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. Sir, you may proceed.

Thank you. Good afternoon, everyone. Welcome to our conference call. Charles Beck, our CFO, is with me. We also have Bob Chemnis, 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 Q4 and fiscal 2020 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. 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 specific risk factors that could cause actual results to differ materially. Charles will now comment on our financial results. Charles?

Thank you, Bruce. 2020 was an extraordinary year, full of unforeseen challenges and opportunities. We started the year with a focus on retail store operations. Then along came COVID-19. The pandemic caused a reprioritization of resources at retailers that impeded progress with thermal labels and new retail account acquisition. Although revenues increased year over year, we did not hit our growth goals for bookings. The effect of the pandemic was not all negative. New customer and partner opportunities emerged along the way with unexpected sources of financing that Bruce discussed during the Needham Conference in January, leading our company to come out of the year stronger and better positioned than when we entered it. Revenue for the fourth quarter was $5.6 million, up 4% from Q4 last year. Service revenue increased 7% from 2.7 million to 2.9 million due to growth in services provided to government and retail customers. Subscription revenue increased 1% from 2.6 million to 2.7 million, reflecting the impact of new bookings offset by the impact of the 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 10%, to $3.3 million driven by growth in both subscription and service revenue. Revenue from retail was down 8% to $1.4 million, reflecting the impact of the renegotiated contract I referenced a moment ago, offset by higher service revenue. Revenue from media was up 6% to $900,000, reflecting growth in subscription revenue. Retail bookings were $1.3 million, around the same level as Q4 last year. The impact of the pandemic continued to have an effect on bookings in Q4. As we enter 2021, we are encouraged by a growing pipeline of opportunities in supply chain and recycling solutions. We entered into several new contracts during Q4, most of which were early production or pilot projects. While these contracts did not contribute significantly to bookings during the quarter, we expect these contracts will grow into larger revenue streams in coming quarters. Retail bookings included several notable developments. We started work on our very first golden thread project in recycling. Bob Chamness will elaborate later on the call. We signed our first contract with a customer in the tobacco industry who was using the Digimark platform for product authentication to deter the selling and usage of counterfeit cigarettes. We continued a customer-funded study of the commercial viability of laser engraving serialization with a global brand and its suppliers. And we generated follow-on bookings for the variable data printing solutions used in the traceability and brand protection use cases that I've referenced on prior calls. In media, we entered into a five-year extension with a customer using the DigiMark platform for monitoring and reporting music usage. Gross margin for the quarter increased to 69% from 66% last year due to improved service margins. Service margins were 61% up from 52% last year due to a favorable mix in billable expenses with higher labor and lower non-labor expenses and lower other costs. Subscription margins were 79% down from 80% last year. Operating expenses were 11.7 million, a decrease of 6% from 12.4 million in Q4 last year. Operating expenses were lower reflecting lower travel, consulting, and trade show costs. We expect operating expenses to range from $12.8 million to $13.2 million in the first quarter. The expected increase in expenses over the fourth quarter reflects the impact of routine annual compensation adjustments for our employees, our 2021 hiring plan, which includes two new senior executive positions, and recurring fiscal year-end related costs. Net loss for Q4 was $7.8 million or $1.27 per common share versus a net loss of $8.7 million or $0.73 per common share in the fourth quarter last year. Our net loss per common share calculation was impacted by an accounting adjustment required in the U.S. GAAP called a beneficial conversion feature, which represents the conversion premium on the preferred stock issued to TCM strategic partners that was later converted into common stock in December upon shareholder approval. The conversion premium negotiated in the deal was 15 percent, the same as the discount for the common stock. However, the preferred portion of the transaction took a couple extra days to close, by which point the stock price had appreciated significantly, thereby creating a larger conversion premium for accounting purposes. This is a non-recurring, and non-cash adjustment to earnings per share. Excluding the impact of this adjustment, our net loss per common share would have been 51 cents. 2020 revenue grew 4% despite the pandemic effects. Service revenue increased 5% to 13.9 million due to growth in services provided to government and retail customers. Subscription revenue increased 4% to 10.1 million, reflecting the impact of new bookings offset by the impact of the renegotiated contract with a retail supplier partner I mentioned earlier. Revenue from government was up 4 percent to $14.9 million in 2020, driven by growth in both service and subscription revenue. Revenue from retail was up 6 percent to $5.6 million, reflecting the impact of new bookings, offset by the impact of the renegotiated contract already referenced. Revenue from media was up 2 percent to 3.5 million, reflecting growth in subscription rates. Retail bookings were 5.4 million in 2020 versus 5.3 million in 2019. For the year, gross margin increased 67 percent from 65 percent last year due to improved service margins. Service margins were 58 percent up from 55 percent last year due to a favorable mix in billable expenses with higher labor and lower non-labor expenses. Subscription margins were flat at 79%. We held operating expenses essentially flat with 2019 at $48.9 million. Payroll costs were higher year over year due to routine annual compensation adjustments for our employees and $800,000 of non-recurring severance costs associated with the corporate restructuring we announced in July. These costs were offset by lower travel, consulting, and trade show costs in 2020. Net loss per common share for 2020 was $3.41 versus a net loss per common share of $2.79 last year. Excluding the impact of the adjustment for the beneficial conversion feature I referenced earlier, our net loss per common share for 2020 would have been $2.52. We ended the year with 77.2% $7 million in cash investments, the highest balance in nearly 18 years. On October 1st, we received the remaining $17 million of proceeds from the $53.5 million investment made by TCM strategic partners. On December 10th, the 17,000 preferred shares issued to TCM as part of the transaction were converted into 1.2 million common shares upon approval by shareholders. Our application for forgiveness of the $5 million Paycheck Protection Program loan is still in the process of being reviewed by the Small Business Administration. We do not have any visibility on when they may complete their review. For further discussion of our financial results and risks and prospects for our business, please see our Form 10-K that we expect to file shortly. Bruce and Bob will now comment on significant business developments, market conditions, and execution of strategy.