Digimarc Corporation

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

Thank you and good afternoon. Welcome to our conference call. Charles Beck, our CFO, is with me. We also have Bob Chamness, our EVP in charge of sustainability, joining us today to provide an update on progress and prospects in this increasingly important use of our platform in plastics recycling. On the call today, we'll review Q3 financial results, discuss significant business developments and market conditions, and provide an update on progress and execution of strategy. We have posted these prepared remarks in the investor relations section of our website and will archive this webcast there. Before we begin, let me remind everyone that today's discussion contains forward-looking statements that have risk and uncertainties. Please refer to our press release for more information on the risk factors that could cause actual results to differ materially. Charles?

Thank you, Bruce, and good afternoon, everyone. Revenue for the third quarter was $5.8 million, essentially flat with Q3 last year. Service revenue increased 6% from $3.2 million to $3.4 million due to growth in services provided to government customers. Subscription revenue decreased 10% from $2.7 million to $2.4 million due to the impact of a renegotiated contract with a retail supplier partner in the first quarter of 2020. that we've discussed on prior calls. Revenue from government was up 4% to 3.5 million, driven by growth in service revenue. Revenue from retail was down 15% to 1.4 million, reflecting the impact of the renegotiated contract I referenced a moment ago. Revenue from media was unchanged at 900,000. Retail bookings, which include store operations, supply chain, and recycling solutions, were 1.2 million, around the same number as Q3 last year. The most significant factor affecting bookings growth during the quarter was the pandemic effect on the organization of Holy Grail 2.0 and planning for the Golden Thread projects. We signed some new revenue deals in Q3 that did not contribute significantly to bookings as they were primarily early production and pilot projects. However, we do expect these initial activities will grow into larger revenue streams in coming quarters. Bookings during Q3 included several notable strategic developments. We started enhancement of private label packages with Digimart barcode for a major retailer in Japan. To date, we have completed more than 70 packages. We expect to transition the enhancement process to a trusted partner in Japan during Q4. We also began a customer-funded study of the commercial viability of laser engraving serialization with a global brand and its suppliers. We generated follow-on bookings for the variable data printing solution that I mentioned on our Q2 earnings call. And we completed the Walmart toy catalog, which began circulating about a week ago. Gross margin for the quarter was 66%, down from 67% last year due to a shift in revenue mix to services. Service margins were 58%, up from 55% last year due to a favorable mix in billable expenses. with higher labor and lower non-labor expenses. Subscription margins were 78% down from 81% last year, primarily due to lower subscription revenue. Operating expenses were $12.2 million, an increase of 2% from $11.9 million in Q3 last year. Operating expenses during the quarter included non-recurring severance costs of $800,000 relating to the corporate restructuring we announced in July. Excluding these costs, operating expenses would have declined by 5% due to lower travel, consulting, and other costs. We expect operating expenses to range from $11.2 million to $11.6 million in the fourth quarter. Net loss for Q3 was $8.4 million, or $0.68 per diluted share, versus a net loss of $7.8 million, or $0.65 per diluted share, in the third quarter last year. Non-recurrent severance costs of $800,000 accounted for $0.07 per diluted share of the net loss. Our balance sheet has been considerably strengthened. We raised $2.1 million under the ATM program prior to the TCM investment. The TCM investment added $53.5 million of cash. We have no further plans to use the ATM. We are also shelving the strategic financing initiative for the time being in light of the substantial increase in working capital. We ended the quarter with $62.7 million in cash and investments, including $36.5 million of proceeds for common stock issued to TCM. We received the remaining $17 million of proceeds from the investment on October 1st when the convertible preferred stock was issued. Cash and investments after receipt of the proceeds from the convertible preferred stock issuance was $79.6 million. We filed for forgiveness of our entire Paycheck Protection Program loan in mid-September. The bank has 60 days to review our application and then the Small Business Administration has 90 days to approve it. We are working on our operating plan for 2021 and have some preliminary views of planning assumptions to share that are guiding our views on allocation of resources for the next year. Our government business is functioning well. We expect revenue to grow at mid-single digits and to vary quarter to quarter based on timing of when services are performed with slightly more work in the first half of the year than the second half. We expect revenue from media to be around the same level as 2020. This area of business is stabilized and does not currently warrant incremental investment. We have a small yet great team that continues to work on efficiencies to maximize account retention and contribution margin and explore opportunities for growth. In the primary growth area of the business, we are currently projecting triple-digit growth in retail bookings and revenues in 2021. The growth in retail subscriptions is expected to come primarily from licensing software to partners and end users. Key applications include traceability, brand protection, logistics, recycling, and retail store operations. Growth in retail services is expected to be fueled by development and consulting projects, associated with the Plastics Recycling Initiative in Europe. We expect subscription revenue to grow at a higher rate than service revenue leading to an expansion of gross margins as the incremental margin contribution for licensing software is nearly 100%. Although we expect significant growth in retail revenues, a wide range of potential outcomes is possible for this area of the business due to the timing of closing contracts and other factors including continuing uncertainties about the effects of the pandemic. We think the most likely outcome is an acceleration in bookings consistent with our momentum theory of market development. When and how much the rate of bookings growth will accelerate due to tipping points in the market remains hard to predict. The range of potential outcomes is largely a function of the nature and timing of key account developments and the effect of adoption by market leaders on the rest of the industry. We are projecting a modest increase in total expenses in 2021, up single digits from 2020, reflecting additional headcount to support growing opportunities in plastics and sustainability and the impact of routine cost-of-living adjustments for existing employees. 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 and Bob will now comment on significant business developments, market conditions, and execution strategy. Bruce?