Digimarc Corporation

Greetings and welcome to the Digimart Corporation second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Joel Meyer, Chief Legal Officer. Sir, please proceed.

Welcome to our Q2 conference call. Riley McCormick, our CEO, and Charles Beck, our CFO, are with me on the call. On the call today, we will discuss Q2 financial results and provide a business update. 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 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, Joel. And hello, everyone. First year commercial bookings were $2.2 million during the quarter compared to $2.3 million in Q2 2021. Bookings in Q2 last year included $800,000 from our piracy intelligence product. that we are nearly complete in winding down. We are not signing any new Piracy Intelligence deals and we have now effectively exited most of our legacy customer contracts. Excluding Piracy Intelligence, our first year commercial bookings increased 700,000 or 44%. As a reminder, we are now selling a combined solution of Digimark Watermarks and the Everything Product Cloud, which makes it impractical to provide a breakout of bookings and revenue for each. Revenue for the second quarter was $7.7 million, up 23% from $6.3 million in Q2 last year, reflecting growth in both subscription and service revenue. Subscription revenue grew 30% in the quarter, from $2.5 million to $3.2 million. Keep in mind there are two offsetting factors impacting our year-over-year growth. The addition of subscription revenue from everything, offset by the decline in subscription revenue from sunsetting our piracy intelligence product. As we previewed last quarter, the sunsetting of the piracy intelligence product was going to have a meaningful impact on subscription revenue starting in Q2, which it did. The product was generating $600,000 of revenue per quarter before we started exiting. And now that we are more than halfway through that process, our revenue is only $300,000 in the second quarter. We expect this revenue to be insignificant going forward as we finalize the wind down process. These offsetting factors as well as the vagaries of revenue recognition rules that have an impact on our reported revenue at this stage in our growth is why we believe first year bookings is the best leading indicator of growth of our business. As a reminder, first year bookings are committed first year contract amounts and will typically flow into revenue in the 12 months after contract signing. Service revenue grew 19% in the quarter from 3.8 million to 4.5 million. The increase largely reflects higher service revenue from Holy Grail 2.0 recycling projects, the majority of which relates to the recycling contract we referenced on the last earnings call. We are nearly complete with that contract, so we do not anticipate significant revenues in Q3 from this contract, and thus service revenue should revert to more normalized levels. First profit margin for the second quarter was 52% compared to 67% in Q2 last year. The decrease in margin reflects 1.1 million of amortization expense recorded on acquired intangible assets recognized in the acquisition accounting for everything. Non-GAAP gross profit margin, which excludes amortization expense and stock-based compensation expense, was 71% in Q2 2022, compared to 72% in Q2 2021. Operating expenses for the quarter were 18.9 million, down 700,000 from Q2 last year. Last year, we incurred 6.2 million of expense, related to the separation agreement we entered into with our previous CEO and $1.3 million of severance costs related to organizational changes we made in Q2 2021. Excluding these costs, operating expenses increased $6.8 million, reflecting the operating expenses of everything and higher compensation costs due to higher headcount and annual compensation adjustments. Non-GAAP operating expenses for the quarter were $15 million, up $2.4 million from Q2 last year, Everything added $3.3 million of non-GAAP operating expenses in the second quarter. Excluding everything, non-GAAP operating expenses decreased $900,000, reflecting the cash costs associated with the separation agreement we entered into with our previous CEO and cash severance costs related to organizational changes we made in Q2 2021, which totaled $2.5 million, partially offset by higher cash compensation costs due to higher headcount and annual compensation adjustments. Net loss per common share for the quarter was 75 cents versus 94 cents in Q2 last year. Non-GAAP net loss per common share for the quarter was 47 cents versus 49 cents in Q2 last year. We ended the quarter with 68.4 million in cash and investments. We used 14.7 million of cash and investments during the second quarter if you exclude the impact of the 58.2 million of capital we raised in April. The $14.7 million included roughly $3 million of cash to pay larger than usual outstanding payables at March 31st. We incurred several large expenditures in Q1 related to the acquisition, financing, and other activities that were not paid until April due to timing of receiving the invoices and processing the payments. Excluding the impact of paying off these higher payables, we used $11.7 million of cash and investments during the quarter, compared to $9.6 million in the second quarter of 2021. The last two quarters' cash flows have been higher than our expected normalized rate going forward due to some non-recurring items. Internally, we look at non-GAAP loss, which excludes non-cash expenses, and layer on cash use for capital expenditures and share repurchases to estimate our normalized level of cash flows. We expect cash flows each quarter may fluctuate from this metric due to timing of customer receipts and vendor payments, but it provides a good indicator of normalized cash flow at existing revenue levels. For further discussion of our financial results and risks and prospects for our business, please see our Form 10-Q that will be filed with the SEC. Riley will now provide a business update.