Digimarc Corporation

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

Welcome to our Q2 conference call. Riley McCormick, our CEO, Charles Beck, our CFO, and Tim Price, our Chief Revenue Officer, are with me. On the call today, we will provide a review of Q2 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 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 Q2 financial results.

Thank you, Bob, and good afternoon, everyone. Revenue for the second quarter was $6.3 million, down 3% from $6.5 million in Q2 last year. Service revenue decreased 3% from $3.9 million to $3.8 million, reflecting lower government services due to timing of program work with the central banks, partially offset by higher commercial services related to Holy Grail 2.0 projects. Subscription revenue decreased 5% from $2.6 million to $2.5 million, reflecting lower revenue from digital media customers. Revenue from government customers was $3.8 million, down 5% from $4 million in Q2 last year, reflecting the timing of program work with the central banks. For the 2021 fiscal year, we still expect revenue from the central banks to grow modestly from fiscal 2020. Revenue from commercial customers was 2.5 million, essentially flat with Q2 last year. Commercial services were higher due to new Holy Grail 2.0 project work, offset by lower commercial subscriptions from digital media customers. Total commercial bookings were 2.3 million, up 13% from 2.1 million in Q2 last year. The increase in bookings reflected new bookings in several areas of the business. During the quarter, we signed our first major contract associated with the Holy Grail 2.0 program. The project is centered around phase two semi-industrial tests, which is the next step in the Holy Grail 2.0 roadmap. The contract is expected to contribute nearly a million dollars of bookings and revenues during 2021. Due to the timing and structure of this contract, there were no bookings recognized in the second quarter. As we promised in the last earnings call, we have again included a table within this script that shows relevant booking and revenue details under both our prior and new market segments. Gross margin for the quarter was 67%, consistent with Q2 last year. Service margins improved 1%, while subscription margins declined 1%. Operating expenses for the quarter were $19.7 million, compared to $11.9 million in Q2 last year. The increase is almost entirely related to non-recurring costs of $7.5 million incurred during the quarter associated with the separation agreement we entered into in April with our former CEO, as well as severance costs incurred for organizational changes we made in June. The $7.5 million is comprised of $5 million of non-cash stock-based compensation expense and $2.5 million of cash-related expenses, most of which will be paid out over a two-year period. Excluding these non-recurring costs, operating expenses increased 2% to $12.2 million, reflecting higher consulting and legal costs, partially offset by lower recurring compensation costs. We anticipate operating expenses for the third quarter will range from $12.1 million to $12.6 million. Net loss for Q2 was $15.4 million, or $0.94 per common share, versus a net loss of $7.5 million, or $0.62 per common share, in Q2 last year. Excluding the $7.5 million of non-recurring costs I referenced earlier, net loss was $7.9 million or $0.48 per common share. We ended the quarter with $61.1 million in cash and investments. We used $9.6 million of cash and investments during the quarter, which included $2.4 million of cash to repurchase shares in satisfaction of required tax withholding on the stock awards associated with the separation agreement with our former CEO. Our application for forgiveness of the $5 million Paycheck Protection Program loan is still in 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-Q that we expect to file shortly. Riley and Tim will now provide a business update. Thanks, Charles.