Digimarc Corporation

Good afternoon, and thank you for participating in today's conference call. Now I would like to turn the call over to Chief Legal Officer, Mr. Bob Chamnitz. Sir, you may proceed.

Thank you. Welcome to our Q1 conference call. Riley McCormick, our CEO, and Charles Beck, our CFO, are with me. On the call today, we will provide a review of Q1 financial results and an update on the business. followed by a question and answer forum. We have posted our 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 risks and opportunities. 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 Q1 financial results.

Thank you, Bob, and good afternoon, everyone. Before I dive into the financial results, I want to make everyone aware of two important changes we have made to our financial reporting structure. First, we are merging what we previously referred to as retail and as media into one market category called commercial. This change was made to better align with the structure of our sales organization create better alignment and greater accountability. Second, we will report both total bookings and first-year bookings for the commercial market to provide better insight into future revenue trends. The definition of total bookings remains unchanged and is defined as the non-cancellable value of a contract over its term versus first-year bookings, which only includes the non-cancellable value over the first 12 months of the contract. To provide full transparency, In our earnings script, we will provide comparative information under both the prior and new reporting structure for the remainder of 2021. We have also included a table within the script showing these comparative results for all of 2020. Revenue for the first quarter was $6.7 million, or 8% higher than Q1 last year. Service revenue increased 1%. from 3.7 million to 3.8 million, reflecting growth in services to commercial customers, partially offset by a decrease in services to the central banks due to timing of program work. Subscription revenue increased 19% from 2.5 million to 2.9 million, reflecting the impact of signing a new commercial customer, which resulted in 460,000 of revenue during the quarter. The majority of the minimum contract value for this deal was recognized as revenue up front versus ratably over the term of the contract, which is customary for most of our commercial contracts. Revenue is recognized up front as there were no continuing performance obligations once the software was delivered. I anticipate we will see similar deals like this in the future, but I still expect most deals to result in ratable revenue recognition over the term of the contract. Revenue from government was lowered by 2% from $4 million to $3.9 million, reflecting the timing of program work with the central banks. For the full year, we still expect revenue from the central banks to grow modestly in 2021 over 2020. Revenue from commercial is up 26% from $2.2 million to $2.8 million, reflecting the impact of the contract I just referenced earlier and the impact of higher services to commercial customers in support of the plastics recycling work in Europe. Total commercial bookings were 3 million, up 15 percent from 2.6 million in Q1 last year. Total bookings included 550,000 booking for the minimum fees owed under a two-year software license for use in brand protection and traceability use cases. The contract is with the same customer I referred to earlier. First-year commercial bookings were $2.5 million, up 11 percent from $2.2 million in Q1 last year. First-year bookings included $200,000 from the same contract I just referenced, representing the minimum fee for the first year of that contract. Gross margin for the quarter increased to 65 percent from 64 percent in Q1 last year due to improved service margins partially offset by lower subscription margins. Service margins were 59% up from 55% last year due to a favorable mix in billable expenses, with higher labor and lower non-labor expenses. Subscription margins were down, sorry, were 73% down from 79% last year, reflecting higher license payments to a technology solutions provider. We have initial customer interest in new solutions where we do not yet have the full tech stack, and are partnering to round out those offerings. These license payments are recorded as cost of goods sold. Operating expenses were $12.6 million, a decrease of 4% from $13 million in Q1 last year. Operating expenses were lower, reflecting lower travel, compensation, and marketing costs. During the second quarter, we will record a non-recurring charge related to the separation agreement we entered into with our prior CEO. The separation agreement includes continuation of salary and benefits through the term of his employment agreement and the acceleration of stock rewards that he would have earned if vesting continued for another two years. We are estimating the total charge will be approximately $6.2 million, which includes $2.2 million of cash-related expenses and $4 million of stock-based compensation expenses. Excluding this non-recurring charge, we expect operating expenses for the second quarter to range from $12.5 million to $13 million. Net loss for Q1 was $8.2 million or $0.50 per common share versus a net loss of $8.9 million or $0.74 per common share in Q1 last year. We ended the quarter with $70.7 million in cash and investments. We used $7.1 million of cash and investments during the quarter to fund the business, including $6 million in operations and $500,000 for capital expenditures. 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. Riley will now provide a business update.