Digimarc Corporation

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

Thank you. Good afternoon. Welcome to our conference call. Charles Beck, our CFO, is with me. On the call today, we'll review Q2 financial results, discuss significant business developments and market conditions, and provide an update on progress and execution strategy. We have posted these prepared remarks in the investor relations section of our website and we'll archive this webcast there later. 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, prospects, industry trends, and growth strategies. We also will discuss from time to time the information provided to us by partners and actual or potential customers. We are providing this information as we understand it was represented to us. We do 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 that we provide during this call to reflect events or circumstances 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 part of this presentation. We do not verify nor vouch for such information. Charles will now comment on our financial results, then I'll discuss significant business developments, market conditions, and execution strategy. Charles?

Thanks, Bruce. Good afternoon, everyone. Revenue for the second quarter was 6.5 million, an increase of 300,000 or 5% from Q2 last year. Service revenue increased 9% due to growth in services provided to government and retail customers. Subscription revenue was flat year over year. Subscription revenue would have increased 250,000 if not for the renegotiated contract with our supplier partner that we discussed on our Q1 earnings call. Revenue from retail was up 10% to 1.6 million, driven by growth in service revenue. Revenue from government was up 5% to $4.1 million, also driven by growth in service revenue, while revenue from media was essentially flat at $900,000. Retail bookings in Q2 were $1.1 million, down from $1.8 million in Q2 last year. Bookings in Q2 last year included a large multi-year committed contract, which accounts for most of the variance. Bookings in Q2 this year included two notable developments. First, we generated our first two bookings for solutions using our variable data printing software, one for a traceability use case and the other for a brand authentication use case. While these two bookings contributed only tens of thousands to our reported Q2 bookings, we anticipate they will become larger contributors to bookings in the second half of this year and thereafter. Both opportunities include variable fees to us based on units produced versus an upfront fixed fee, which mitigates amounts included in bookings. These are partner-led initiatives whereby charging per unit is preferred to align our costs with their existing business models. I anticipate you will see more opportunities like these in the coming quarters as our business partners are becoming more engaged in selling DigiMark enabled solutions. These two use cases are also repeatable amongst a large base of prospective customers. Second, we closed our first four paid contracts for recycling use cases during the quarter. Two of the contracts provided for enhancement of product packaging, one for consulting on optimizing the reading environment for plastic sortation, and the other on enhancing plastic packaging molds with DigiMark barcode. The bookings impact of these four contracts to Q2 was not significant as the fees are variable or dependent upon meeting milestones, but we anticipate they will grow in significance going forward. These contracts along with other opportunities we are seeing in the sales pipeline are encouraging signs of real interest in investing in recycling use cases. Gross margin for the quarter was 67% up from 65% last year, largely driven by an increase in service margins. Service margins are 59% up from 53% last year, primarily due to a favorable mix in billable expenses with higher labor and lower non-labor expenses. Labor expenses have a much higher margin than non-labor expenses in our service contracts. Subscription revenue was unchanged at 80%. Operating expenses were $11.9 million, a decrease of 2% from Q2 last year, mainly due to lower travel, consulting, and marketing costs. Operating expenses were down sequentially from last quarter, dropping $1.1 million as we successfully executed the cost-cutting measures that we shared with you on the last earnings call. Expenses ended up even lower than the 12 to 12.5 million range we guided to as we identified additional expense reduction opportunities in non-essential areas. We are further decreasing spending by virtue of some corporate restructuring that is underway to improve our execution strategy. These changes will further reduce our operating expenses by reducing headcount by approximately 7%. We expect to incur severance costs of $900,000 during Q3 consisting of 400,000 of cash-based severance and 500,000 of stock-based severance. Annual operating costs are expected to decrease 2.3 million as a result of these reductions consisting of 2.1 million of cash-based compensation and 200,000 of stock-based compensation. We anticipate operating expenses in the third quarter to be between 12.2 million and 12.6 million, which includes the 900,000 of non-recurring severance costs I just mentioned. We expect cash usage in the third quarter to be between 6.5 and 7.5 million, including 400,000 of non-recurring cash-based severance. 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 and allocation of resources. Net loss for Q2 was lower than last year at 7.5 million, or 62 cents per diluted share, versus a net loss of $7.9 million or $0.68 per diluted share in the second quarter last year. We used $100,000 of cash and investments during Q2, well below the low end of the range of $1 to $2 million we provided on our last earnings call. Our cash usage was lower than anticipated as we reduced and deferred spending where we could, as well as restructured some vendor contracts. As noted on our Q1 earnings call, we received a $5 million Paycheck Protection Program loan in April. We spent the entire amount on qualified expenses as defined by the Paycheck Protection Program and plan to file for forgiveness of the entire $5 million loan once the portal to apply for forgiveness is available. Once we file, the bank has 60 days to review our application and then the Small Business Administration has 90 days to approve our application for forgiveness. We ended the quarter with $30.5 million in cash and investments. We did not raise any capital under the ATM program during the second quarter. We filed a new form S3 registration statement with the SEC in June for $100 million as our prior registration statement was expiring. The old registration statement had $49 million remaining for future issuance that has now expired. We continue to believe having a registration statement on file with the SEC is prudent to allow us maximum financial flexibility. We plan to file a prospective supplement to our form S3 registration statement soon that will allow us to continue to utilize the ATM program, which has $9 million available for future issuance. This filing is purely an administrative requirement as the ATM program was initiated on what is now an expired registration statement. We will exercise customary care in determining the best course of action regarding the remainder of the ATM authorization. We have also reengaged on strategic financing in parallel. 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 developments, market conditions, and execution strategy.