RISKS RELATED TO OUR CAPITAL STOCK
(25) Our common stock price may be volatile, and you could lose all or part of your investment in shares of
our common stock.
The price of shares of our common stock may fluctuate as a result of changes in our operating performance or
prospects and other factors. Some specific factors that may have a significant effect on the price of shares of our
common stock include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the public’s reaction to our public disclosures;
actual or anticipated changes in our operating results or future prospects;
potential unfavorable changes from originally reported royalties by customers resulting from an audit
performed by us or a third party, or self-corrected by the customer;
strategic actions by us or our competitors, such as acquisitions or restructurings;
impact of acquisitions on our liquidity and financial performance;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidance, interpretations or principles applicable to us;
conditions of the industry as a result of changes in financial markets or general economic or political
conditions;
the failure of securities analysts to cover our common stock in the future, or changes in financial
estimates by analysts;
changes in analyst recommendations or earnings estimates regarding us, other comparable companies or
the industry generally, and our ability to meet those estimates;
changes in the amount of dividends paid, if any;
changes in our financing strategy or capital structure;
future issuances of our common stock or the perception that future sales could occur; and
volatility in the equity securities market.
17
(26) Our common stock price may increase or decrease on material news or developments.
As a thinly-traded microcap company, volatility in the equity securities market may disproportionately cause
swings in our stock price, upward and downward, on positive and negative developments or based on market
fluctuations. We believe that computerized trading exacerbates fluctuations in our stock price.
(27) Our corporate governance documents and Oregon law may delay or prevent an acquisition of us that
shareholders may consider favorable, which could decrease the value of your shares.
Our articles of incorporation, bylaws and Oregon law contain provisions that could make it more difficult for a
third party to acquire us without the consent of our Board of Directors. These provisions include supermajority
voting requirements for shareholders to amend our organizational documents and limitations on actions by our
shareholders by written consent. In addition, our Board of Directors has the right to issue preferred stock without
shareholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Oregon law
restricts the ability to vote shares of stock acquired in a transaction that causes the acquiring person to control at
least one-fifth, one-third or one-half of the votes entitled to be cast in the election of directors (a “control share
acquisition”). Shares acquired in a control share acquisition have no voting rights except as authorized by a vote of
the shareholders. Although we believe these provisions protect our shareholders from coercive or otherwise unfair
takeover tactics and thereby provide for an opportunity to receive a higher bid by requiring potential acquirers to
negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some
shareholders.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2: PROPERTIES
We lease our principal administrative, marketing, research, and intellectual property development facility,
which is approximately 47,000 square feet in size and located in Beaverton, Oregon. In July 2015, we entered into
an amendment with the landlord of our corporate offices in Beaverton, Oregon to extend the lease term through
March 2024 for rent payments totaling $5.5 million, payable in monthly installments.
In February 2015, we entered into a new facilities lease agreement for a facility in San Mateo, California,
which is approximately 5,400 square feet in size, with a lease term through March 2020 for rent payments totaling
$1.0 million, payable in monthly installments. We currently sublease this facility to a third party with a lease term
through March 2020.
We believe that our existing facilities are suitable and adequate for our current and foreseeable future needs.
See Note 8 of our Notes to Consolidated Financial Statements for further lease related disclosures.
ITEM 3: LEGAL PROCEEDINGS
We are subject from time to time to legal proceedings and claims arising in the ordinary course of business.
At this time, we do not believe that the resolution of any such matters will have a material adverse effect on our
financial position, results of operations or cash flows.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
18
PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock began trading on the Nasdaq Stock Market LLC in October 2008 under the symbol
“DMRC.”
At February 21, 2020, we had 275 shareholders of record of our common stock, as shown in the records of our
transfer agent. Since many holders hold shares in “street name,” we believe that there is a significantly larger
number of beneficial owners of our common stock than the number of record holders.
We withhold (purchase) shares of common stock in connection with the vesting of restricted shares to satisfy
required tax withholding obligations.
The following table sets forth information regarding purchases of our equity securities during the three-month
period ended December 31, 2019:
(c)
(d)
Approximate
Total number dollar value
(a)
(b)
purchased as
of shares
Total number Average price part of publicly
of shares that
may yet be
purchased
Period
Month 1
of shares
purchased (1)
paid per
share (1)
announced plans under the plans
or programs
or programs
October 1, 2019 to
October 31, 2019 .................
Month 2
November 1, 2019 to
November 30, 2019 .............
Month 3
December 1, 2019 to
December 31, 2019..............
Total .............................................
— $
—
— $
19,280 $
35.00
— $
2,423 $
21,703 $
32.38
34.71
— $
— $
—
—
—
—
(1) Fully vested shares of common stock withheld (purchased) by us in satisfaction of required withholding tax
liability upon vesting of restricted stock.
19
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 of Digimarc,
which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements. Please see the discussion regarding forward-looking statements included at the end of
this discussion, under the caption “Forward-Looking Statements,” and Item 1A, “Risk Factors” for a discussion of
some of the uncertainties, risks and assumptions associated with these statements.
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 Annual Report on Form 10-K.
All dollar amounts are in thousands except per share amounts or unless otherwise noted. The percentages
within the tables included in this section may not sum to 100% due to rounding.
Overview
Digimarc Corporation, an Oregon corporation incorporated in 2008, 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. We have 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 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, is used to
assess signal quality and validate 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.
Our growth strategy encompasses both our government and commercial businesses. We plan to continue
investing in research and development and sales and marketing to develop and market our products, including
Digimarc Discover, Digimarc Barcode and Digimarc Guardian, and to continue to expand our intellectual property
portfolio. To protect our significant efforts in creating our technology, 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 over 1,100 U.S. and foreign patents
granted and applications pending as of December 31, 2019. We continue to develop and broaden our portfolio of
patented technology in the fields of media identification and management technology and related applications and
systems. We devote significant resources to developing and protecting our inventions and continuously seek to
identify and evaluate potential licensees for our patents.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the
U.S. (“U.S. GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to bad debts, contingencies, goodwill, income taxes, intangible assets,
marketable securities, property and equipment and revenue recognition. We base our estimates on historical
experience and on other assumptions we believe to be reasonable in the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
Some of our accounting policies require higher degrees of judgment than others in their application. We
believe the following critical accounting policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue recognition: We adopted Accounting Standards Codification (“ASC”) 606 “Revenue from
Contracts with Customers” using the cumulative effect method with an effective date of January 1, 2018.
20
Revenue is recognized in accordance with ASC 606 by applying the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligation(s) in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligation(s) in the contract.
Step 5: Recognize when (or as) the entity satisfies the performance obligation(s).
We derive our revenue primarily from software development services, subscriptions and licensing of our
intellectual property. Applicable revenue recognition criteria are considered separately for each performance
obligation as follows:
•
•
•
Service revenue consists primarily of revenue received from software development services with the
Central Banks and government agencies. The majority of service revenue arrangements are structured as
time and materials consulting agreements. Revenue for software development services is recognized as
the services are performed. Billing for services rendered generally occurs within one month after the
services are provided.
Subscription revenue includes revenue derived from the sale of Digimarc Discover, Digimarc Barcode
and Digimarc Guardian products and services, is generally recurring, paid in advance and recognized
over the term of the subscription, which is generally one to three years.
License revenue originates primarily from licensing our intellectual property where we receive license
fees and/or royalties. License fees are typically paid in advance and recognized when the customer has
the right to the intellectual property and the license period has begun, and royalties are typically billed in
arrears and recognized in the quarter in which the royalty was earned.
Some customer arrangements contain multiple performance obligations such as software development
services, software licenses, and maintenance and support fees. We account for individual products and services
separately if they are distinct. To determine the transaction price, we consider the terms of the contract and our
customary business practices. Some contracts may contain variable consideration. In those cases, we estimate 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, we will evaluate whether any of the variable consideration is
constrained and if it is we 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, we estimate
the standalone selling price based on reasonably available information, including market conditions, specific factors
affecting us, and information about the customer. For distinct products and services, we typically recognize the
revenue associated with these performance obligations as they are delivered to the customer. Goods and services
which are not capable of being distinct are combined with other goods 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 goods and services as we perform
them.
All revenue recognized in the Consolidated Statements of Operations is considered to be revenue from
contracts with customers.
21
Results of Operations—the Years Ended December 31, 2019 and December 31, 2018
The following tables present our consolidated statements of operations data for the periods indicated.
Year Ended
December 31,
Year Ended
December 31,
2019
2018
Revenue:
Service....................................................
Subscription ...........................................
License ...................................................
Total revenue ....................................
$
Cost of revenue:
Service....................................................
Subscription ...........................................
License ...................................................
Total cost of revenue ........................
Gross profit..................................................
Operating expenses:
Sales and marketing ...............................
Research, development and
engineering..........................................
General and administrative ....................
Intellectual property ...............................
Total operating expenses ..................
Operating loss..............................................
Other income, net ........................................
Loss before income taxes ............................
Provision for income taxes ..........................
Net loss .............................................
$
$
12,793
8,125
2,069
22,987
5,523
1,840
673
8,036
14,951
12,774
6,041
2,377
21,192
5,922
1,907
597
8,426
12,766
19,875
19,140
16,467
10,848
1,492
48,682
(33,731)
912
(32,819)
(21)
(32,840)
$
15,971
9,897
1,282
46,290
(33,524)
1,057
(32,467)
(39)
(32,506)
22
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Percentages are percent of total revenue
Revenue:
Service ...............................................
Subscription .......................................
License ...............................................
Total revenue................................
Cost of revenue:
Service ...............................................
Subscription .......................................
License ...............................................
Total cost of revenue ....................
Gross profit..............................................
Operating expenses:
Sales and marketing ...........................
Research, development and
engineering......................................
General and administrative ................
Intellectual property ...........................
Total operating expenses ..............
Operating loss..........................................
Other income, net ....................................
Loss before income taxes ........................
Provision for income taxes ......................
Net loss .........................................
56%
35
9
100
24
8
3
35
65
86
72
47
6
212
(147)
4
(143)
(0)
(143%)
60%
29
11
100
28
9
3
40
60
90
75
47
6
218
(158)
5
(153)
(0)
(153%)
Summary
Total revenue increased $1.8 million, or 8%, to $23.0 million, primarily due to higher subscription revenue
reflecting higher Digimarc Discover and Digimarc Barcode revenue, partially offset by lower Digimarc Guardian
revenue.
Total operating expenses increased $2.4 million, or 5%, to $48.7 million, primarily due to routine annual
compensation and benefits adjustments for our employees.
23
Revenue
Revenue:
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
Service ...................................... $
Subscription..............................
License......................................
Total .................................... $
12,793
8,125
2,069
22,987
$
$
12,774
6,041
2,377
21,192
$
$
19
2,084
(308)
1,795
0%
34%
(13)%
8%
Revenue (as % of total revenue):
Service ......................................
Subscription..............................
License......................................
Total ....................................
56%
35%
9%
100%
60%
29%
11%
100%
Service. Service revenue consists primarily of revenue derived from the sale of software development
services. The majority of service revenue arrangements are structured as time and materials consulting agreements.
Most of our service revenue is derived from contracts with the Central Banks and government agency contractors.
The agreements range from several months to several years in length, and our longer-term contracts are subject to
work plans that are reviewed and agreed upon at least annually. These contracts generally provide for billing hours
worked at predetermined rates and, to a lesser extent, reimbursement for third party costs and services. Increases or
decreases in the services provided under these contracts are generally subject to both volume and price changes. The
volume of work is generally negotiated at least annually and can be modified as the customer’s needs change. We
also have provisions in our longer-term contracts that allow for specific hourly rate increases on an annual basis to
account for cost of living variables. Contracts with government agency contractors are generally shorter-term in
nature, less linear in billings and less predictable than our longer-term contracts because the contracts with
government agency contractors are subject to government budgets and funding.
The increase in service revenue was insignificant and reflected higher billable rates offsetting lower billable
hours under our contracts.
Subscription. Subscription revenue includes revenue derived from the sale of Digimarc Discover, Digimarc
Barcode and Digimarc Guardian products and services, and is generally recurring in nature, paid in advance and
recognized over the term of the subscription.
The increase in subscription revenue was due to higher Digimarc Discover and Digimarc Barcode revenue,
partially offset by lower Digimarc Guardian revenue.
License. License revenue includes revenue from licensing our intellectual property where we receive license
fees and/or royalties.
The decrease in license revenue was primarily due to lower reported royalties from a licensee.
24
Revenue by geography
Year Ended
December 31,
Year Ended
December 31,
2019
2018
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
Revenue by geography:
Domestic................................. $
International............................
Total .................................. $
7,187
15,800
22,987
$
$
5,573
15,619
21,192
$
$
1,614
181
1,795
29%
1%
8%
Revenue (as % of total revenue):
Domestic.................................
International............................
Total ..................................
31%
69%
100%
26%
74%
100%
The increase in domestic revenue was primarily due to higher subscription revenue from domestic customers.
The increase in international revenue was insignificant.
Cost of revenue
Service. Cost of service revenue primarily includes costs that are allocated from research, development and
engineering and sales and marketing that relate directly to performing services under our customer contracts and
direct costs of program delivery. Costs include:
•
•
•
•
•
•
compensation, benefits, incentive compensation in the form of stock-based compensation and related
costs of our software developers, quality assurance personnel, product managers, business development
managers 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 machinery, equipment and software directly used by customers;
travel costs directly attributable to software development and consulting contracts; and
charges for infrastructure and centralized costs of facilities and information technology.
Subscription. Cost of subscription revenue primarily includes:
•
•
•
compensation, benefits, incentive compensation in the form of stock-based compensation and related
costs of operations personnel where we bill our customers for services;
cost of outside contractors that provide operational support; and
Internet service provider connectivity charges and image search data fees to support the services offered
to our subscription customers.
License. Cost of license revenue primarily includes:
•
•
amortization of capitalized patent costs; and
amortization of patent maintenance fees.
25
Gross profit
Gross Profit:
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
Service ................................................
Subscription ........................................
License................................................
Total ..............................................
$
$
7,270
6,285
1,396
14,951
$
$
6,852
4,134
1,780
12,766
$
$
418
2,151
(384)
2,185
6%
52%
(22)%
17%
Gross Profit (as % of related
revenue components):
Service ................................................
Subscription ........................................
License................................................
Total ..............................................
57%
77%
67%
65%
54%
68%
75%
60%
The increase in total gross profit was primarily due to higher subscription revenue and lower service costs.
The increase in service gross profit as a percentage of service revenue was primarily due to the mix of labor
performing services under our contracts.
The increase in subscription gross profit as a percentage of subscription revenue was primarily due to higher
subscription revenue. Subscription costs were relatively flat.
The decrease in license gross profit as a percentage of license revenue was primarily due to lower license
revenue and higher amortization of patent costs.
Operating expenses
We allocate certain costs of research, development and engineering and sales and marketing to cost of revenue
when they relate directly to our customer contracts. We record all remaining, or “residual,” costs as sales and
marketing, research, development and engineering, general and administrative, and intellectual property expenses.
Sales and marketing
Sales and marketing ................................
Sales and marketing
(as % of total revenue) .........................
Year Ended
December 31,
2019
19,875
$
Year Ended
December 31,
2018
19,140
$
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
$
735
4%
86%
90%
Sales and marketing expenses consist primarily of:
•
•
•
•
compensation, benefits, incentive compensation in the form of stock-based compensation and related
costs of sales and marketing employees and product managers;
travel and market research costs, and costs associated with marketing programs, such as trade shows,
public relations and new product launches;
professional services and outside contractors costs for product and marketing initiatives; and
charges for infrastructure and centralized costs of facilities and information technology.
26
The increase in sales and marketing expenses was primarily due to:
•
•
increased headcount and compensation-related expenses of $1.0 million; partially offset by
decreased marketing communication costs of $0.2 million.
Research, development and engineering
Research, development and
engineering...........................................
Research, development and
engineering (as % of total revenue) .....
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
$
16,467
$
15,971
$
496
3%
72%
75%
Research, development and engineering expenses arise primarily from three areas that support our business
model:
•
Fundamental Research:
•
•
•
•
•
•
•
•
•
investigation of new digital watermarking algorithms to increase robustness and/or
computational efficiency;
research of mobile device usage models and imaging sub-systems in camera-phones;
industry conference participation and authorship of papers for industry journals;
development of new intellectual property, including documentation of claims and production of
supporting diagrams and materials;
research in multi-spectral analyses, machine learning, machine readable indicia and other content
identification technologies;
investigation of substrates, printing techniques and printing technology relating to consumer
packaged goods and thermal labels;
study and analysis of optimal illumination and imaging parameters to enable detection of
Digimarc Barcode in high-speed sorting environments;
creation of models and sampling methodologies to enable recovering of Digimarc Barcode from
high soiled and highly distorted (e.g., crushed) objects; and
investigation and development of enhancement strategies for variety of manufacturing processes
involved in the production and formation of plastic containers and objects.
•
Platform Development:
•
•
•
•
•
•
tuning and optimization of implementation models to improve resistance to non-malicious
attacks and routine transformations, such as JPEG, cropping and printing;
platform creation to leverage device-specific capabilities (e.g., instruction sets and Graphics
Processing Units);
embedded systems platform creation and tuning for barcode scanners, thermal label printers, and
machine vision environments;
tuning big data analytics transformation and metrics aggregation engine;
tuning data-driven Internet crawling infrastructure with policy-driven feedback loop; and
assembly of master book publishing catalog based on aggregation and reconciliation of multiple
public data sources.
27
•
Product Development:
•
•
delivery and enhancement of Digimarc Barcode for an expanding list of applications, including
packaging for consumer packaged goods, thermal labels for fresh foods and machine vision
applications for manufacturing and recycling;
improvements to the Digimarc Barcode Manager and Digimarc Barcode Central to provide
campaign management and routing services for the Digimarc Discover platform;
• maintenance of the web-hosted image enhancement service in support of Digimarc Discover
platform;
•
•
•
development and optimization of production level image enhancement tools and quality control
services;
iterative development and release of the Digimarc Discover application for the iOS and Android
platforms; and
development of real-time analytics portal to support anti-piracy services for the publishing
industry.
Research, development and engineering expenses consist primarily of:
•
•
•
•
compensation, benefits, incentive compensation in the form of stock-based compensation and related
costs of software and hardware developers and quality assurance personnel;
charges for infrastructure and centralized costs of facilities and information technology;
payments to outside contractors; and
the purchase of materials and services for product development.
The increase in research, development and engineering expenses was primarily due to increased headcount
and compensation-related expenses of $0.4 million.
General and administrative
General and administrative .....................
General and administrative
(as % of total revenue) .........................
Year Ended
December 31,
2019
10,848
$
Year Ended
December 31,
2018
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
$
9,897
$
951
10%
47%
47%
We incur general and administrative costs in the functional areas of finance, legal, human resources, 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 cost of revenue, sales and
marketing, research, development and engineering and intellectual property.
General and administrative expenses consist primarily of:
•
•
•
•
compensation, benefits and incentive compensation in the form of stock-based compensation and related
costs of general and administrative personnel;
third party and professional fees associated with legal, accounting and human resources functions;
costs associated with being a public company; and
charges for infrastructure and centralized costs of facilities and information technology.
The increase in general and administrative expenses was primarily due to:
•
•
•
increased headcount and compensation-related expenses of $0.5 million;
increased professional and consulting fees of $0.2 million; and
increased hardware and software costs of $0.2 million.
28
Intellectual property
Intellectual property ................................
Intellectual property (as %
of total revenue) ...................................
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
$
1,492
$
1,282
$
210
16%
6%
6%
We incur intellectual property expenses that arise primarily from costs associated with documenting, applying
for, and maintaining domestic and international patents and trademarks.
Gross expenditures for intellectual property costs, before reflecting the effect of capitalized patent costs,
primarily consist of:
•
•
•
•
compensation, benefits and incentive compensation in the form of stock-based compensation and related
costs of attorneys and legal assistants;
third party costs, including filing and governmental regulatory fees and fees for outside legal counsel
and translation costs, each incurred in the patent process;
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.
Intellectual property expenses can vary from period to period based on the level of capitalized patent activity.
The increase in intellectual property expenses was primarily due to:
•
•
increased write-offs of abandoned patent costs of $0.1 million; and
increased legal costs of $0.1 million.
Stock-based compensation
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
Cost of revenue ............................................. $
Sales and marketing ......................................
Research, development and engineering.......
General and administrative ...........................
Intellectual property ......................................
Total......................................................... $
669 $
1,928
1,466
3,877
274
8,214 $
613 $
1,649
1,361
3,386
289
7,298 $
56
279
105
491
(15)
916
9%
17%
8%
15%
(5)%
13%
The changes in stock-based compensation expense were primarily due to the timing and amount of stock
awards.
We anticipate incurring an additional $13,535 in stock-based compensation expense through December 31,
2023 for awards outstanding as of December 31, 2019.
29
Other income, net
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Other income, net ........................... $
Other income, net (as % of
total revenue) ...............................
912
$
1,057
4%
5%
Dollar
Percent
Increase
Increase
(Decrease) (Decrease)
$
(145)
(14)%
The decrease in other income, net was primarily due to lower interest income reflecting lower cash and
investment balances, partially offset by higher interest rates on our investments.
Provision for income taxes
The provision for income taxes reflects current taxes, deferred taxes and withholding taxes in certain foreign
jurisdictions.
For the year ended December 31, 2019, our effective tax rate was 0%, reflecting a full valuation allowance
recorded against our deferred tax assets. The valuation allowance against deferred tax assets as of December 31,
2019 was $47.8 million, an increase of $7.9 million from $39.9 million as of December 31, 2018. We continually
assess the applicability of a valuation allowance against our deferred tax assets. Based upon the positive and
negative evidence available as of December 31, 2019, and largely due to the cumulative loss incurred by us over the
preceding three 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.
For the year ended December 31, 2018, our effective tax rate was 0%, reflecting a full valuation allowance
recorded against our deferred tax assets. The valuation allowance against deferred tax assets as of December 31,
2018 was $39.9 million, an increase of $7.6 million from $32.3 million as of December 31, 2017.
Liquidity and Capital Resources
December 31,
2019
December 31,
2018
Working capital.............................................. $
Current ratio (1) .............................................
Cash, cash equivalents and short-term
marketable securities................................... $
Long-term marketable securities ................... $
Total cash, cash equivalents and
marketable securities................................... $
37,850 $
8.0:1
36,817 $
— $
45,326
11.5:1
43,656
—
36,817 $
43,656
(1) The current (liquidity) ratio is calculated by dividing total current assets by total current liabilities.
The $6.8 million decrease in cash, cash equivalents and marketable securities at December 31, 2019 from
December 31, 2018 resulted primarily from:
•
•
cash used in operations,
purchases of common stock related to tax withholding in connection with the vesting of restricted stock,
and
30
•
•
•
purchases of property and equipment and capitalized patent costs; partially offset by
net proceeds from the issuance of common stock; and
proceeds from stock option exercises.
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 financial institutions and at times deposits may exceed insured limits. Marketable securities include
commercial paper, corporate notes and U.S. treasuries. Our investment policy requires our portfolio to be invested to
ensure that the greater of $3 million 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 and cash equivalents and marketable securities or $1 million, 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 and cash equivalents and marketable securities, or $15 million, whichever is greater,
to be invested in any one industry category, (e.g., financial or energy industries), at the time of purchase. As a result,
we believe our credit risk associated with cash and investments to be minimal. A decline in the market value of any
security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value.
To determine whether an impairment is other-than-temporary, we consider whether we have the ability and intent to
hold the investment until a market price recovery and evidence indicating that the cost of the investment is
recoverable outweighs evidence to the contrary. There have been no other-than-temporary impairments identified or
recorded by us in the years ended December 31, 2019 and 2018.
Cash flows from operating activities
The components of operating cash flows were:
Net loss..................................................... $
Non-cash items.........................................
Changes in operating assets and
liabilities ................................................
Net cash used in operating activities ........ $
Year Ended
December 31,
2019
(32,840) $
10,421
Year Ended
December 31,
2018
(32,506) $
9,441
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
(334)
980
7
(22,412) $
1,855
(21,210) $
(1,848)
(1,202)
(1)%
10%
(100)%
(6)%
Cash flows used in operating activities in 2019 compared to 2018 increased by $1.2 million, primarily as a
result of changes in operating assets and liabilities, partially offset by higher non-cash items. The changes in
operating assets and liabilities reflected the collection of a $1.7 million non-recurring license fee received in January
2018. The increase in non-cash items was primarily due to higher stock-based compensation.
Cash flows from investing activities
Cash flows from investing activities in 2019 compared to 2018 decreased by $19.4 million, from $8.5 million
provided to $10.9 million used, primarily as a result of higher net purchases of marketable securities.
Cash flows from financing activities
Cash flows from financing activities in 2019 compared to 2018 increased by $18.1 million, from $0.8 million
used to $17.3 million provided, primarily as a result of the sale of our common stock.
31
Future cash expectations
We believe that our current cash, cash equivalents, and short-term marketable securities balances will satisfy
our projected working capital and capital expenditure requirements for at least the next 12 months.
In May 2019, we entered into an Equity Distribution Agreement, whereby we may sell from time to time
through Wells Fargo Securities, LLC, as our sales agent, our common stock having an aggregate offering price of up
to $30 million. 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 million, 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. As of December 31, 2019, we had sold 335,748 shares at an average price of $60.61 under
this Equity Distribution Agreement, totaling $20.3 million of cash proceeds, less $0.5 million of commissions and
$0.3 million of stock issuance costs, for net cash proceeds of $19.6 million.
We have a $100 million shelf registration statement in place, of which $17.8 million and $12.0 million were
allocated for sales of our common stock in connection with our registered direct offerings in June 2017 and
November 2017, respectively. We have also allocated up to $30 million of the shelf registration statement for the
sale of our common stock under the Equity Distribution Agreement with Wells Fargo Securities, LLC, of which
$20.3 million has been sold. As of December 31, 2019, $49.9 million remains available for future issuances under
this shelf registration statement, which expires in June 2020.
We may sell shares under the Equity Distribution Agreement 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.
Contractual Obligations
We are party to operating leases in Beaverton, Oregon, and San Mateo, California.
In July 2015, we entered into an amendment with the landlord of our corporate offices in Beaverton, Oregon, to
extend the lease term through March 2024 for rent payments totaling $5.5 million, payable in monthly installments.
In February 2015, we entered into a new facilities lease agreement in San Mateo, California, with a lease term
through March 2020 for rent payments totaling $1.0 million, payable in monthly installments.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to investors.
We are party to operating leases for our facilities in Beaverton, Oregon, and San Mateo, California. In July 2015,
we entered into an amendment with the landlord of our corporate offices in Beaverton, Oregon, to extend the lease term
through March 2024, with remaining rent payments totaling $3.5 million, payable in monthly installments. In February
2015, we entered into a new facilities lease agreement in San Mateo, California, with a lease term through March
2020, with remaining rent payments totaling $0.1 million, payable in monthly installments, offset by $0.1 million in
sublease payments.
Forward-Looking Statements
This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 21E
of the Securities Exchange Act of 1934 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
32
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”), 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
concentration of revenue with few customers comprising a large majority of the revenue;
revenue trends and expectations, including our belief that international revenue could represent a
growing percentage of total revenue in the future;
anticipated successful advocacy of our technology by our partners;
our belief regarding the global deployment of our products;
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, judgements and assumptions related to impairment testing;
variability of contracted 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;
the sources of our future revenue;
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;
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 the availability 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 adoption of our technology and success of our products, including Digimarc Discover, Digimarc
Barcode and Digimarc Guardian;
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;
33
•
•
•
•
•
our beliefs related to our relationship with our employees;
our beliefs regarding cybersecurity incidents;
our beliefs related to certain provisions in our bylaws and articles of incorporation;
our beliefs related to legal proceedings and claims arising in the ordinary course of business; and
other risks detailed in our filings with the Securities and Exchange Commission, including the risk
factors set forth in Item 1A. “Risk Factors.”
We believe that the risk factors specified above and the risk factors contained in Item 1A, “Risk Factors,”
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 Annual Report on
Form 10-K. 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 Annual Report on
Form 10-K.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and the accompanying Notes that are filed as part of this Annual
Report are listed under Part III, Item 15, Exhibits and Financial Statement Schedules and are set forth beginning on
page F-1 immediately following the signature page of this Form 10-K.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, have carried out an evaluation of the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period
covered by this Form 10-K. 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 Securities Exchange Act of 1934 is
(i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms,
and (ii) 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 our 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 Form 10-K, were effective.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
Because of inherent limitations, any control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met. Management is committed to
continue monitoring our internal controls over financial reporting and will modify or implement additional controls and
procedures that may be required to ensure the ongoing integrity of our consolidated financial statements.
34
With the participation of our Chief Executive Officer and Chief Financial Officer, management conducted an
evaluation of the effectiveness of internal control over financial reporting based on the framework established in
Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission, (COSO). Based on this evaluation, management has concluded that internal control over
financial reporting was effective as of the end of the period covered by this Form 10-K based on those criteria.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended
December 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Our independent auditors have issued an audit report on the effectiveness of our internal control over financial
reporting as of December 31, 2019, which is included herein.
35
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Digimarc Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Digimarc Corporation and subsidiaries’ (the Company) internal control over financial
reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the
related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-
year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and
our report dated February 27, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ KPMG LLP
Portland, Oregon
February 27, 2020
36
ITEM 9B: OTHER INFORMATION
None
37
PART III
Certain information required by Part III of this Annual Report on Form 10-K is incorporated herein by
reference to the Proxy Statement for our 2020 annual meeting of shareholders, which we intend to file no later than
120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Code of Ethics
We have adopted a Code of Business Conduct that applies to our principal executive officer, principal
financial officer and controller, as well as a Code of Ethics for Financial Professionals that applies to our principal
financial officer and controller. We have made these codes available in the Corporate Governance section of our
website at www.digimarc.com/about/company/corporate-governance. If we waive, or implicitly waive, any material
provision of the codes, or substantively amend the codes, we will disclose that fact on our website within four
business days.
The other information required by this item is incorporated herein by reference to the information in the Proxy
Statement, which we intend to file with the SEC no later than 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K under the captions “Election of Directors,” “Management,” “Report of the
Governance and Nominating Committee of the Board of Directors—Audit Committee,” and “Other Matters—
Delinquent Section 16(a) Reports.”
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the information in the Proxy
Statement, which we intend to file with the SEC no later than 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K, under the captions “Director Compensation” and “Executive Compensation.”
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the information in the Proxy
Statement, which we intend to file with the SEC no later than 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K, under the captions “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information.”
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated herein by reference to the information in the Proxy
Statement, which we intend to file with the SEC no later than 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K under the caption “Election of Directors—Determination of Independence,” and
“Related Person Transactions.”
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the information in the Proxy
Statement, which we intend to file with the SEC no later than 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K, under the caption “Audit Fees.”
38
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following documents are filed as part of this Annual Report on Form 10-K:
(i) Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019 and 2018
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018
(ii) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All schedules have been omitted since they are not required or are not applicable or the required information is
shown in the consolidated financial statements or related notes.
(a)(3) Exhibits
EXHIBIT INDEX
The agreements included or incorporated by reference as exhibits to this report may contain representations
and warranties by each of the parties to the applicable agreement. These representations and warranties have been
made solely for the benefit of the other party or parties to the applicable agreement and:
• were not intended to be treated as categorical statements of fact, but rather as a means of allocating the
risk to one of the parties if those statements prove to be inaccurate;
• were qualified by disclosures that were made to the other party or parties in connection with the
negotiation of the applicable agreement, which disclosures are not necessarily reflected in the
agreement;
• may apply standards of “materiality” that are different from “materiality” under the securities laws; and
• were made only as of the date of the applicable agreement or other date or dates that may be specified in
the agreement.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date
they were made or at any other time. Additional information about Digimarc may be found elsewhere in this Annual
Report on Form 10-K and in Digimarc’s other public filings, which are available without charge through the SEC’s
website at http://www.sec.gov.
Exhibit
Number
1.1
2.1
2.2
Exhibit Description
Equity Distribution Agreement, dated May 16, 2019 by and between the Company and Wells Fargo
Securities, LLC (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form
8-K, filed with the Commission on May 17, 2019 (File No. 001-34108))
Separation Agreement among DMRC Corporation, DMRC LLC, Digimarc Corporation and, with
respect to certain sections, L-1 Identity Solutions, Inc. (incorporated by reference to Exhibit 2.1 to
Amendment No. 2 to the Company’s Registration Statement on Form 10, filed with the Commission
on August 13, 2008 (File No. 001-34108))†
Agreement and Plan of Merger dated April 30, 2010 between Digimarc Corporation, a Delaware
corporation, and Digimarc Oregon Corporation, an Oregon corporation (incorporated by reference to
Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Commission on May 4,
2010 (File No. 001-34108))
39
Exhibit
Number
3.1
3.2
4.1
Exhibit Description
Articles of Incorporation of Digimarc Corporation (incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K, filed with the Commission on May 4, 2010 (File No. 001-
34108))
Bylaws of Digimarc Corporation (incorporated by reference to Exhibit 3.2 to the Company’s Current
Report on Form 8-K, filed with the Commission on May 4, 2010 (File No. 001-34108))
Specimen common stock certificate of Digimarc Corporation (incorporated by reference to Exhibit
4.1 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on July 25, 2014
(File No. 001-34108))
4.2
Description of Securities
10.1
10.2
*10.3
*10.4
*10.5
*10.6
10.7
10.8
10.9
10.10
10.11
License Agreement between DMRC Corporation and L-1 Identity Solutions Operating Company
(incorporated by reference to Exhibit 10.2 to Amendment No. 4 to the Company’s Registration
Statement on Form 10, filed with the Commission on October 2, 2008 (File No. 001-34108))(1)
Counterfeit Deterrence System Development and License Agreement, dated as of December 6, 2012,
between Digimarc Corporation and the Bank for International Settlements (incorporated by
reference to Exhibit 10.2 to the Company’s amended Annual Report on Form 10-K/A, filed with the
Commission on August 7, 2013 (File No. 001-34108))(5)
Digimarc Corporation 2008 Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q, filed with the Commission on April 25, 2014
(File No. 001-34108))
Equity Compensation Program for Nonemployee Directors under the Digimarc Corporation 2008
Incentive Plan (as amended on February 21, 2011, February 20, 2014 and March 27, 2015)
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed
with the Commission on April 28, 2015 (File No. 001-34108))
Form of Indemnification Agreement between Digimarc Corporation and each of its executive
officers and directors (incorporated by reference to Exhibit 10.1 to Digimarc Corporation’s Annual
Report on Form 10-K, as filed by Digimarc Corporation with the Securities and Exchange
Commission on March 13, 2006 (File No. 000-28317))
Form of Change of Control Retention Agreement entered into by and between Digimarc Corporation
and each of Messrs. Chamness, Meyer, Beck, Rodriguez and Arana (incorporated by reference to
Exhibit 10.6 to the Company’s Annual Report on Form 10-K, filed with the Commission on
February 22, 2019 (File No. 001-34108))
Patent License Agreement, dated as of June 11, 2009 between Digimarc Corporation and The
Nielsen Company (US), LLC (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q, filed with the Commission on July 31, 2009 (File No. 001-34108))(2)
Limited Liability Company I Agreement, dated June 11, 2009 between Digimarc Corporation and
The Nielsen Company (US), LLC (incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q, filed with the Commission on July 31, 2009 (File No. 001-
34108))(2)
Limited Liability Company II Agreement, dated June 11, 2009 between Digimarc Corporation and The
Nielsen Company (US), LLC (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly
Report on Form 10-Q, filed with the Commission on July 31, 2009 (File No. 001-34108))(2)
Lease Agreement, dated March 22, 2004, between Digimarc Corporation and PS Business Parks,
L.P., as amended on May 13, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q, filed with the Commission on July 30, 2010 (File No. 001-34108))
Second Amendment to Lease, dated July 31, 2015, by and between PD Office Owner 9, L.P. and
Digimarc Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q, filed with the Commission on October 30, 2015 (File No. 001-34108))
40
Exhibit
Number
10.12
10.13
10.14
10.15
*10.16
*10.17
*10.18
10.19
21.1
23.1
31.1
31.2
32.1
32.2
Exhibit Description
Patent License Agreement, effective as of October 5, 2010, between Digimarc Corporation and IV
Digital Multimedia Inventions, LLC (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q, filed with the Commission on April 28,2016 (File No. 001-
34108))(4)
Grant-Back License Agreement, dated October 5, 2010, between Digimarc Corporation and IV
Digital Multimedia Inventions, LLC (incorporated by reference to Exhibit 10.13 to the Company’s
Annual Report on Form 10-K, filed with the Commission on March 3, 2011 (File No. 001-
34108))(3)
Patent Rights Agreement, dated October 5, 2010, between Digimarc Corporation and IV Digital
Multimedia Inventions, LLC (incorporated by reference to Exhibit 10.14 to the Company’s Annual
Report on Form 10-K, filed with the Commission on March 3, 2011 (File No. 001-34108))
Work Agreement, dated October 5, 2010, by and among Digimarc Corporation, Invention Law
Group, P.C. and IV Digital Multimedia Inventions, LLC (incorporated by reference to Exhibit 10.2
to the Company’s Quarterly Report on Form 10-K, filed with the Commission on April 28, 2016
(File No. 001-34108))(4)
Employment Agreement, effective as of September 1, 2017, between Digimarc Corporation and
Bruce Davis (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-
K, filed with the Commission on September 6, 2017 (File No. 001-34108))
Digimarc Corporation 2018 Incentive Plan (incorporated by reference to Appendix A of the
Company’s Definitive Proxy Statement on Schedule 14A, filed with the Commission on March 21,
2018 (File No. 001-34108))
Equity Compensation Program for Nonemployee Directors under the Digimarc Corporation 2018
Incentive Plan (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on
Form 10-K, filed with the Commission on February 22, 2019 (File No. 001-34108))
Grant-Back License Agreement, dated October 5, 2010, between Digimarc Corporation and IV
Digital Multimedia Inventions, LLC (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q, filed with the Commission on May 2, 2019 (File No. 001-34108))
(6)
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer
101.INS
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
41
Exhibit
Number
Exhibit Description
101.PRE XBRL Taxonomy Extension Label Linkbase Document
104
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
* Management contract or compensatory plan or arrangement.
†
Schedules and certain exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-
K. Digimarc hereby undertakes to furnish to the Securities and Exchange Commission (the “Commission”)
copies of the omitted schedules and exhibits upon request by the Commission.
(1) Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order
granted by the Commission on October 21, 2008, under Rule 24b-2 of the Securities Exchange Act of 1934, as
amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange
Commission.
(2) Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order
granted by the Commission on September 10, 2009, under Rule 24b-2 under the Securities Exchange Act of
1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and
Exchange Commission.
(3) Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order
granted by the Commission on March 17, 2011, under Rule 24b-2 under the Securities Exchange Act of 1934,
as amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange
Commission.
(4) Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order
granted by the Commission on May 6, 2016, under Rule 24b-2 under the Securities Exchange Act of 1934, as
amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange
Commission.
(5) Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order
granted by the Commission on September 3, 2013, under Rule 24b-2 under the Securities Exchange Act of
1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and
Exchange Commission.
(6) Confidential treatment has been requested for certain portions omitted from this exhibit pursuant to Rule 24b-2
under the Exchange Act. Confidential portions of this exhibit have been separately filed with the SEC.
42
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 27, 2020
By:
DIGIMARC CORPORATION
/S/ CHARLES BECK
Charles Beck
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/S/ BRUCE DAVIS
Bruce Davis
/S/ CHARLES BECK
Charles Beck
/S/ GARY DESTEFANO
Gary DeStefano
/S/ RICHARD L. KING
Richard L. King
/S/ JAMES T. RICHARDSON
James T. Richardson
/S/ ANDREW WALTER
Andrew Walter
/S/ BERNARD WHITNEY
Bernard Whitney
Chief Executive Officer and Chairman of the
Board of Directors
(Principal Executive Officer)
February 27, 2020
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
Director
Director
Director
Director
Director
43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.................................................................................
Consolidated Balance Sheets ................................................................................................................................
Consolidated Statements of Operations................................................................................................................
Consolidated Statements of Shareholders’ Equity................................................................................................
Consolidated Statements of Cash Flows...............................................................................................................
Notes to Consolidated Financial Statements ........................................................................................................
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Digimarc Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Digimarc Corporation and subsidiaries (the
Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, shareholders’
equity, and cash flows for each of the years in the two-year period ended December 31, 2019 and the related notes
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the
results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 27, 2020 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of
accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the
risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our
opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2010.
Portland, Oregon
February 27, 2020
F-2
DIGIMARC CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
2019
December 31,
2018
Current assets:
ASSETS
Cash and cash equivalents.................................................................................... $
Marketable securities ...........................................................................................
Trade accounts receivable, net .............................................................................
Other current assets..............................................................................................
Total current assets .........................................................................................
Property and equipment, net......................................................................................
Intangibles, net ..........................................................................................................
Goodwill ....................................................................................................................
Other assets................................................................................................................
Total assets ..................................................................................................... $
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities.................................................... $
Deferred revenue..................................................................................................
Total current liabilities....................................................................................
Lease liability and other long-term liabilities............................................................
Total liabilities................................................................................................
Commitments and contingencies (Note 13) ..............................................................
Shareholders’ equity:
Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares
issued and outstanding at December 31, 2019 and 2018).................................
Common stock (par value $0.001 per share, 50,000 authorized, 12,446
and 11,891 shares issued and outstanding at December 31, 2019 and 2018,
respectively) ......................................................................................................
Additional paid-in capital.....................................................................................
Accumulated deficit .............................................................................................
Total shareholders’ equity ..............................................................................
Total liabilities and shareholders’ equity........................................................ $
See Notes to Consolidated Financial Statements
11,213 $
25,604
4,021
2,456
43,294
3,650
6,670
1,114
2,660
57,388 $
2,272 $
3,172
5,444
2,494
7,938
27,278
16,378
3,888
2,100
49,644
3,955
6,649
1,114
425
61,787
1,092
3,226
4,318
854
5,172
50
50
12
188,103
(138,715)
49,450
57,388 $
12
162,428
(105,875)
56,615
61,787
F-3
DIGIMARC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Revenue:
Service ...........................................................................................................
Subscription ...................................................................................................
License ...........................................................................................................
Total revenue............................................................................................
$
12,793 $
8,125
2,069
22,987
Cost of revenue:
Service ...........................................................................................................
Subscription ...................................................................................................
License ...........................................................................................................
Total cost of revenue ................................................................................
Gross profit..........................................................................................................
Operating expenses:
Sales and marketing .......................................................................................
Research, development and engineering .......................................................
General and administrative ............................................................................
Intellectual property.......................................................................................
Total operating expenses ..........................................................................
Operating loss......................................................................................................
Other income, net ................................................................................................
Loss before income taxes ....................................................................................
Provision for income taxes ..................................................................................
Net loss .....................................................................................................
Earnings (loss) per common share:
Loss per common share — basic.........................................................................
Loss per common share — diluted......................................................................
Weighted average common shares outstanding — basic...............................
Weighted average common shares outstanding — diluted............................
$
$
$
5,523
1,840
673
8,036
14,951
19,875
16,467
10,848
1,492
48,682
(33,731)
912
(32,819)
(21)
(32,840) $
(2.79) $
(2.79) $
11,762
11,762
12,774
6,041
2,377
21,192
5,922
1,907
597
8,426
12,766
19,140
15,971
9,897
1,282
46,290
(33,524)
1,057
(32,467)
(39)
(32,506)
(2.86)
(2.86)
11,360
11,360
See Notes to Consolidated Financial Statements
F-4
82,347
1,256
—
—
(2,089)
7,468
139
(32,506)
56,615
56,615
19,615
1,178
—
—
(3,506)
8,388
(32,840)
49,450
DIGIMARC CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Additional
Total
Preferred Stock Common Stock Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital
50 11,651 $
Equity
Deficit
10 $
BALANCE AT DECEMBER 31, 2017 ...................
102 —
Exercise of stock options ............................................ — —
239 —
Issuance of restricted common stock .......................... — —
(24) —
Forfeiture of restricted common stock ........................ — —
Purchase and retirement of common stock ................. — —
(77) —
Stock-based compensation .......................................... — — — —
Cumulative effect of the adoption of the new
revenue standard, net of tax ..................................... — — — —
Net loss........................................................................ — — — —
BALANCE AT DECEMBER 31, 2018 ...................
50 11,891 $
10 $
12 $ 155,793 $
1,256
—
—
(2,089)
7,468
139
(32,506)
12 $ 162,428 $ (105,875) $
—
—
(73,508) $
—
—
—
—
—
10 $
50 11,891 $
BALANCE AT DECEMBER 31, 2018 ...................
336 —
Issuance of common stock, net of issuance costs ....... — —
55 —
Exercise of stock options ............................................ — —
300 —
Issuance of restricted common stock .......................... — —
(49) —
Forfeiture of restricted common stock ........................ — —
Purchase and retirement of common stock ................. — —
(87) —
Stock-based compensation .......................................... — — — —
Net loss........................................................................ — — — —
BALANCE AT DECEMBER 31, 2019 ...................
12 $ 162,428 $ (105,875) $
—
—
—
—
—
—
(32,840)
12 $ 188,103 $ (138,715) $
19,615
1,178
—
—
(3,506)
8,388
—
50 12,446 $
10 $
See Notes to Consolidated Financial Statements
F-5
DIGIMARC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
December 31,
Year Ended
December 31,
2019
2018
(32,840)
$
(32,506)
1,449
758
8,214
(133)
(356)
474
702
(41)
(639)
(22,412)
(1,055)
(659)
42,084
(51,310)
(10,940)
19,615
1,178
(3,506)
17,287
(16,065)
27,278
11,213
1,554
589
7,298
2,516
92
(57)
(744)
182
(134)
(21,210)
(1,292)
(747)
34,558
(24,021)
8,498
—
1,256
(2,089)
(833)
(13,545)
40,823
27,278
88
(79)
170
—
$
$
$
$
$
Cash flows from operating activities:
Net loss............................................................................................................ $
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, amortization and write-off of property and equipment .......
Amortization and write-off of intangibles .................................................
Stock-based compensation.........................................................................
Changes in operating assets and liabilities:
Trade accounts receivable ....................................................................
Other current assets ..............................................................................
Other assets ..........................................................................................
Accounts payable and other accrued liabilities ....................................
Deferred revenue ..................................................................................
Lease liability and other long-term liabilities ......................................
Net cash used in operating activities...............................................
Cash flows from investing activities:
Purchase of property and equipment...............................................................
Capitalized patent costs...................................................................................
Maturity of marketable securities....................................................................
Purchase of marketable securities ...................................................................
Net cash provided by (used in) investing activities ........................
Cash flows from financing activities:
Issuance of common stock, net of issuance costs ......................................
Exercise of stock options ...........................................................................
Purchase of common stock ........................................................................
Net cash provided by (used in) financing activities........................
Net decrease in cash and cash equivalents......................................
Cash and cash equivalents at beginning of period..........................
Cash and cash equivalents at end of period .................................... $
Supplemental disclosure of cash flow information:
Cash received for income taxes, net................................................................ $
90
Supplemental schedule of non-cash activities:
Property and equipment and patent costs in accounts payable ....................... $
Stock-based compensation capitalized to software and patent costs .............. $
Right of use assets obtained in exchange for lease obligations....................... $
35
174
2,709
See Notes to Consolidated Financial Statements
F-6
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(1) Description of Business and Summary of 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
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,
is used to assess signal quality and validate 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.
Principles of Consolidation
The consolidated financial statements include the accounts of Digimarc and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in accordance with accounting principles generally
accepted in the U.S. (“U.S. GAAP”) requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The
Company’s accounting policies for revenue recognition require higher degrees of judgment than others in their
application. Management bases its estimates on historical experience and on other assumptions that are believed to
be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
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.
Cash Equivalents
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 commercial paper and money market funds
totaling $10,436 and $25,543 at December 31, 2019 and 2018, respectively. Cash equivalents are carried at either
cost or amortized cost depending on the type of security, which approximates fair value.
Marketable Securities
The Company considers all investments with original maturities over 90 days that mature in less than one-year
from the balance sheet date to be short-term marketable securities. Short-term marketable securities primarily
include commercial paper, corporate notes and U.S. treasuries. The Company’s marketable securities are classified
as held-to-maturity and are reported at amortized cost, which approximates market value.
F-7
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
A decline in the market value of any security below amortized cost that is deemed to be other-than-temporary
results in a reduction in the carrying amount. The impairment is charged to earnings and a new cost basis for the
security is established. To determine whether an impairment is other-than-temporary, the Company considers
whether it has the ability and intent to hold the investment until a market price recovery and considers whether
evidence indicating that the cost of the investment is recoverable outweighs evidence to the contrary. There have
been no other-than-temporary impairments identified or recorded by the Company.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to
yield using a method that approximates the effective interest method. Under this method, dividend and interest
income are recognized when earned.
Fair Value of Financial Instruments
Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures” defines fair
value, establishes a framework for measuring fair value under generally accepted accounting principles in the U.S.,
and enhances disclosures about fair value measurements. ASC 820 describes a fair value hierarchy based on three
levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to
measure fair value, which are the following:
•
•
•
Level 1—Pricing inputs are quoted prices available in active markets for identical investments as of the
reporting date.
Level 2—Pricing inputs are quoted for similar investments, or inputs that are observable, either directly
or indirectly, for substantially the full term through corroboration with observable market data. Level 2
includes investments valued at quoted prices adjusted for legal or contractual restrictions specific to
these investments.
Level 3—Pricing inputs are unobservable for the investment; that is, the inputs reflect the reporting
entity’s own assumptions about the assumptions market participants would use in pricing the asset or
liability.
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 fair value hierarchy for its cash equivalents and marketable securities as of December 31,
2019 and 2018, respectively, was as follows:
December 31, 2019
Money market securities .......................................... $
Commercial paper....................................................
Corporate notes ........................................................
U.S. treasuries ..........................................................
Total ......................................................................... $
Level 1
Level 2
Level 3
Total
— $
746 $
25,481
—
5,773
—
—
4,040
746 $ 35,294 $
746
— $
25,481
—
5,773
—
—
4,040
— $ 36,040
December 31, 2018
Money market securities .......................................... $
Commercial paper....................................................
Corporate notes ........................................................
Total ......................................................................... $
Level 1
Level 2
Level 3
Total
1,472 $
—
—
— $
28,343
12,106
1,472 $ 40,449 $
— $
1,472
—
28,343
12,106
—
— $ 41,921
F-8
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
The fair value maturities of the Company’s cash equivalents and marketable securities as of December 31,
2019 are as follows:
Cash equivalents and marketable securities ............. $ 36,040 $ 36,040 $
— $
Less than
1 year
Maturities by Period
1-5
years
Total
5 - 10
years
More than
10 years
—
— $
Concentrations of Business and Credit Risk
A significant portion of the Company’s business depends on a limited number of large contracts. The loss of
any large contract may result in loss of revenue and margin on a prospective basis. Financial instruments that
potentially subject Digimarc to concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities, and accounts receivable. Digimarc places its cash and cash equivalents with major banks and
financial institutions and at times deposits may exceed insured limits. Other than cash used for operating needs,
which may include short-term marketable securities with the Company’s principal banks, Digimarc’s investment
policy limits its credit exposure to any one financial institution or type of financial instrument by limiting the
maximum of 5% of its 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. The Company’s investment policy also limits its credit exposure by limiting the
maximum of 40% of its cash equivalents and marketable securities, or $15,000, whichever is greater, to be invested
in any one industry category, (e.g., financial or energy industries), at the time of purchase. As a result, Digimarc’s
credit risk associated with cash and cash equivalents and marketable securities is believed to be minimal.
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.
Equity Method Investments
The Company accounts for its joint ventures under the equity method of accounting pursuant to ASC 323
“Investments—Equity Method and Joint Ventures.” Under the equity method, investments are carried at cost, plus or
minus the Company’s proportionate share, based on present ownership interests, of: (a) the investee’s profit or loss
after the date of acquisition; (b) changes in the Company’s equity that have not been recognized in the investee’s
profit or loss; and (c) certain other adjustments. Distributions received from the investee (such as dividends) reduce
the carrying amount of the investment.
Goodwill
The Company accounts for business combinations under the acquisition method of accounting in accordance
with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified
intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is
allocated using the information currently available, and may be adjusted, up to one-year from the acquisition date,
after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to
preliminary estimates.
F-9
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
Contingent consideration, if any, is recorded at the acquisition date based upon the estimated fair value of the
contingent payments. The fair value of the contingent consideration is re-measured each reporting period with any
adjustments in fair value being recognized in earnings from operations.
The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less
liabilities assumed is recognized as 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 exceeded the carrying value.
Impairment of Long-Lived Assets
The Company assesses long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, in accordance with the provisions of ASC 360
“Property, Plant and Equipment.”
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets
to future net undiscounted cash flows expected to be generated by the assets over their remaining useful life. If such
assets are considered to be impaired, the impairment would be recognized in operating results at the amount by
which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on
discounted cash flows or appraised values, depending on the nature of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Research and Development
Research and development costs are expensed as incurred in accordance with ASC 730 “Research and
Development.”
Software Development Costs
Under ASC 985 “Software,” software development costs are to be capitalized beginning when a product’s
technological feasibility has been established and ending when a product is made available for general release to
customers. To date, the establishment of technological feasibility of the Company’s products has occurred shortly
before general release and, therefore, software development costs qualifying for capitalization have been immaterial.
Accordingly, the Company has not capitalized any software development costs and has charged all such costs to
research and development expense.
Patent Costs
Costs associated with the application and award of patents in the U.S. and various other countries are
capitalized and amortized on a straight-line basis over the term of the patents as determined at award date, which
varies depending on the pendency period of the application, generally approximating seventeen years. Capitalized
patent costs, also referred to as patent prosecution costs, include internal legal labor, professional legal fees,
government filing fees and translation fees related to expanding the Company’s patent portfolio.
Costs associated with the maintenance and annuity fees of patents are accounted for as prepaid assets at the
time of payment and amortized over the shorter of the maintenance period or remaining life of the related patent.
F-10
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
Revenue Recognition
See Note 2 for detailed disclosures of the Company’s revenue recognition policy.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718 “Compensation—Stock
Compensation,” which requires the measurement and recognition of compensation for all stock-based awards made
to employees and directors including stock options and restricted stock based on estimated fair values. The estimated
fair value of stock option and restricted stock awards is recognized over the vesting period of the award using the
straight-line method.
For stock option awards, the Company uses the Black-Scholes option pricing model as its method of
valuation. The Company’s determination of the fair value on the date of grant (measurement date) is affected by its
stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not
limited to, the expected life of the award, the Company’s expected stock price volatility over the term of the award,
the risk-free interest rate and the expected dividend yield. Although the fair value of stock-based awards is
determined in accordance with ASC 718 and Staff Accounting Bulletin (“SAB”) No. 107 “Shared-Based Payment,”
the Black-Scholes option pricing model requires the input of subjective assumptions, and other reasonable
assumptions could provide differing results.
For restricted stock awards, the Company uses the fair market value of the Company’s common stock on the
date of the grant (measurement date) as its method of valuation.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740 “Income Taxes” utilizing the asset and
liability method. Under the asset and liability method, deferred income taxes reflect the future tax consequences of
differences between the tax basis of assets and liabilities and their financial reporting amounts. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period of enactment.
The Company records valuation allowances on deferred tax assets if, based on available evidence, it is more-
likely-than-not that all or some portion of the assets will not be realized.
The Company is subject to income taxes within the U.S. and other countries, and, in the ordinary course of
business, there are transactions and calculations where the ultimate tax determination is uncertain. The Company
reports a liability (or contra asset) for unrecognized tax benefits resulting from uncertain tax positions taken (or
expected to be taken) on a tax return. The Company recognizes interest and penalties, if any, related to the
unrecognized tax benefits in income tax expense.
F-11
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
Accounting Pronouncements Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09, “Revenue from Contracts with Customers (ASC 606).” ASU No. 2014-09 provides specific
guidance to recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
ASU replaces most existing revenue recognition guidance in U.S. GAAP. In August 2015, the FASB issued ASU
No. 2015-14 to defer the effective date of the new revenue standard for public entities by one-year to annual
reporting periods beginning after December 31, 2017, and interim periods beginning in the first interim period
within the year of adoption. The guidance permitted the use of either the retrospective or cumulative effect transition
method. The Company adopted the new standard on January 1, 2018 and elected to use the cumulative effect
transition method. Upon adoption, the Company recorded a $139 increase to opening retained earnings to reflect the
impact of adopting the new standard using the cumulative effect transition method. The adoption of the standard did
not have a material impact on the Company’s financial condition, results of operations and cash flows.
In February 2016, the FASB issued 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, ASU’s 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 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 8 for further information.
Accounting Pronouncements Issued But Not Yet Adopted
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 simplify generally accepted accounting principles. 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.
F-12
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(2) Revenue Recognition
The Company adopted ASC 606 “Revenue from Contracts with Customers” using the cumulative effect
method with an effective date of January 1, 2018.
Revenue is recognized in accordance with ASC 606 by applying the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligation(s) in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligation(s) in the contract.
Step 5: Recognize when (or as) the entity satisfies the performance obligation(s).
The Company derives its revenue primarily from software development and consulting services, subscriptions
and licensing of its intellectual property. Applicable revenue recognition criteria are considered separately for each
performance obligation as follows:
•
•
•
Service revenue consists primarily of revenue received from software development services with the
Central Banks and government agencies. The majority of service revenue arrangements are structured as
time and materials consulting agreements. Revenue for software development services is recognized as
the services are performed. Billing for services rendered generally occurs within one month after the
services are provided.
Subscription revenue includes revenue derived from the sale of Digimarc Discover, Digimarc Barcode
and Digimarc Guardian products and services, is generally recurring, paid in advance and recognized
over the term of the subscription, which is generally one to three years.
License revenue originates primarily from licensing the Company’s intellectual property where the
Company receives license fees and/or royalties. License fees are typically paid in advance and
recognized when the customer has the right to the intellectual property and the license period has begun,
and royalties are typically billed in arrears and recognized in the quarter in which the royalty was
earned.
Some customer arrangements 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. Goods and services which are not capable of
being distinct are combined with other goods 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 goods and services as we perform them.
All revenue recognized in the Consolidated Statements of Operations is considered to be revenue from
contracts with customers.
F-13
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
The following table provides information about disaggregated revenue by major product line in the
Company’s single reporting segment:
Service..................................................................... $
Subscription
Digimarc Guardian ............................................
Digimarc Discover and Digimarc Barcode .......
License ....................................................................
Total ............................................................. $
Year Ended
December 31,
2019
Year Ended
December 31,
2018
12,793
$
12,774
3,242
4,883
2,069
22,987
$
3,660
2,381
2,377
21,192
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 6.
The Company has contract liabilities from contracts with customers that are classified as “deferred revenue.”
Deferred revenue consists of billings in advance for software development services, subscriptions and licenses for
which the performance obligation has not been satisfied.
The following table provides information about contract liabilities from contracts with customers:
Deferred revenue, current...................................... $
Deferred revenue, long term..................................
Total............................................................ $
3,172
59
3,231
$
$
3,226
46
3,272
December 31,
2019
December 31,
2018
The Company recognized $2,979 of revenue during the year ended December 31, 2019 that was included in
the contract liability balance as of December 31, 2018.
The aggregate amount of the transaction price from contractual obligations that are unsatisfied or partially
unsatisfied was $17,759 and $17,496, as of December 31, 2019 and 2018, respectively.
(3) Segment Information
Geographic Information
The Company derives its revenue from a single reporting segment: media management solutions. Revenue is
generated in this segment through software development services, subscriptions and licensing of intellectual
property. The Company markets its products in the U.S. and in non-U.S. countries through its sales and licensing
personnel and partners.
Revenue by geographic area, based upon the “bill-to” location, was as follows:
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Domestic....................................................
International (1) .........................................
Total .....................................................
$
$
7,187
15,800
22,987
$
$
5,573
15,619
21,192
(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.
F-14
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
Major Customers
The following customers accounted for 10% or more of revenue:
Central Banks ............................................
61%
65%
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Long-lived assets by geographical area
The Company’s long-lived assets are all domestic, domiciled in the U.S.
(4) 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.
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.
Stock Option Valuation Assumptions:
Expected life (years) ...................................................................
Expected volatility ......................................................................
Risk-free interest rate ..................................................................
Expected dividend yield..............................................................
3.20
58.68%
1.51%
0%
4.50
57.11%
2.77%
0%
Year Ended
December 31,
2019
Year Ended
December 31,
2018
F-15
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
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
Year Ended Year Ended
December 31, December 31,
2019
2018
Stock-based compensation:
Cost of revenue ....................................................................... $
Sales and marketing ................................................................
Research, development and engineering.................................
General and administrative......................................................
Intellectual property ................................................................
Stock-based compensation expense...................................
Capitalized to software and patent costs............................
Total stock-based compensation................................................... $
669 $
1,928
1,466
3,877
274
8,214
174
8,388 $
613
1,649
1,361
3,386
289
7,298
170
7,468
The following table sets forth total unrecognized compensation cost related to non-vested stock-based awards
granted under all equity compensation plans:
Total unrecognized compensation costs ....................................... $
2019
13,535 $
2018
14,055
Year Ended Year Ended
December 31, December 31,
Total unrecognized compensation costs will be adjusted for any future forfeitures if and when they occur.
The Company expects to recognize the total unrecognized compensation costs as of December 31, 2019 for
stock options and restricted stock over weighted average periods through December 31, 2023 as follows:
Weighted average period .................................................. 1.10 years 1.38 years
Stock
Options
Restricted
Stock
(5) Earnings Per Common Share
The Company calculates basic and diluted earnings per common share in accordance with ASC 260 “Earnings
Per Share,” using the two-class method because the Company’s unvested restricted stock is a participating security
since these awards contain non-forfeitable rights to receive dividends. Under the two-class method, earnings are
allocated to each class of common stock and participating security as if all of the earnings for the period had been
distributed.
Basic earnings per common share excludes dilution and is calculated by dividing earnings to common shares
by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share
is calculated by dividing earnings to common shares by the weighted-average number of common shares, as
adjusted for the potentially dilutive effect of stock options.
F-16
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
The following table reconciles earnings (loss) per common share for the years ended December 31, 2019 and
2018:
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Basic Earnings (Loss) per Common Share:
Numerator:
Net loss......................................................................................... $
Distributed earnings to common shares .......................................
Distributed earnings to participating securities............................
Total distributed earnings.............................................................
Undistributed loss allocable to common shares ...........................
Undistributed earnings allocable to participating securities ........
Total undistributed loss ................................................................
Loss to common shares — basic .................................................. $
Denominator
Weighted average common shares outstanding — basic .............
Basic earnings (loss) per common share ...................................... $
(32,840) $
—
—
—
(32,840)
—
(32,840)
(32,840) $
(32,506)
—
—
—
(32,506)
—
(32,506)
(32,506)
11,762
(2.79) $
11,360
(2.86)
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Diluted Earnings (Loss) per Common Share:
Numerator:
Loss to common shares — basic .................................................. $
Undistributed earnings allocated to participating securities ........
Undistributed earnings reallocated to participating securities .....
Loss to common shares — diluted ............................................... $
Denominator
Weighted average common shares outstanding — basic .............
Dilutive effect of stock options ....................................................
Weighted average common shares outstanding — diluted ..........
Diluted earnings (loss) per common share................................... $
(32,840) $
—
—
(32,840) $
(32,506)
—
—
(32,506)
11,762
—
11,762
(2.79) $
11,360
—
11,360
(2.86)
The following table indicates the common stock equivalents related to stock options that were anti-dilutive
and excluded from diluted earnings per common share calculations for the years ended December 31, 2019 and
2018:
Anti-dilutive shares due to:
Exercise prices higher than the average market price...................
Net loss..........................................................................................
100
28
475
—
Year Ended Year Ended
December 31, December 31,
2019
2018
F-17
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(6) Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount.
December 31,
December 31,
2019
2018
Trade accounts receivable ................................................... $
Allowance for doubtful accounts.........................................
Trade accounts receivable, net ............................................ $
Unpaid deferred revenue included in trade
accounts receivable........................................................... $
4,036 $
(15)
4,021 $
3,903
(15)
3,888
2,015 $
2,030
Allowance for doubtful accounts
The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in
the Company’s existing trade accounts receivable. The Company determines the allowance based on historical
write-off experience and current information. The Company reviews its allowance for doubtful accounts each
reporting period. Account balances are charged against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.
Unpaid deferred revenue
The unpaid deferred revenue that is included in trade accounts receivable is billed in accordance with the
provisions of the contracts with the Company’s customers.
Major customers
The following customers accounted for 10% or more of trade accounts receivable, net:
Central Banks ......................................................................
69%
48%
December 31,
2019
December 31,
2018
(7) Property and Equipment
Property and Equipment
Property and equipment are stated at cost. Repairs and maintenance are charged to expense when incurred.
F-18
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
Depreciation on property and equipment is calculated using the straight-line method over the estimated useful
lives of the assets, generally two to ten years. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated useful life or the lease term.
December 31, December 31,
2019
2018
Office furniture and fixtures ......................................... $
Software ........................................................................
Equipment .....................................................................
Leasehold improvements ..............................................
Gross property and equipment.................................
Less accumulated depreciation and amortization .........
Property and equipment, net.................................... $
1,650 $
4,379
5,041
1,721
12,791
(9,141)
3,650 $
1,626
3,686
4,814
1,721
11,847
(7,892)
3,955
8. Leases
The Company adopted ASC 842, “Leases,” as amended, as of January 1, 2019, using the retrospective approach.
The retrospective approach provides a method for recording existing leases at adoption and recording the cumulative
effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. In addition,
the Company elected the package of practical expedients permitted under the transition guidance within the new
standard, which allowed the Company to carry forward the historical lease classification, its assessment on whether a
contract was or contains a lease, and its initial direct costs for any leases that existed prior to January 1, 2019. In
addition, the Company elected the short-term lease exception as a practical expedient and to combine lease and non-
lease components.
The Company leases office spaces in Beaverton, Oregon, and San Mateo, California. In July 2015, the Company
entered into an amendment with the landlord of its corporate offices in Beaverton, Oregon, to extend the lease term
through March 2024 with remaining rent payments as of December 31, 2019 totaling $3,484, payable in monthly
installments. In February 2015, the Company entered into a new facilities lease agreement in San Mateo, California,
with a lease term through March 2020, with remaining rent payments as of December 31, 2019 totaling $59, payable
in monthly installments. The Company currently subleases this facility to a third party with a lease term through
March 2020.
All of the Company’s leases are operating leases. The following table provides additional details of leases
presented in the consolidated balance sheets:
Right of use assets.........................................................................
Lease liabilities, current ................................................................
Lease liabilities, long-term............................................................
$
$
$
Weighted-average remaining life..................................................
Weighted-average discount rate....................................................
December 31,
2019
2,263
663
2,435
4.0 years
8.20%
The carrying value of the right of use assets is included in “Other assets” and the current and long-term lease
liabilities are included in “Accounts payable and other accrued liabilities” and “Lease liability and other long-term
liabilities,” respectively, in the consolidated balance sheets.
Operating lease expense is included in cost of revenue and operating expenses in the consolidated statements
of operations and in cash flows from operating activities in the consolidated statements of cash flows. The operating
leases include variable lease costs which are not material and are included in operating lease expense. Additional
details of the Company’s operating leases are presented in the following table:
F-19
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
Operating lease expense ................................................................
Cash paid for operating leases .......................................................
$
$
1,044
1,339
The table below reconciles the cash payment obligations for the first five years and total of the remaining
years for the operating lease liability recorded in the consolidated balance sheet as of December 31, 2019:
Year Ended
December 31,
2019
Year ending December 31:
2020 ...............................................................................................
2021 ...............................................................................................
2022 ...............................................................................................
2023 ...............................................................................................
2024 ...............................................................................................
Thereafter ......................................................................................
Total lease payments .....................................................................
Imputed interest .............................................................................
Total minimum lease payments.....................................................
$
$
Cash
Payment
Obligations
890
838
862
867
218
—
3,675
(577)
3,098
Future minimum lease payments as of December 31, 2018 under non-cancelable operating leases were as
follows:
Year ending December 31:
2019..................................................................................................
2020..................................................................................................
2021..................................................................................................
2022..................................................................................................
2023..................................................................................................
Thereafter .........................................................................................
Total minimum lease payments........................................................
$
$
Rent expense on the operating leases was as follows:
Operating
Leases
1,055
890
838
862
867
218
4,730
Year Ended
December 31,
2018
Rent expense ....................................................................................
$
1,104
(9) Intangibles
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. No impairment charges were recorded for the years ended
December 31, 2019 and 2018.
Amortization of capitalized patent costs associated with the application and award of patents in the U.S. and
various other countries are capitalized and amortized on a straight-line basis over the term of the patents as
determined at the award date, which varies depending on the pendency period of the application, generally
approximating seventeen years.
F-20
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
Amortization of intangible assets acquired is calculated using the straight-line method over the estimated
useful lives of the assets.
Capitalized patent costs ...............................................
Intangible assets acquired:
Purchased patents and intellectual property...........
Existing technology................................................
Customer relationships...........................................
Backlog ..................................................................
Tradenames ............................................................
Non-solicitation agreements ..................................
Gross intangible assets ................................................
Accumulated amortization...........................................
Intangibles, net ............................................................
Amortization expense on intangible assets was as follows:
Estimated Life December 31, December 31,
2019
2018
(years)
17-20
3-10
5
7
2
3
1
$
9,245 $
8,757
250
1,560
290
760
290
120
12,515
(5,845)
6,670 $
250
1,560
290
760
290
120
12,027
(5,378)
6,649
$
Year Ended Year Ended
December 31, December 31,
2019
2018
Amortization expense ................................................................... $
567 $
516
For intangible assets recorded at December 31, 2019, the estimated future aggregate amortization expense for
the years ending December 31, 2020 through December 31, 2024 is approximately as follows:
Year ending December 31:
2020.................................................................................. $
2021..................................................................................
2022..................................................................................
2023..................................................................................
2024..................................................................................
471
413
398
387
377
Amortization
Expense
(10) Shareholders’ Equity
Preferred Stock
In June 2008, the Board of Directors authorized 2,500 shares of preferred stock, par value $0.001 per share.
The Board of Directors has the authority to issue the undesignated preferred stock in one or more series and to
determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed
upon any wholly unissued series of undesignated preferred stock and to fix the number of shares constituting any
series and the designation of such series, without any further vote or action by the shareholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a change of control of the Company without
further action by shareholders and may adversely affect the voting and other rights of the holders of common stock.
The Board of Directors authorized 10 shares of Series A Redeemable Nonvoting Preferred stock (“Series A
Preferred”) that were issued to certain executive officers at the time of formation. The Series A Preferred has no
voting rights, except as required by law, and may be redeemed at the option of the Company’s Board of Directors at
any time.
The Series A Preferred is redeemable based on the stated fair value of $5.00 per share. The Series A Preferred
has no dividend rights and no rights to the undistributed earnings of the Company.
F-21
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
Common Stock
In June 2008, the Board of Directors authorized 50,000 shares of common stock, par value $0.001 per share.
The holders of Digimarc common stock are entitled to one vote for each share held of record on all matters
submitted to a vote of its shareholders, including the election of directors. Subject to preferences that may be granted
to any then outstanding preferred stock, holders of common stock are entitled to receive ratably those dividends as
may be declared by the Board of Directors out of funds legally available for such purpose, as well as any
distributions to the Company’s shareholders. In the event of the Company’s liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in all of the Company’s assets remaining after payment of
liabilities and the liquidation preference of any then outstanding preferred stock. Holders of common stock have no
preemptive or other subscription or conversion rights. There are no redemption or sinking fund provisions applicable
to the common stock. All outstanding shares of common stock are fully paid and non-assessable.
In May 2019, the Company entered into an Equity Distribution Agreement, whereby the Company may sell
from time to time through Wells Fargo Securities, LLC, as its sales agent, the Company’s common stock having an
aggregate offering price of up to $30,000. For the year ended December 31, 2019, the Company sold 336 shares at
an average price of $60.61 under this Equity Distribution Agreement totaling $20,349 of cash proceeds, less $483 of
commissions and $251 of stock issuance costs, for net cash proceeds of $19,615.
Stock Incentive Plan
In March 2018, the Company’s Board of Directors approved the 2018 Incentive Plan (2018 Plan) which was
later approved by the Company’s shareholders at the Company’s 2018 Annual Meeting of Shareholders in April
2018. The 2018 Plan replaced the 2008 Incentive Plan (2008 Plan). The 2018 Plan provides for the grant of
incentive and non-qualified stock options, stock appreciation rights, stock awards, restricted stock awards, restricted
stock units, performance shares, performance units, and other stock or cash-based awards, which may be granted to
officers, directors, employees, consultants, agents, advisors and independent contractors who provide services to the
Company and its affiliated companies.
The 2018 Plan authorizes the issuance of 1,000 shares of common stock. In addition, up to 770 shares of
common stock subject to awards outstanding under the 2008 Plan will become available for issuance under 2018
Plan to the extent that those shares cease to be subject to the awards (as a result of, for example, expiration,
cancellation or forfeiture of the award). The shares authorized under the 2018 Plan are subject to adjustment in the
event of a stock split, stock dividend, recapitalization or similar event. Shares issued under the 2018 Plan will
consist of authorized and unissued shares or shares held by the Company as treasury shares. If an award granted
under the 2018 Plan lapses, expires, terminates or is forfeited or surrendered without having been fully exercised or
without the issuance of all the shares subject to the award, the shares covered by that award will again be available
for issuance under the 2018 Plan. Shares that are (i) tendered by a participant or retained by the Company as
payment for the purchase price of an award or to satisfy tax withholding obligations or (ii) covered by an award that
is settled in cash, or in some manner that some or all of the shares covered by the award are not issued, will again be
available for issuance under the 2018 Plan. In addition, awards granted as substitute awards in connection with
acquisition transactions will not reduce the number of shares authorized for issuance under the 2018 Plan.
As of December 31, 2019, under all of the Company’s stock-based compensation plans, an additional 1,276
shares remained available for future grants under the 2018 Plan.
Stock Options
The Company issues new shares upon option exercises.
F-22
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
Options granted, exercised and forfeited under the stock incentive plan are summarized as follows:
Options outstanding, December 31, 2017 .......................
Granted.......................................................................
Exercised....................................................................
Forfeited or expired ...................................................
Options outstanding, December 31, 2018 .......................
Granted.......................................................................
Exercised....................................................................
Forfeited or expired ...................................................
Options outstanding, December 31, 2019 .......................
Options exercisable, December 31, 2019........................
Options unvested, December 31, 2019............................
Aggregate
Intrinsic
Value
Options
Weighted
Average
Grant Date
Fair Value
11.64
14.46
7.02
—
13.10
16.40
9.76
—
Weighted
Average
Exercise
Price
515 $ 25.13 $
100 $ 29.55 $
(102) $ 12.38 $
—
—
513 $ 28.52 $
100 $ 39.54 $
(55) $ 21.26 $
—
558 $ 31.22 $
358 $ 29.46
200 $ 34.37
—
14.03 $ 1,902
$ 1,515
387
$
The aggregate intrinsic value is based on the closing price of $33.56 per share of Digimarc common stock on
December 31, 2019, which would have been received by the optionees had all of the options with exercise prices
less than $33.56 per share been exercised on that date.
The following table summarizes information about stock options outstanding at December 31, 2019:
Options Outstanding
Options Exercisable
Exercise Price
$18.01 - $27.61 .....................................................
$29.55 - $30.01 .....................................................
$30.50 - $39.54 .....................................................
$18.01 - $39.54 .....................................................
Weighted
Remaining Average
Contractual Exercise Number
Weighted
Remaining Average
Contractual Exercise
Outstanding Life (Years) Price
Number
Outstanding Life (Years) Price
108
150
300
558
1.74 $ 26.94
6.12 $ 29.70
8.34 $ 33.51
6.47 $ 31.22
108
92
158
358
1.74 $ 26.94
4.49 $ 29.80
7.78 $ 30.98
5.12 $ 29.46
Restricted Stock
The Compensation Committee of the Board of Directors has awarded shares of restricted stock under the
Company’s 2018 Plan to employees and directors. The shares subject to the restricted stock awards vest over a
certain period, usually four years, following the date of the grant. Specific terms of the restricted stock awards are
governed by Restricted Stock Agreements between the Company and the award recipients.
F-23
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
The following table reconciles the unvested balance of restricted stock:
Unvested balance, December 31, 2017 ............................
Granted .......................................................................
Vested .........................................................................
Forfeited......................................................................
Unvested balance, December 31, 2018 ............................
Granted .......................................................................
Vested .........................................................................
Forfeited......................................................................
Unvested balance, December 31, 2019 ............................
Number of
Shares
Weighted
Average
Grant Date
Fair Value
28.44
29.73
28.96
29.29
28.85
25.22
27.88
27.43
27.05
426 $
239 $
(215) $
(24) $
426 $
300 $
(242) $
(49) $
435 $
The following table indicates the fair value of all restricted stock awards that vested during the years ended
December 31, 2019 and 2018, respectively:
Fair value of restricted stock awards vested ................................. $
9,495 $
5,835
Year Ended Year Ended
December 31, December 31,
2019
2018
(11) Defined Contribution Plan
The Company sponsors an employee retirement savings plan (the “Plan”) which qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. The Plan combines both an employee savings plan
and company matching plan into one plan under Section 401(k), including a 401(k) Roth option. Employees become
eligible to participate in the Plan at the beginning of the month following the employee’s hire date. Employees may
contribute up to 75% of their pay to the Plan, subject to the limitations of the Internal Revenue Service Code.
Company matching contributions are mandatory under the Plan.
The Company made matching contributions in the aggregate amount as follows:
Matching contributions ................................................................. $
1,062 $
1,026
Year Ended Year Ended
December 31, December 31,
2019
2018
F-24
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(12) Income Taxes
The benefit (provision) for income taxes reflects current taxes, deferred taxes, and withholding taxes. The
effective tax rates for the years ended December 31, 2019 and 2018 were 0% and 0%, respectively. The Company
continues to provide for a full valuation allowance to offset its net deferred tax assets until such time it is more likely
than not the tax assets or portions thereof will be realized.
Components of tax benefit (provision) allocated to continuing operations include the following:
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Current:
Federal.......................................................................................... $
State..............................................................................................
Foreign .........................................................................................
Sub-total.................................................................................. $
Deferred:
Federal.......................................................................................... $
State..............................................................................................
Foreign .........................................................................................
Sub-total.................................................................................. $
Total tax benefit (provision)......................................................... $
(4) $
10
(27)
(21) $
— $
—
—
— $
(21) $
—
(28)
(11)
(39)
—
—
—
—
(39)
The reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as
follows:
Year Ended
December 31,
2019
%
Year Ended
December 31,
2018
%
Income taxes computed at statutory rates ....................................... $
(Increases) decreases resulting from:
6,892
(21)% $
6,818
(21)%
State income taxes, net of federal tax benefit ............................
Federal and state research and experimentation credits ............
Change in valuation allowance..................................................
Impact of expired tax positions .................................................
Impact of recent U.S. tax reform ...............................................
Other ..........................................................................................
Total................................................................................... $
143
781
(7,873)
(1)%
(2)%
24%
— —%
— —%
36 —%
(21) —% $
(359)
1,064
(7,611)
1%
(4)%
24%
1 —%
— —%
48 —%
(39) —%
F-25
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects
of significant items comprising the Company’s deferred tax assets and deferred tax liabilities are as follows:
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Deferred tax assets:
Stock based compensation .................................... $
Federal and state net operating losses...................
Goodwill ...............................................................
Accrued compensation..........................................
ASC 842 - lease liabilities ....................................
Deferred rent .........................................................
Federal and state research and experimentation
credit ..................................................................
Intangible asset differences...................................
Other .....................................................................
Total gross deferred tax assets......................
Less valuation allowance ......................................
Net deferred tax assets .................................. $
Deferred tax liabilities:
Patent expenditures ............................................... $
ASC 842 - right of use assets................................
Fixed asset differences..........................................
Total gross deferred tax liabilities ................ $
1,166 $
39,879
220
9
712
—
8,173
122
57
50,338
(47,809)
2,529 $
(1,481) $
(528)
(520)
(2,529) $
1,337
32,460
341
11
—
290
7,528
185
76
42,228
(39,936)
2,292
(1,781)
—
(511)
(2,292)
Total net deferred tax assets ......................... $
— $
—
The Company had a valuation allowance of $47,809 and $39,936 on deferred tax assets as of December 31,
2019 and 2018, respectively, an increase of $7,873 during the year ended December 31, 2019.
As of December 31, 2019, the Company has federal and state net operating loss carry-forwards of $157,557
and $114,825, respectively, which have a carry-forward of 5 years to indefinite depending on the jurisdiction. The
gross deferred tax assets for federal and state net operating loss carryforwards acquired in the Attributor Corporation
acquisition have been reduced to the amount of losses allowed to be utilized in the post-acquisition period before
expiration after considering the applicable limitations of Internal Revenue Code Section 382.
As of December 31, 2019, the Company has federal and state research and experimental tax credits of $7,831
and $1,289, respectively, which have a carry-forward of 5 to 20 years depending on the jurisdiction.
The Company records accrued interest and penalties associated with uncertain tax positions in the provision
for income taxes in the consolidated statements of operations. For the years ended December 31, 2019 and 2018, the
Company recognized accrued interest and penalties associated with uncertain tax positions of $0 and $0,
respectively. The Company does not anticipate any of its unrecognized benefits will significantly increase or
decrease within the next 12 months.
F-26
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
A summary reconciliation of the Company’s uncertain tax positions is as follows:
Year Ended Year Ended
December 31, December 31,
2019
2018
Beginning balance ........................................................................ $
Addition for current year tax positions.........................................
Addition for prior year tax positions ............................................
Reduction for prior year positions ................................................
Reduction for prior year positions resolved during the current
year ............................................................................................
Ending balance.............................................................................. $
613 $
61
2
—
—
676 $
549
88
—
(23)
(1)
613
Uncertain tax positions are classified as a long-term liability (or a contra deferred tax asset) in the consolidated
balance sheets for uncertain tax positions taken (or expected to be taken) on a tax return.
The Company’s open tax years subject to examination in the U.S. federal jurisdiction are 2015 through 2018
and applicable state jurisdictions for the tax years 2015 through 2018. To the extent allowed by law, the taxing
authorities may have the right to examine prior periods where net operating losses or tax credits were generated and
carried forward, and make adjustments up to the amount of the net operating loss or tax credit carryforward.
(13) Commitments and Contingencies
Certain of the Company’s product license and services agreements include an indemnification provision for
claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are
accounted for in accordance with ASC 450 “Contingencies.” To date, there have been no claims made under such
indemnification provisions.
The Company is subject from time to time to other legal proceedings and claims arising in the ordinary course
of business. At this time, the Company does not believe that the resolution of any such matters will have a material
adverse effect on its financial position, results of operations or cash flows.
F-27
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
(14) Quarterly Financial Information—Unaudited
March 31
June 30
September 30
December 31
Quarter Ended
2019
Service revenue........................................................
Subscription revenue ...............................................
License revenue .......................................................
Total revenue ...........................................................
Total cost revenue....................................................
Gross profit ..............................................................
Gross profit percent, service revenue ......................
Gross profit percent, subscription revenue ..............
Gross profit percent, license revenue ......................
Gross profit percent, total ........................................
Sales and marketing.................................................
Research, development and engineering .................
General and administrative......................................
Intellectual property.................................................
Operating loss ..........................................................
Net loss ....................................................................
Earnings (loss) per common share:
Loss per common share—basic...............................
Loss per common share—diluted ............................
Weighted average common shares outstanding—
basic ......................................................................
Weighted average common shares outstanding—
diluted ...................................................................
$
$
$
3,635
1,563
462
5,660
2,134
3,526
$ 3,529
2,088
563
6,180
2,185
3,995
58%
72%
66%
62%
56%
78%
70%
65%
$
4,950
4,038
2,852
358
$ 5,087
3,981
2,686
393
(8,672) (8,152)
(8,463) (7,933)
$
3,003
2,273
552
5,828
1,918
3,910
57%
80%
69%
67%
$
4,839
4,105
2,656
342
(8,032)
(7,761)
2,626
2,201
492
5,319
1,799
3,520
56%
79%
64%
66%
4,999
4,343
2,654
399
(8,875)
(8,683)
$
$
(0.74) $ (0.68) $
(0.74) $ (0.68) $
(0.65) $
(0.65) $
(0.73)
(0.73)
11,487
11,487
11,66
5
11,66
5
11,924
11,967
11,924
11,967
F-28
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except per share data)
March 31
June 30
September 30
December 31
Quarter Ended
$
$ 3,336
1,444
658
5,438
2,205
3,233
2018
Service revenue............................................................ $ 3,507
Subscription revenue.................................................... 1,578
License revenue ...........................................................
528
Total revenue ............................................................... 5,613
Total cost revenue ........................................................ 2,185
Gross profit .................................................................. 3,428
Gross profit percent, service revenue...........................
Gross profit percent, subscription revenue ..................
Gross profit percent, license revenue...........................
Gross profit percent, total ............................................
Sales and marketing ..................................................... $ 4,887
Research, development and engineering...................... 3,947
General and administrative .......................................... 2,632
Intellectual property .....................................................
315
Operating loss .............................................................. (8,353) (8,303)
Net loss......................................................................... (8,112) (8,038)
Earnings (loss) per common share:
Loss per common share—basic ................................... $ (0.72) $ (0.71) $
Loss per common share—diluted ................................ $ (0.72) $ (0.71) $
Weighted average common shares outstanding—
basic .......................................................................... 11,266
Weighted average common shares outstanding—
diluted ....................................................................... 11,266
$ 4,757
4,058
2,416
305
54%
65%
77%
59%
$
55%
69%
73%
61%
11,337
11,337
$
2,787
1,532
595
4,914
1,935
2,979
53%
69%
74%
61%
$
4,741
4,069
2,447
328
(8,606)
(8,342)
3,144
1,487
596
5,227
2,101
3,126
52%
71%
74%
60%
4,755
3,897
2,402
334
(8,262)
(8,014)
(0.73) $
(0.73) $
(0.70)
(0.70)
11,394
11,443
11,394
11,443
F-29
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Bruce Davis
Bruce Davis
Chairman of the Board and Chief Executive Officer
Chairman and Chief Executive Officer
Digimarc Corporation
James T. Richardson
Lead Director
Charles Beck
Executive Vice President, Chief Financial Officer and Treasurer
Independent Director and Consultant
Robert Chamness
Former Senior Vice President and Chief Financial Officer
Executive Vice President, Chief Legal Officer and Secretary
WebTrends
Gary DeStefano
Independent Director and Consultant
Former President of Global Operations
Nike, Inc.
Richard L. King
Independent Director and Consultant
Former President and Chief Operating Officer
Albertsons Companies, Inc.
Andrew J. Walter
Independent Director and Consultant
Joel Meyer
Executive Vice President Intellectual Property
Tony Rodriguez
Executive Vice President, Chief Technology Officer
TRANSFER AGENT
Broadridge Corporate Issuer Solutions, Inc.
P. O. Box 1342, Brentwood, NY 11717
Former Vice President of Global Business Services
(866) 321 8022
The Procter & Gamble Company
Bern Whitney
Independent Director and Consultant
Partner
FLG Partners, LLC
shareholder@broadridge.com
www.broadridge.com
DIGIMARC CORPORATION
9405 SW Gemini Drive, Beaverton, OR 97008 USA
T: +1 800 DIGIMARC (344 4627)
T: +1 503 469 4800
F: +1 503 469 4777
www.digimarc.com