Digimarc Corporation

Good afternoon and thank you for participating in today's conference call. Now I will turn the call over to Bruce Davis, Chairman and CEO of Digimark. Mr. Davis, please proceed.

Thank you. Good afternoon. Welcome to our conference call. Charles Beck, our CFO, is with me. On the call today, we'll review Q1 financial results, discuss significant business developments and market conditions, and provide an update on progress and execution strategy. We've posted these prepared remarks in the investor relations section of our website and we'll archive this webcast there. Please note that we may make certain forward looking statements in this call and in the prepared remarks we filed with the SEC and posted on our website under the heading safe harbor statement regarding revenue recognition matters, results of operations, investments, initiatives, perspectives on business partners, customers and prospects, industry trends and growth strategies. We also will discuss from time to time information provided to us by our partners and actual potential customers. We are providing this information as we understand it was represented to us. We did not verify nor vouch for such information. All such statements and information are subject to many assumptions, risks, uncertainties and changes in circumstances. Any assumptions we share about future performance represent a point in time estimate. Actual results may vary materially from those expressed or implied by such statements. We expressly disclaim any obligation to revise or update statements or other information We provide during this call to reflect events or circumstance that may arise after the date of this conference call. For more information about risk factors that may cause actual results to differ from expectations, please see the company's filings with the SEC, including the Form 10-Q that we expect to file shortly. Any links included in our prepared remarks are provided for general information and context only. The content reference is not incorporated by reference, and you should not consider it a part of this presentation. We do not verify nor vouch for such information. Charles will now comment on our financial results and I'll discuss significant business developments, market conditions and execution strategy. Charles.

Thank you, Bruce. Good afternoon, everyone. First off, you may have noticed some changes to our income statement. We revised our income statement to improve visibility into the return on investment and growth initiatives targeting retailers and consumer brand owners and to facilitate more effective comparisons with our peers. We incorporated license revenue into subscription revenue and reclassified a small amount of revenue from subscription to service. We've also incorporated intellectual property expense into general and administrative expense. These changes reflect the evolution of our business from IP licensing to provision of software and services based on our auto identification platform. The focus of patent development has shifted from monetization to support licensing of our software. The designations of Barcode and Guardian are no longer relevant considering our approach to platform monetization. Assessment of return on investment is facilitated via reporting revenue by target markets. The key market categories are government, retail, and media. Government includes services and subscriptions provided to the central banks and other government agencies. Retail includes services and subscriptions provided to retailers, brands, their suppliers and related solution providers. Retail is mostly what we used to refer to as barcode revenue, but also includes revenue from retail customers formerly categorized as guardian and license revenue. Media includes all other services and subscriptions provided to media, entertainment, education, and other customers. Media comprises mostly what we used to refer to as guardian and license revenue, but also includes barcode for commercial print and audio for non-retail customers. We anticipate adding other market categories as the business expands to facilitate your evaluation of our investment spending and returns. Given that retail is the primary area of investment and driver for top-line growth, we will focus disclosure on retail bookings in our quarterly reports. Bookings for government and media are relatively consistent year-over-year and therefore we do not intend to disclose bookings in these areas unless we observe something that is likely to significantly impact those trends. We have recast the 2019 bookings and revenue figures we provided last year to reflect this new reporting structure. The recast had minimal impact on the classifications of amounts previously reported. Now to our Q1 results. Revenue for the first quarter was $6.2 million, an increase of $500,000, or 9%, from the first quarter last year. Subscription revenue increased 33% to $2.5 million, while services revenue was essentially flat. Revenue from retail was up 70% to 1.3 million from 700,000 in Q1 last year. Revenue from government and media was essentially flat at 4 million and 900,000 respectively. Most of our revenues are recurring. Q1 retail bookings, which includes bookings from contracts with retailers, brands, their suppliers and related solution providers doubled to 1.8 million up from 900,000 in Q1 last year. Bookings included 450,000 for the contract renegotiation that we mentioned on our last earnings call with our supplier partner focused on supply chain improvements. As we expected, the fixed amount of the new contract is lower than the original. The program has potential upside in the future as it expands to more customers. This margin for the quarter was 64%, up from 62% last year, primarily reflecting the impact of higher subscription revenue. Subscription margin was 79%, while service margin was 55%. Operating expenses were $13 million, an increase of 7% from Q1 last year, primarily reflecting increased headcount to address growing demand and delivery requirements and routine annual compensation adjustments for our employees. Operating expenses were below the low end of the range of $13.6 to $13.8 million that we provided on our last earnings call due to cost cuts and deferrals. We will continue to closely monitor our product and financial markets and our sales pipeline in relation to our working capital on hand in managing our rate of investment. Net loss for Q1 was 8.9 million or 74 cents per diluted share versus a net loss of 8.5 million or 74 cents per diluted share in the first quarter last year. Strategic financing discussions have been paused as potential investors assess their circumstances. Before the market collapsed due to the pandemic, we raised $600,000 of capital under the ATM program by selling 28,000 shares at an average price of $22. There was substantial uncertainty and volatility in the small-cap sector of the stock market that has negatively impacted our share price, which is inhibiting potential use of the ATM. After the end of the quarter, we received a Paycheck Protection Program loan that will give us more time to observe financial market trends and assess the effects of the pandemic on our prospects to determine the best course of action concerning financing the business. I will summarize the details of the loan in a moment. We invested 6.2 million of working capital during Q1, below the low end of the range of 7 to 8 million we provided on our last earnings call. In addition to the ATM proceeds, we were able to reduce our cash spend from initial estimates by deferring headcount additions, capital expenditures and other discretionary spending. On April 16th, we executed a promissory note with Stearns Bank for $5 million pursuant to the Paycheck Protection Program under the CARES Act. The note matures in 24 months, bears interest of 1% per annum, provides for six months of payment deferral, and requires no collateral or guarantees. The note is also subject to forgiveness provision to the program. The amount to be forgiven is determined based on the amount of the loan used to pay for qualified payroll costs, including group health care benefits, rent, and utilities for the first eight weeks after the note is issued. We anticipate a significant majority of the loan amount will be forgiven. We ended the quarter prior to receiving the loan proceeds with $30.6 million in cash and investments. We will continue to be careful in spending, deferring open headcount positions and CapEx where possible, and cutting or eliminating professional service fees as well as other expenses. For instance, we anticipate future cost savings as the result of moving public relations and investor relations in-house with the hiring of a Senior Director of Corporate Communications. I believe this move will have the added benefit of a more nuanced understanding of our execution strategy and relationship with our shareholders. We anticipate operating expenses in the second quarter to be between $12 and $12.5 million. We expect cash usage in the second quarter to be between $1 million and $2 million, after reflecting the $5 million of loan proceeds received in April. For further discussion of our financial results and risks and prospects for our business, please see our Form 10-Q that we expect to file shortly. Bruce will now provide his comments on significant business development, market conditions, and execution strategy.