Digimarc Corporation

Ladies and gentlemen, greetings and welcome to the Digimark Corporation Q2 2025 Earnings Conference Call. At this time, all participants are in the listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, George Karamanos.

Please go ahead. Thank you very much. Welcome, everyone, 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 provide a business update and discuss Q2 2025 financial results. 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. For those of you dialing in, we've changed the format of our prepared remarks and we'll be simulcasting a presentation that Riley and Charles will walk through today. If you would like to follow along with the slides, I would encourage you to join our webcast as referenced in our earnings press release shared earlier today. 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. Riley will now provide a business update.

Thank you, George, and hello, everyone. On this call, we will walk through DigiMark's Q2 performance highlight our strategic progress across product innovation and commercial execution, including the pending launch of our gift card solution, share updates on our financial metrics such as ARR and cash burn, and provide clarity on where we are focused heading into the second half of the year. In Q2, we made significant progress toward launching our gift card solution, generated new ARR from a European packaging customer through a multi-year committed contract that should generate near seven figures next year, and had several upsell ARR wins with existing customers. We delivered our next generation audio digital watermark to enable accurate compensation for creators and safeguard sensitive data. And we were recognized in Gartner's hype cycle as a key vendor in the emerging trust ops category alongside the likes of Microsoft and Google and aligned with McKinsey's identification of digital trust as one of the top technology trends shaping the future. We also completed our corporate reorganization in the second quarter and are seeing significant benefits across the organization as a result. Financially, the reorganization has resulted in a meaningful reduction in operating expenses and cash usage, and we remain on track to deliver positive free cash flow by Q4 2025. Operationally, it has allowed us to increase our focus on the areas most likely to deliver the scalable and repeatable business we must always focus on delivering. I would like to thank all of my teammates for their hard work in effecting this important step in our continued evolution. While not an easy process, we are seeing positive results in our ability to execute on our business. As has been shared previously, our three focus areas are retail loss prevention, product authentication, and digital authentication. We have several significant ARR generation opportunities in front of us, such as protecting the world's gift cards, that exhibit strong demand-pull characteristics with the goal of much quicker time to revenue relative to some of our identification use cases. The decision to focus our time and resources on these three core areas in the authentication space was supported by deep market research, validated by customer feedback, and further confirmed independently by work we commissioned from our consulting partners. With that said, we remain firm believers in our positioning and our ability to execute on the various ecosystem-driven opportunities in the identification space as they eventually become ripe enough to pursue. Our greatest near-term opportunity is retail loss prevention, and more specifically, our gift card solution. We made substantial progress during the quarter on commercializing our solutions to address gift card fraud, an ever-increasing existential threat the industry is hyper-focused on solving. We are proud to announce that the first DigiMark protected gift cards have been received by our first retailer and will appear on shelves next week. While the initial rollout took slightly longer than planned, for reasons outside of our control, it includes gift cards from multiple different brands, including some of the largest companies in the world. The interest from these brands reflects the detailed joint success planning we have been undertaking with members of the gift card industry ecosystem, including gift card network companies, gift card manufacturers, card manufacturing equipment providers, label providers, point of sale scanner manufacturers, and, of course, retailers and brands. This joint success planning positions us to increase long-term revenue velocity as these initial cards hit shelves. We intend to predominantly sell our solution to gift card manufacturers who will apply our technology during their normal printing process before delivering the cards as they currently do today. We have built our go-to-market strategy around trying to solve for two often conflicting goals, providing a revolutionary new solution and minimizing impact on the ecosystem's existing workflow. I think the team has done an incredible job of doing just that. From jointly building threat models that clearly show how our existing solution already reduces fraud and how our roadmap will drive even greater results, to creating a detailed interactive pilot plan that allows for near real-time impact measurement to all the work in between, we've invested the time and resources to set up our solution for success today, as well as accelerate the pace of adoption in the future. As we've shared in the past, one of the most powerful facets of this opportunity is that laggards in the adoption of our gift card solution will bear the compounded cost of an increasing percentage of an increasing amount of fraud. We and our partners believe this positions us for a powerful demand-pull dynamic. Moreover, this is a widely held view across the industry, and the interest of those not yet included in next week's rollout has continued to increase. In parallel to setting up this initial rollout for maximum success, We've been planning additional rollouts with other industry players as well. While it is hard to be certain ahead of some critical upcoming events what impact, if any, the slight delay in our initial rollout will have on our 2025 revenue, we have lowered our internal estimate for 2025 gift card revenue. Next week marks a critical milestone and accomplishment in our work to catalyze the gift card industry towards meaningful adoption of our solution, and we believe whatever impact the pilot delay might cause to our 2025 revenue, if any, will be paid back next year and beyond. Turning now to our focus on product authentication, I am thrilled to announce we signed a multi-year committed deal with a large European packaging company that should represent near seven figures of ARR starting next year and beyond. In addition to providing our customer the ability to resell DigiMark Validate and DigiMark Automate directly, This deal allows our partner to roll out or deploy now activate later offering and all the packaging they produce feeding the market for among other things, potential future DigiMark recycle deals. Just last week I had dinner with the CEO of this valued customer and he shared his plans for utilizing our partnership to drive messaging at an upcoming conference, stating that he believes our partnership will enable his company to stand out amongst their peers and drive new business their way. More immediately, He wants to arrange an opportunity for us to spend time with a sister company that he believes is interested in pursuing a similar relationship with us. Nothing is more powerful in driving to a scalable and repeatable business than delighting existing customers, and our focus is, as it always is, on continuing to win our customers' business every day. We also signed upsell deals with three of our existing DigiMark Validate customers, reflecting both increased contract value and the expansion of our solution to new geographies and new brands. As we have repeatedly stated, when we solve our customers' most challenging problems, we expect to be an upsell and cross-sell company for a long time. While still early in that journey, the results are proving this thesis correct. Brands face rampant counterfeiting and IP theft, and our secure and scalable, covert and connected solutions provide far superior results compared to competing analog solutions such as tags, codes, inks, and labels. Touching now on our digital authentication solutions, as mentioned on our last two calls, we chose to be conservative about this area's contribution to 2025 ARR. We made this decision to help ensure we remain focused on optimizing our work in this area for the long term. We have already exceeded these conservative assumptions. As announced in a recent press release, we recently delivered a next generation audio digital watermark architected to address the unprecedented challenges rights holders, content creators, companies, and governments face with the explosion of digital and AI-generated content and capabilities. We recently signed a new deal with Source Audio to embed our audio watermarks into production music for TV commercials in order to monitor royalty rights across over 150 national channels and 100 local stations. Additionally, we have multiple deals in the pipeline as a result of our new offering, including technical testing with an AI company looking to both comply with EU regulation as well as automate internal authentication. Our next generation offering has also caught the attention of an important industry group that is searching for solutions to an unmet need arising from the emergence of AI. We look forward to proving our value to this gatekeeper and unlocking the opportunities on the other side. Q2 also saw us grow the relationship with the Fortune 100 customer we mentioned on the last call, signing a low six-figure deal that we believe could grow close to seven figures starting in year two and beyond. In addition to our belief this customer presents a future upsell opportunity, they have offered to be a reference account to other prospects in the future. Additionally, the implementation of our solution is being led by one of the world's largest system integrators. Success with our shared mutual customer should open future doors for us to partner with this industry giant to deter insider threats and safeguard sensitive data for additional customers across industries and sectors worldwide. The twin catalyst of the relentless advance of AI models and agents and the rapid progression of content credentials has created a wave of awareness and urgency for a robust, scalable, secure, and imperceptible perpetual and deterministic solution to address the many trust and authenticity problems growing in the digital world. We expect this space to continue its recent notary growth and evolution. While some of the nascent digital use cases might be served, at least in the interim, with good enough offerings, what has become apparent to us in the last few months is that the aforementioned TWIFT catalysts are opening the market for use cases where good enough just simply will not do. Our technology, our history, our credibility, our expertise, our experience, and our first to market with and co-leadership of the digital watermarking component of the C2PA standard are all coalescing to ensure we are well positioned to serve this ever-growing wave. We pioneered this space. This is quite literally what we were born to do, and the market is finally here. Although our focus over the near term will be on our three core focus areas, we continue to believe in our positioning and ability to execute in other areas when those markets are ripe for addressing. Before I turn the call over to Charles, I want to address a development that will have a negative future impact on our near term top line results. We are currently in contract renegotiations with a large retailer customer of a legacy solution, which will most likely result in a reduction of up to $3 million in annual revenue. As these conversations are very recent and currently ongoing, we are not able to estimate the exact impact at this time. This development also reinforces our decision to focus on our three authentication markets and building the trust layer for the modern world. Solving urgent problems provides stronger protection from changes in customer strategic focus than some of our legacy solutions did. Moreover, this retailer is an important gift card vendor, and our focus is on maximizing future revenue opportunities for our gift card solution, not on trying to maximize revenue from a use case we haven't sold in many years. We believe we continue to have an excellent relationship with this customer and that there is much to accomplish with them over the coming years. We are excited to continue to help them win. We are also energized by moving DigiMark into a future where we are not overly reliant on any one customer and can move more quickly with the market. We are confident in the opportunities provided in our key three focus areas and are excited by the results our increased focus are already beginning to deliver. Ecosystem-based sales are great because of their size, but the sales cycles can be slow, expensive, and multiple constituencies must adopt before meaningful ROI is unlocked. Our strategic shift allows for the building of a scalable and repeatable business where we can fail fast, iterate, and win often. Even with the expected top-like impact of this contract renegotiation, we still anticipate being free cash flow positive in Q4. Reorganizing our company to focus on our authentication use cases was a difficult but necessary decision, and we appreciate our investors' patience as we navigate this transition, which we are more confident than ever is the best strategy for the company and will create the best outcome for investors. Even if timing around meaningful revenue generation from our new products were to slip one to two quarters, we believe the company is well positioned to win and reach significant scale. I will now turn the call over to Charles to discuss our financial results.