8-K
Digimarc CORP (DMRC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 1, 2023
DIGIMARC CORPORATION
(Exact name of registrant as specified in its charter)
| Oregon | 001-34108 | 26-2828185 |
|---|---|---|
| (State or other jurisdiction<br><br> <br>of incorporation) | (Commission<br><br> <br>File No.) | (IRS Employer<br><br> <br>Identification No.) |
8500 SW Creekside Place, Beaverton Oregon 97008
(Address of principal executive offices) (Zip Code)
(503) 469-4800
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| --- | --- |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| --- | --- |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| --- | --- |
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
|---|---|---|
| Common Stock, $0.001 Par Value Per Share | DMRC | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act (17 CFR 230.405) or Rule 12b-2 of the Exchange Act of 1934 (17 CFR 240.12b-2).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
| Item 2.02. | Results of Operations and Financial Condition |
|---|
On March 1, 2023, Digimarc Corporation issued a press release announcing its financial results for the quarter-ended and year-ended December 31, 2022. The full text of the press release is attached hereto as Exhibit 99.1.
Attached hereto as Exhibit 99.2 is the script from the Company’s conference call on March 1, 2023 announcing its financial results for the quarter-ended and year-ended December 31, 2022, as posted on the Company’s website at https://www.digimarc.com/investors/quarterly-earnings.
| Item 9.01. | Financial Statements and Exhibits |
|---|
(d) Exhibits
| Exhibit No . | Description |
|---|---|
| 99.1 | Press Release issued by Digimarc Corporation, dated March 1, 2023 (furnished pursuant to Item 2.02 hereof). |
| 99.2 | Script of Digimarc Corporation conference call, dated March 1, 2023 (furnished pursuant to Item 2.02 hereof). |
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: March 1, 2023
| By: | /s/ Charles Beck |
|---|---|
| Charles Beck | |
| Chief Financial Officer and Treasurer |
ex_461979.htm
Exhibit 99.1
Digimarc Reports Fourth Quarter and Fiscal Year 2022 Financial Results
Beaverton, Ore. – March 1 , 2023 – **** Digimarc Corporation (NASDAQ: DMRC) reported financial results for the fourth quarter and fiscal year ended December 31, 2022.
Fourth Quarter 2022 Financial Results
Subscription revenue for the fourth quarter of 2022 increased 13% to $4.1 million compared to $3.6 million in the fourth quarter of 2021, primarily reflecting subscription revenue from new commercial contracts and the contribution of subscription revenue post acquisition from EVRYTHNG, partially offset by $1.0 million of revenue from the sale of 10 non-core patents in the fourth quarter of 2021, and $0.6 million of lower subscription revenue as a result of sunsetting our Piracy Intelligence product.
Service revenue for the fourth quarter of 2022 decreased 11% to $3.1 million compared to $3.5 million in the fourth quarter of 2021, primarily reflecting lower service revenue from HolyGrail 2.0 recycling projects, partially offset by the contribution of service revenue post acquisition from EVRYTHNG.
Total revenue for the fourth quarter of 2022 increased 1% to $7.2 million compared to $7.1 million in the fourth quarter of 2021.
Gross profit for the fourth quarter of 2022 was $3.8 million compared to $5.0 million in the fourth quarter of 2021, primarily reflecting $1.1 million of amortization expense recognized in the fourth quarter of 2022 on the developed technology intangible asset acquired in the EVRYTHNG acquisition.
Non-GAAP gross profit for the fourth quarter of 2022 was $5.2 million compared to $5.3 million in the fourth quarter of 2021.
Operating expenses for the fourth quarter of 2022 increased 30% to $17.1 million compared to $13.2 million in the fourth quarter of 2021, primarily reflecting $2.9 million of operating expenses from EVRYTHNG post acquisition, $1.2 million of higher compensation costs due to annual compensation adjustments and higher headcount, and $0.3 million in non-cash lease impairment charges, partially offset by a reduction in other expenses.
Non-GAAP operating expenses for the fourth quarter of 2022 increased 38% to $14.3 million compared to $10.3 million in the fourth quarter of 2021.
Net loss for the fourth quarter of 2022 was $12.4 million or $(0.62) loss per common share compared to $8.2 million or $(0.50) loss per common share in the fourth quarter of 2021.
Non-GAAP net loss for the fourth quarter of 2022 was $8.2 million or $(0.41) loss per common share compared to $5.0 million or $(0.30) loss per common share in the fourth quarter of 2021.
Fiscal Year 2022 Financial Results
Subscription revenue for fiscal year 2022 increased 32% to $15.2 million compared to $11.5 million in fiscal year 2021, primarily reflecting the contribution of subscription revenue post acquisition from EVRYTHNG and subscription revenue from new commercial contracts, partially offset by $1.5 million of lower subscription revenue as a result of sunsetting our Piracy Intelligence product, $1.0 million of revenue from the sale of 10 non-core patents in 2021, and $0.4 million of upfront subscription revenue on a two-year contract signed in 2021.
Service revenue was flat year-over-year at $15.0 million, primarily reflecting the contribution of service revenue post acquisition from EVRYTHNG offsetting lower service revenue from HolyGrail 2.0 recycling projects.
Total revenue for fiscal year 2022 increased 14% to $30.2 million compared to $26.5 million in fiscal year 2021.
Gross profit for fiscal year 2022 was $15.3 million compared to $17.7 million in fiscal year 2021, primarily reflecting $4.4 million of amortization expense recognized in fiscal year 2022 on the developed technology intangible asset acquired in the EVRYTHNG acquisition, partially offset by gross profit contribution from higher subscription revenue.
Non-GAAP gross profit for the fiscal year 2022 was $21.3 million compared to $19.0 million in fiscal year 2021.
Operating expenses for fiscal year 2022 increased 34% to $77.1 million compared to $57.6 million in fiscal year 2021, primarily reflecting $15.8 million of EVRYTHNG operating expenses post acquisition, $6.6 million of higher compensation costs due to annual compensation adjustments and higher headcount, and $0.9 million in non-cash lease impairment charges, partially offset by $6.2 million of costs recognized in the second quarter of 2021 associated with the Separation Agreement we entered into with our former chief executive officer.
Non-GAAP operating expenses for fiscal year 2022 increased 43% to $61.8 million compared to $43.3 million in fiscal year 2021.
Net loss for fiscal year 2022 was $59.8 million or $(3.12) loss per common share compared to a net loss of $34.8 million or $(2.11) loss per common share in fiscal year 2021.
Non-GAAP net loss for fiscal year 2022 was $38.6 million or $(2.02) loss per common share compared to a net loss of $24.2 million or $(1.47) loss per common share in fiscal year 2021.
At December 31, 2022, cash, cash equivalents, short- and long-term marketable securities totaled $52.5 million compared to $41.6 million at December 31, 2021.
Conference call
Digimarc will hold a conference call today (Wednesday, March 1, 2023) to discuss these results and provide an update on market conditions and its execution of strategy. CEO Riley McCormack, CFO Charles Beck and CLO Joel Meyer will host the call starting at 5:00 p.m. Eastern time (2:00 p.m. Pacific time). A question and answer session will follow management’s presentation.
The conference call will be broadcast live and available for replay here and in the investor section of the company's website. The conference call script will also be posted to the company's website shortly before the call.
For those who wish to call in via telephone to ask a question, please dial the number below at least five minutes before the scheduled start time:
Toll-Free Number: 877-407-0832
International Number: +1 201-689-8433
Conference ID: 13734719
Company contact:
Charles Beck
Chief Financial Officer
Charles.Beck@digimarc.com
+1 503-469-4721
About Digimarc
Digimarc Corporation (NASDAQ: DMRC) is a global leader in product digitization, delivering business value across industries through unique identifiers and cloud-based solutions. A trusted partner in deterring digital counterfeiting of global currency for more than 20 years, Digimarc reveals a product's journey to provide intelligence and promote a prosperous, safer, and more sustainable world. With Digimarc, you can finally see everything. And when you see everything, you can achieve anything. For more information, visit us at digimarc.com.
Forward-looking statements
Except for historical information contained in this release, the matters described in this release contain various “forward-looking statements.” These forward-looking statements include statements identified by terminology such as “will,” “should,” “expects,” “estimates,” “predicts” and “continue” or other derivations of these or other comparable terms. These forward-looking statements are statements of management's opinion and are subject to various assumptions, risks, uncertainties and changes in circumstances. Actual results may vary materially from those expressed or implied from the statements in this release as a result of changes in economic, business and regulatory factors. More detailed information about risk factors that may affect actual results are outlined in the company's Form 10-K for the year ended December 31, 2021, and in subsequent periodic reports filed with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date of this release. Except as required by law, Digimarc undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this release.
Non-GAAP Financial Measures
This press release contains the following non-GAAP financial measures: Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per common share (diluted). See below for a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. These non-GAAP financial measures are an important measure of our operating performance because they allow management, investors and analysts to evaluate and assess our core operating results from period-to-period after removing non-cash and non-recurring activities that affect comparability. Our management uses these non-GAAP financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparisons.
Digimarc believes that providing these non-GAAP financial measures, together with the reconciliation to GAAP, helps management and investors make comparisons between us and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measures and the corresponding GAAP measures provided by each company under applicable SEC rules. These non-GAAP financial measures are not measurements of financial performance or liquidity under GAAP. In order to facilitate a clear understanding of its consolidated historical operating results, investors should examine Digimarc’s non-GAAP financial measures in conjunction with its historical GAAP financial information, and investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to, GAAP financial measures. Non-GAAP financial measures may not be indicative of the historical operating results of the Company nor are they intended to be predictive of potential future results.
Digimarc Corporation
Consolidated Income Statement Information
(in thousands, except per share amounts)
(Unaudited)
| Three Month Information | Twelve Month Information | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | December 31, | December 31, | |||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||
| Revenue: | **** | **** | **** | **** | ||||||||
| Service | $ | 3,120 | $ | 3,499 | $ | 14,978 | $ | 15,006 | ||||
| Subscription | 4,098 | 3,626 | 15,219 | 11,514 | ||||||||
| Total revenue | 7,218 | 7,125 | 30,197 | 26,520 | ||||||||
| Cost of revenue: | **** | **** | **** | **** | ||||||||
| Service ^(1)^ | 1,380 | 1,584 | 6,557 | 6,299 | ||||||||
| Subscription ^(1)^ | 944 | 586 | 3,878 | 2,478 | ||||||||
| Amortization expense on acquired intangible assets | 1,077 | — | 4,439 | — | ||||||||
| Total cost of revenue | 3,401 | 2,170 | 14,874 | 8,777 | ||||||||
| Gross profit | **** | **** | **** | **** | ||||||||
| Service ^(1)^ | 1,740 | 1,915 | 8,421 | 8,707 | ||||||||
| Subscription ^(1)^ | 3,154 | 3,040 | 11,341 | 9,036 | ||||||||
| Amortization expense on acquired intangible assets | (1,077 | ) | — | (4,439 | ) | — | ||||||
| Total gross profit | 3,817 | 4,955 | 15,323 | 17,743 | ||||||||
| Gross profit margin: | **** | **** | **** | **** | ||||||||
| Total | 53 | % | 70 | % | 51 | % | 67 | % | ||||
| Service ^(1)^ | 56 | % | 55 | % | 56 | % | 58 | % | ||||
| Subscription ^(1)^ | 77 | % | 84 | % | 75 | % | 78 | % | ||||
| Operating expenses: | **** | **** | **** | **** | ||||||||
| Sales and marketing | 6,016 | 4,568 | 29,718 | 20,433 | ||||||||
| Research, development and engineering | 6,759 | 4,612 | 26,490 | 17,542 | ||||||||
| General and administrative | 3,918 | 4,023 | 18,945 | 19,634 | ||||||||
| Amortization expense on acquired intangible assets | 100 | — | 1,064 | — | ||||||||
| Impairment of lease right of use assets and leasehold improvements | 341 | — | 915 | — | ||||||||
| Total operating expenses | 17,134 | 13,203 | 77,132 | 57,609 | ||||||||
| Operating loss | (13,317 | ) | (8,248 | ) | (61,809 | ) | (39,866 | ) | ||||
| Other income: | **** | **** | **** | **** | ||||||||
| Gain on extinguishment of note payable | — | — | — | 5,094 | ||||||||
| Refundable tax credit | 382 | — | 1,260 | — | ||||||||
| Other income | 512 | 3 | 848 | 29 | ||||||||
| Other income, net | 894 | 3 | 2,108 | 5,123 | ||||||||
| Loss before income taxes | (12,423 | ) | (8,245 | ) | (59,701 | ) | (34,743 | ) | ||||
| (Provision) benefit for income taxes | (25 | ) | 1 | (97 | ) | (16 | ) | |||||
| Net loss | $ | (12,448 | ) | $ | (8,244 | ) | $ | (59,798 | ) | $ | (34,759 | ) |
| Loss per common share: | **** | **** | **** | **** | ||||||||
| Loss per common share — basic | $ | (0.62 | ) | $ | (0.50 | ) | $ | (3.12 | ) | $ | (2.11 | ) |
| Loss per common share — diluted | $ | (0.62 | ) | $ | (0.50 | ) | $ | (3.12 | ) | $ | (2.11 | ) |
| Weighted average common shares outstanding — basic | 19,921 | 16,565 | 19,140 | 16,463 | ||||||||
| Weighted average common shares outstanding — diluted | 19,921 | 16,565 | 19,140 | 16,463 |
^(1)^ Cost of revenue, Gross profit and Gross profit margin for Service and Subscription excludes amortization expense on acquired intangible assets.
Digimarc Corporation
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands, except per share amounts)
(Unaudited)
| Three Month Information | Twelve Month Information | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | December 31, | December 31, | |||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||
| GAAP gross profit | $ | 3,817 | $ | 4,955 | $ | 15,323 | $ | 17,743 | ||||
| Amortization of acquired intangible assets | 1,077 | — | 4,439 | — | ||||||||
| Amortization and write-off of other intangible assets | 146 | 145 | 576 | 576 | ||||||||
| Stock-based compensation | 177 | 178 | 913 | 693 | ||||||||
| Non-GAAP gross profit | $ | 5,217 | $ | 5,278 | $ | 21,251 | $ | 19,012 | ||||
| Non-GAAP gross profit margin | 72 | % | 74 | % | 70 | % | 72 | % | ||||
| GAAP operating expenses | $ | 17,134 | $ | 13,203 | $ | 77,132 | $ | 57,609 | ||||
| Depreciation and write-off of property and equipment | (336 | ) | (319 | ) | (1,372 | ) | (1,370 | ) | ||||
| Amortization of acquired intangible assets | (100 | ) | — | (1,064 | ) | — | ||||||
| Amortization and write-off of other intangible assets | (100 | ) | (8 | ) | (163 | ) | (102 | ) | ||||
| Amortization of lease right of use assets under operating leases | (197 | ) | (129 | ) | (965 | ) | (493 | ) | ||||
| Stock-based compensation | (1,802 | ) | (1,410 | ) | (10,376 | ) | (11,243 | ) | ||||
| Impairment of lease right of use assets and leasehold improvements | (341 | ) | — | (915 | ) | — | ||||||
| Acquisition-related expenses | — | (1,029 | ) | (447 | ) | (1,140 | ) | |||||
| Non-GAAP operating expenses | $ | 14,258 | $ | 10,308 | $ | 61,830 | $ | 43,261 | ||||
| GAAP net loss | $ | (12,448 | ) | $ | (8,244 | ) | $ | (59,798 | ) | $ | (34,759 | ) |
| Total adjustments to gross profit | 1,400 | 323 | 5,928 | 1,269 | ||||||||
| Total adjustments to operating expenses | 2,876 | 2,895 | 15,302 | 14,348 | ||||||||
| Gain on extinguishment of note payable | - | - | - | (5,094 | ) | |||||||
| Non-GAAP net loss | $ | (8,172 | ) | $ | (5,026 | ) | $ | (38,568 | ) | $ | (24,236 | ) |
| GAAP loss per common share (diluted) | $ | (0.62 | ) | $ | (0.50 | ) | $ | (3.12 | ) | $ | (2.11 | ) |
| Non-GAAP net loss | $ | (8,172 | ) | $ | (5,026 | ) | $ | (38,568 | ) | $ | (24,236 | ) |
| Non-GAAP loss per common share (diluted) | $ | (0.41 | ) | $ | (0.30 | ) | $ | (2.02 | ) | $ | (1.47 | ) |
Digimarc Corporation
Consolidated Balance Sheet Information
(in thousands)
(Unaudited)
| December 31, | December 31, | |||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| Assets | **** | **** | ||||
| Current assets: | **** | **** | ||||
| Cash and cash equivalents ^(1)^ | $ | 33,598 | $ | 13,789 | ||
| Marketable securities ^(1)^ | 18,944 | 19,537 | ||||
| Trade accounts receivable, net | 5,427 | 6,368 | ||||
| Loan receivable from related party | — | 2,001 | ||||
| Other current assets | 6,172 | 2,316 | ||||
| Total current assets | 64,141 | 44,011 | ||||
| Marketable securities ^(1)^ | — | 8,292 | ||||
| Property and equipment, net | 2,390 | 2,875 | ||||
| Intangibles, net | 33,170 | 6,611 | ||||
| Goodwill | 8,229 | 1,114 | ||||
| Lease right of use assets | 4,720 | 1,300 | ||||
| Other assets | 1,127 | 673 | ||||
| Total assets | $ | 113,777 | $ | 64,876 | ||
| Liabilities and Shareholders' Equity | **** | **** | ||||
| Current liabilities: | **** | **** | ||||
| Accounts payable and other accrued liabilities | $ | 5,989 | $ | 4,727 | ||
| Deferred revenue | 4,145 | 2,989 | ||||
| Total current liabilities | 10,134 | 7,716 | ||||
| Long-term lease liabilities | 5,977 | 1,028 | ||||
| Other long-term liabilities | 76 | 752 | ||||
| Total liabilities | 16,187 | 9,496 | ||||
| Shareholders' equity: | **** | **** | ||||
| Preferred stock | 50 | 50 | ||||
| Common stock | 20 | 17 | ||||
| Additional paid-in capital | 367,692 | 261,324 | ||||
| Accumulated deficit | (265,809 | ) | (206,011 | ) | ||
| Accumulated other comprehensive loss | (4,363 | ) | — | |||
| Total shareholders' equity | 97,590 | 55,380 | ||||
| Total liabilities and shareholders' equity | $ | 113,777 | $ | 64,876 |
^(1)^ Aggregate cash, cash equivalents, and marketable securities was $52,542 and $41,618 at December 31, 2022 and December 31, 2021, respectively.
Digimarc Corporation
Consolidated Cash Flow Information
(in thousands)
(Unaudited)
| Twelve Month Information | ||||||
|---|---|---|---|---|---|---|
| December 31, | December 31, | |||||
| 2022 | 2021 | |||||
| Cash flows from operating activities: | ||||||
| Net loss | $ | (59,798 | ) | $ | (34,759 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
| Depreciation and write-off of property and equipment | 1,372 | 1,370 | ||||
| Amortization of acquired intangible assets | 5,503 | — | ||||
| Amortization and write-off of other intangible assets | 739 | 678 | ||||
| Amortization of lease right of use assets under operating leases | 965 | 493 | ||||
| Amortization of net premiums on marketable securities | — | 650 | ||||
| Gain on extinguishment of note payable | — | (5,032 | ) | |||
| Stock-based compensation | 11,289 | 11,936 | ||||
| Impairment of lease right of use assets and leasehold improvements | 915 | — | ||||
| Increase in allowance for doubtful accounts | 89 | — | ||||
| Changes in operating assets and liabilities: | ||||||
| Trade accounts receivable | 2,232 | (2,647 | ) | |||
| Other current assets | (1,933 | ) | (119 | ) | ||
| Other assets | (520 | ) | (83 | ) | ||
| Accounts payable and other accrued liabilities | (3,856 | ) | 2,078 | |||
| Deferred revenue | (371 | ) | (10 | ) | ||
| Lease liability and other long-term liabilities | (1,034 | ) | (671 | ) | ||
| Net cash used in operating activities | (44,408 | ) | (26,116 | ) | ||
| Cash flows from investing activities: | ||||||
| Net cash paid for acquisition | (3,512 | ) | — | |||
| Loan to related party | — | (2,000 | ) | |||
| Purchase of property and equipment | (934 | ) | (966 | ) | ||
| Capitalized patent costs | (533 | ) | (606 | ) | ||
| Proceeds from maturities of marketable securities | 21,425 | 82,076 | ||||
| Purchases of marketable securities | (12,689 | ) | (52,523 | ) | ||
| Net cash provided by investing activities | 3,757 | 25,981 | ||||
| Cash flows from financing activities: | ||||||
| Issuance of common stock, net of issuance costs | 62,890 | — | ||||
| Purchase of common stock | (2,356 | ) | (5,772 | ) | ||
| Loan repayment | (35 | ) | — | |||
| Net cash provided by (used in) financing activities | 60,499 | (5,772 | ) | |||
| Effect of exchange rate on cash | (39 | ) | — | |||
| Net increase (decrease) in cash and cash equivalents ^(2)^ | $ | 19,809 | $ | (5,907 | ) | |
| Cash, cash equivalents and marketable securities at beginning of period | 41,618 | 77,728 | ||||
| Cash, cash equivalents and marketable securities at end of period | 52,542 | 41,618 | ||||
| (2) Net increase (decrease) in cash, cash equivalents and marketable securities | $ | 10,924 | $ | (36,110 | ) |
###
ex_461980.htm
Exhibit 99.2
Digimarc Corporation (DMRC) Conference Call Fourth Quarter and FY 2022 Financial Results March 1, 2023
Joel Meyer – Chief Legal Officer
Welcome to our Q4 conference call. Riley McCormack, our CEO, and Charles Beck, our CFO, are with me on the call. On the call today, we will provide a business update and discuss Q4 and Fiscal 2022 financial results. This will be followed by a question and answer forum. We have posted our prepared remarks in the investor relations section of our website and will archive this webcast there.
Safe Harbor Statement
Before we begin, let me remind everyone that today's discussion contains forward-looking statements that have risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Riley will now provide a business update.
Business Update
Thank you Joel, and good afternoon everyone.
2022 was a transformative year for our company. In a bit, Charles will review the financial highlights from the year. I want to spend time on the strategic highlights, and how they position us in 2023 and beyond.
As you all know, we generate revenue through two primary markets: government and commercial. On the government side, we re-signed our contract with a consortium of the world’s Central Banks two years before expiry, extending it out through the end of the decade. We take great pride in our work to deter global currency counterfeiting and are excited to continue our work with our long-standing and deeply-valued customers, the Central Banks. Moreover, this program is a wonderful testament to the power of our technology, our scalability, and our trustworthiness as a partner, not to mention our ability to build and support a massive, mission critical, multi-national, and multi-stakeholder system, similar to what we are doing in recycling.
On the commercial side, we closed on our acquisition of EVRYTHNG, launched our first products, announced our first major Value-Added Reseller (VAR), repeatedly and publicly proved our ability to make a real impact on the global plastic problem, and signed a multi-year deal with Walmart for an exciting new use case, further strengthening our relationship with the world’s largest retailer.
We have combined our digital watermarking and product cloud capabilities to form the Digimarc Illuminate platform, and on top of that platform have built four products: Digimarc Engage, Digimarc Validate, Digimarc Recycle, and Digimarc Retail Experience. We also continue to progress product candidates along the rigorous process all must endure to become launched products, including intense market research to ensure they address large and growing problems and that Illuminate’s functionality, upon which all of our products are built, provides significant technological differentiation. We prioritize product candidates that have forcing functions, network effects, or other powerful drivers of adoption. We have multiple promising product candidates we are currently progressing.
Our goal is to digitize the world’s products. To accomplish this, we must be easy to begin doing business with and excellent at guiding customers along their Digimarc journey. These simple truths drive everything we do.
On the channel sales side, by licensing Digimarc Illuminate to a growing number of VARs, we not only gain quickly-scalable and high-margin revenue as our VARs go to market with their own products and services built upon our world-leading product digitization platform, we also increase the amount of items that are digitized using our technology. This creates an ever-increasing number of upsell and cross-sell opportunities for both us and our VARs.
On the direct sales side, by building a growing number of our own accretive products upon the Illuminate platform, we are not only ensuring a customer is able to solve the problem that brought them to us today, but also providing them a frictionless path to solve the problems they want to solve tomorrow. Moreover, because our products are accretive, which means that the stand-alone value they provide is increased by the adoption of additional Digimarc products, this frictionless path forward not just solves new problems, it compounds returns from all products, existing and new.
We are building the product digitization market one product and one VAR at a time, solving discrete problems while watching with growing excitement as visionary companies and industry observers begin to understand that by adopting multiple products built on a single platform, our customers can solve for today’s and tomorrow’s discrete problems while positioning themselves to finally achieve true digital transformation as their products are no longer stranded in the analog world.
This is what we mean by being easy to begin doing business with and excellent at guiding customers along their Digimarc journey. This is why we are indifferent as to where our customers decide to begin their Digimarc journey. And this is how we’ll digitize the world’s products, and in so doing, build a new market we are uniquely positioned to lead due to our one-of-a-kind means of identifying an item --our digital watermark -- and the world’s most scalable product cloud.
A perfect example of this is a comment recently made to us by one of the world’s largest CPGs. A current Engage customer, they are looking to dramatically increase their adoption of this product. While they know they can get lower pricing from companies that can provide some of the consumer engagement functionality we are currently providing them, it isn’t just our superior functionality that is keeping them moving forward on their Digimarc journey. It’s their realization that their journey will include Digimarc Recycle and potentially another Digimarc product in the not-too-distant-future. Having all their products on the same platform will provide them accretive value that no stitching together of point solutions, if they were even available, would be able to replicate. This is the power of what we built in 2022. This is what gives us excitement for 2023 and beyond.
Looking ahead, I want to provide an update on two of our products, the two I refer to as our “top-down drivers of product digitization” because of their ability to quickly advance the market we are building.
The first is Retail Experience, which we recently soft launched and about which more is available on our website. While we are excited for a broader launch, it is in our best interest to work with the industry on this product’s rollout. The potential downside of top-down drivers of product digitization is that the very fact they are top-down means we don’t always control all the aspects of that product’s launch. The upside, of course, is that there are top-down drivers encouraging adoption. I would note that a lack of broad publicity about this launch does not mean there is not on-going activity nor real intent from interested parties to drive adoption to modernize the retail experience, an experience where watermarks have moved from a “nice to have” to a “need to have.” As stated on our last call, the Serviceable Addressable Market for Retail Experience is enough to take us well into profitability by itself.
The second is Recycle. While the same top-down driver give-and-take that applies to Retail Experience applies here as well, the two big differences with Recycle are we have been actively advancing Recycle for almost a year, and we are active on multiple continents and with multiple important stakeholders. We believe the per-country TAM for Digimarc Recycle is well into the eight figures and plan to soon publish Recycle pricing on our website to provide requested transparency to multiple important stakeholders. Our activity in two countries, France and Canada, is publicly known.
A few weeks ago, the industry gathered in Pertuis, France, to learn more about the opportunity to make France the European pilot market for Digimarc Recycle. A large CPG announced at this public gathering that they are committed to being part of this Pilot market at scale, and we are in discussions with multiple other brands and retailers about joining them. The group has set aggressive targets for both the scope and timing of initial adoption, and we stand by ready to assist them in their quest to make a real impact on plastics recycling. We are all aware the world is watching. Stay tuned.
Moving to Canada, in Q4 we announced the results of our work with the Circular Plastics Taskforce. What I have found most impressive about this group’s efforts is that they are proving how quickly a small, nimble, dedicated, and motivated group can move to make a real difference to a large and growing problem, and our wonderful partnership with them continues to deepen. Here again we expect to have more to say soon. Our work in Canada is also informing our work in other countries that are further behind both France and Canada, but where we hope to apply the learnings we are gaining in Canada to close that timing gap.
Before I turn the call over to Charles, I want to talk about our path to profitability. We know that to deliver upon the immense value inherent in what we are building, we need to build a financially sustainable business that can deliver what we fully expect to be able to deliver. This includes making sure we are always investing with great responsibility across all areas of our business. We recently made the very difficult decision to streamline in certain areas and re-organize in others, and in so doing, parted ways with some wonderful people and talented teammates. This action was neither a reflection of our prospects or the performance of any impacted teammate. Instead, it was a reflection of our knowing that in order to change the world, we must have a durable business.
The actions we recently took not only have a big impact in reducing our current cash burn, but importantly take us a big step forward on our path to profitability, something that, based on the size of the markets immediately ahead of us, coupled with the world-class contribution margins we enjoy, is squarely in both our focus and line of sight.
I will now turn the call over to Charles to discuss our financial results.
Financial Results
Thank you Riley, and hello everyone.
As we reflect back on 2022, there were a number of strategically important accomplishments to note, as Riley just highlighted, and there were also some important financial developments during the year I want to highlight before I dive into the Q4 numbers.
First, we delivered 85% year-over-year growth in first year commercial bookings, with bookings of $19.1 million in 2022. As a reminder, the commercial market is our largest area of focus given the enormous opportunities we are uniquely positioned to address. If you exclude our Piracy Intelligence product, which we have now completely sunset, our commercial bookings growth was even higher at 160% year-over-year.
Second, we delivered 32% growth in subscription revenue year-over-year, with subscription revenue of $15.2 million in 2022. For the first time in a decade, subscription revenue accounted for over half of our total revenue, which is notable given the sale of our software subscription products is not only our most important product focus but also our most profitable. We earn roughly 80% incremental margins on our software products right now with the potential to increase that to more than 90% at scale. If you exclude Piracy Intelligence, our subscription revenue growth was even higher at 77%.
Third, while service revenue was flat year-over-year at $15 million, we expect service revenue to be higher in 2023. As a reminder, the majority of service revenue comes from software development services we provide to the Central Banks. With the early extension of our contract with the Central Banks, which now runs thru the end of 2029, we expect services revenue from that contract, which were $12.9 million in 2022, to be up over 10% in 2023.
Now as promised I will dive deeper into our Q4 results.
First year commercial bookings were $10 million during the fourth quarter compared to $2.6 million in Q4 last year. Bookings in Q4 last year included $1.3 million from Piracy Intelligence. As I referenced earlier, our Piracy Intelligence product has now been completely sunset so there will be no future bookings or revenues. Excluding Piracy Intelligence, first year commercial bookings increased $8.7 million or 680%. First year commercial bookings in Q4 included the remaining $7.3 million of minimum fees due from the new Walmart contract we signed in Q3 as during Q4 these fees became non-cancelable and payable within the next 12 months.
Total revenue for the quarter was $7.2 million, an increase of $100 thousand or 1% from $7.1 million in Q4 last year.
Subscription revenue, which represented 57% of total revenue in Q4, grew 13% in the quarter from $3.6 million to $4.1 million. There are multiple factors offsetting one another that impact the overall positive trend in subscription revenue. Adding to revenue was the impact of new deals signed during 2022, including the new Walmart contract in Q3, and the addition of subscription revenue from the EVRYTHNG acquisition. These additions were offset by $1.6 million of subscription revenue from Piracy Intelligence recognized in Q4 last year, which included the $1 million sale of non-core patents, versus no revenue in Q4 of this year. Excluding Piracy Intelligence, subscription revenue increased $2.1 million, or 105%.
Service revenue was $3.1 million in the quarter compared to $3.5 million in Q4 last year and was higher than our internal forecasts. The year-over-year decline is due to the recognition of significant project work last year related to HolyGrail 2.0, while services with the Central Banks were marginally higher year-over-year. As a reminder to those modeling our business, our Central Bank business tends to be seasonal, and thus for the last several years, our Q4 services revenue has been down sequentially from Q3.
Gross profit margin for the quarter was 53% compared to 70% in Q4 last year. The decrease in margin reflects $1.1 million, or 15 percentage points, of amortization expense recorded on acquired intangible assets recognized in the acquisition accounting for EVRYTHNG. Excluding amortization, subscription margins were 77% and service margins were 56%.
Non-GAAP gross profit margin, which excludes amortization expense as well as stock-based compensation expense, was 72% for the quarter compared to 74% in Q4 last year. The slight decrease in gross margin was driven by lower subscription gross margins year-over-year, which in turn was largely related to product mix as the legacy EVRYTHNG subscription business carried a lower gross margin than the legacy Digimarc subscription business. As we have worked to combine these two amazing technologies into one seamless platform, we have identified ways to improve our product margins, and expect the combination of cost-outs and revenue growth to drive our subscription gross margins north of 80% in 2023, higher than they were pre-acquisition.
Operating expenses for the quarter were $17.1 million compared to $13.2 million in Q4 last year. The increase reflects $3.1 million of operating expenses from EVRYTHNG post acquisition. Excluding the impact of EVRYTHNG, operating expenses were $900 thousand higher, which included $1.2 million of higher compensation costs for annual compensation adjustments and higher headcount, of which $200 thousand was non-cash stock compensation expense. Additionally, we recorded $300 thousand in non-cash lease impairment charges. The higher compensation costs and lease impairment charges were partially offset by lower other expenses. The lease impairment charges related to adjusting our assumptions regarding the timing of subleasing our prior corporate office in Oregon as well as our decision to abandon our office lease in London.
Non-GAAP operating expenses for the quarter were $14.3 million compared to $10.3 million in Q4 last year. The increase reflects $2.6 million of Non-GAAP operating expenses from EVRYTHNG post acquisition. Excluding the impact of EVRYTHNG, Non-GAAP operating expenses were $1.3 million higher year-over-year, which included $1 million higher cash compensation costs.
On February 16th, we announced a restructuring plan focused on streamlining our operations, removing redundancies and improving operating margins. While our level of optimism regarding our future business prospects only continues to grow, these reductions were the right thing to do to optimize the business for long-term sustainable success. The plan involved a reduction in our workforce of approximately 17%.
We estimate the plan will result in one-time cash charges of approximately $1.5 million and non-cash charges of approximately $600 thousand for accelerated stock compensation expense. We expect that most of these charges will be incurred and the plan will be substantially complete in the first quarter.
The plan should result in approximately $7.4 million in annual cash savings and approximately $700 thousand in stock compensation expense. We are also looking at other, non-headcount related areas of the business where we can streamline operations and reduce costs. Offsetting some of these savings though is the impact of annual compensation adjustments for our employees and generally higher prices for third party products and services due to inflationary pressures.
Net loss per common share for the quarter was 62 cents versus 50 cents in Q4 last year. Non-GAAP net loss per common share, which excludes non-cash and non-recurring items, was 41 cents versus 30 cents in Q4 last year.
We ended the year with $52.5 million in cash and investments.
We used $3.8 million of cash and investments during the quarter compared to $10.9 million in Q4 last year. During Q4, we opportunistically raised $4.7 million of net proceeds under our At-The-Market (“ATM”) program to bolster the balance sheet. We sold 222 thousand shares at an average price of $22.42. The ATM program has $1.9 million available for future sales, although we have no plans to sell any additional stock under the ATM program in Q1 as we assess the opportunities ahead of us. Excluding the net proceeds from the ATM, cash usage would have been $8.5 million.
For further discussion of our financial results, and risks and prospects for our business, please see our Form 10-K that will be filed with the SEC.
I will now turn the call back over to Riley for final remarks.
Final Remarks
Thanks Charles.
2022 saw us set the foundation for the years ahead, and we are excited to continue to build upon that foundation in 2023 and beyond. We are seeing momentum across all areas of our business, and are hard at work continuing to increase that momentum as we create a market we are uniquely positioned to lead for years to come, a market that at scale has the opportunity to be as large if not larger than the other legs of the digital transformation stool. There are trillions of items produced each year, and our goal is to sell multiple Digimarc products into each of them, adding exponentially accretive value as we digitize the world’s products.
Operator, we will now open up the call for questions.