Digimarc Corporation

Good afternoon, and thank you for participating in today's conference. I will now turn the call over to Chief Legal Officer Bob Chemnitz. Please go ahead.

Welcome to our Q4 conference call. Riley McCormick, our CEO, and Charles Beck, our CFO, are with me on the call. On the call today, we will discuss Q4 financial results and provide a business update, including an update on the integration of the everything acquisition that closed on January 3rd. This will be followed by a question and answer forum. We have posted our 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 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 Q4 financial results.

Thank you, Bob, and hello, everyone. First off, I want to provide an overview of Q4 financial results for Legacy DigiMark. Please keep in mind these results do not include the financial results of everything as the acquisition closed on January 3rd. The financial results for everything will be included on a prospective basis starting in the first quarter of 2022. Revenue for the fourth quarter was $7.1 million, up 28% from $5.6 million in Q4 last year. Subscription revenue increased 37% from 2.7 million to 3.6 million, reflecting the sale of 10 non-core patents for a one-time fee of $1 million during the quarter. Service revenue increased 21% from 2.9 million to 3.5 million, reflecting higher commercial services related to Holy Grail 2.0 projects. Total commercial bookings in Q4 were 2.6 million, up slightly from Q4 last year. First year commercial bookings in the quarter were up 39% year over year. For fiscal 2021, total commercial bookings were 10.9 million, up 20% from fiscal 2020. First year commercial bookings were up 27% over the same period. Operating expenses for the quarter were 13.2 million, up 1.5 million from Q4 last year. The increase reflects $1 million of non-recurring legal and accounting costs incurred during the quarter associated with the everything acquisition. Excluding these costs, operating expenses were up 4% reflecting higher consulting, travel, and marketing costs. Net loss for Q4 was 8.2 million or 50 cents per common share versus a net loss of 7.8 million or 51 cents per common share in Q4 last year on a comparative basis. We ended the year with $41.6 million in cash and investments. We used $10.9 million of cash and investments during the fourth quarter, including a $2 million loan to Everything, and we paid $600,000 of non-recurring costs related to the Everything acquisition. Backing out these costs, during the fourth quarter, we used $7.1 million to fund operations and another $300,000 to fund capital expenditures. We also have 231,000 warrants outstanding with a strike price of $36.56 that expire on March 27th. As a reminder, these warrants were issued in lieu of shares to cover Everything's cash closing costs related to the acquisition. If all of the warrants are exercised by Everything shareholders, it would result in $8.5 million of additional cash to DigiMark. If none of them are exercised, it would have the effect of reducing our purchase price by $2.5 million. For further discussion of our financial results, and risks and prospects for our business. Please see our Form 10-K that will be filed with the SEC. Next, I wanted to provide some inputs to help you with your modeling of our business, giving the effect of closing the everything deal. We expect the acquisition to add approximately $1.3 million in Q1 subscription revenue and approximately $200,000 in Q1 service revenue. We expect everything standalone subscription gross margins to be around 70%, and service gross margins to be around 55%. As a reminder, we believe that we will be able to increase Everything's standalone product gross margins over time into the high 70s at current revenue levels and higher still as our product cloud revenue grows. On the operating expense side, we expect Everything to add approximately $3.5 million in operating expenses in Q1. Finally, the Everything business is currently using around $2 million of cash per quarter. Both the operating expense and cash usage numbers are before any non-recurring legal and other deal costs, which will add approximately $800,000 to operating expenses and cash usage in the first quarter. As is the case with the standalone DigiMark business, with the extremely high product gross margins in the everything business, if we were able to increase product subscription revenue from current levels, cash usage should decline significantly. Before I turn the call over to Riley, I want to cover three more things. First, I wanted to provide a preliminary update on everything's projected product annual recurring revenue, or product ARR, as of February 28, 2022. We are working to close the books for February, so we do not have a final number yet. However, we anticipate the product ARR will end up slightly under $5 million. If product ARR is $5 million or less, then there would be no second consideration payment in September under the terms of the share purchase agreement. Second, as we have mentioned is a key tenant of our transformation, we are applying an intense focus to every part of our business. After careful thought and consideration, we have decided to sunset our piracy intelligent product offering for e-book publishers. The market opportunity is just too small, isn't growing fast enough, and doesn't provide enough high margin opportunity to justify allocating any of our valuable resources to this market. In 2021, the Piracy Intelligence product generated $2.2 million in bookings and $2.5 million of subscription revenue and was neutral to cash flow. We expect to complete the wind-down of the Piracy Intelligence product by December 2022. To provide visibility into historical bookings and revenues for this product line, we have included a table within the script showing 2020 and 2021 Piracy Intelligence bookings and revenues by quarter. Lastly, we opportunistically took advantage of the future of work uncertainty caused by COVID and entered into a sublease and lease extension for new corporate office space less than one mile from our existing office in Beaverton, Oregon. The new space was recently completely redone by the previous tenant in order to provide the functional and collaborative benefits modern office space allows. It is also 40% larger than our existing space, providing optionality on our future needs. We were able to negotiate this lease with no incremental cost to us for the next 26 months, and moreover, this move eliminates the multi-million dollars of capital expenditures that would have been required to update our existing office space. We intend to market our existing office for sublease once we move out in March, and depending on our success with that, this move could actually end up being cash flow positive over the next two years before giving any benefits from the CapEx costs we have now avoided. The new lease will run through September, 2030. We will record a large asset liability on our balance sheet starting in Q1, reflecting the net present value of the contractual lease payments. Additionally, our non-cash lease expense will increase given the 26-month free rent period, as lease expense is required to be recognized radically over the lease term. Riley will now provide a business update.