Digimarc Corporation

Greetings, and welcome to the DigiMark Corporation Q3 2025 Earnings Conference Call. At this time, all participants are in a list-only mode. A question and answer session will follow the formal presentation. If anyone requires 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 the conference over to your host, George Karamanos. You may begin.

Thank you so much. Welcome everyone to our Q3 conference call. Riley McCormick, our CEO, and Charles Beck, our CFO, are with me on the call today. On this call, we'll provide a business update and discuss Q3 2025 financial results. This will be followed by a question and answer forum. We have posted our premarital remarks in the investor relations section of our website and we'll archive this webcast there. For those of you dialing in, this is a reminder that we are somewhat casting a presentation that Riley and Charles will walk through today. If you would like to follow along with a slide, 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 Q3 performance, highlight our strategic progress across product innovation and commercial execution, share updates on our financial metrics such as ARR and cash burn, and provide clarity on where we are focused heading into the last quarter of the year. In Q3, we made significant progress in advancing towards widespread adoption of our gift card solution and closed multiple upsell opportunities in the product authentication space, including our expansion to a sixth country with a global tobacco company. We quickly turned an inbound inquiry from a major pharmaceutical company into a paid pilot for a novel application of our product authentication solution that, Depending on pilot results, may have wide applicability not only across other pharmaceutical companies, but additional industries as well. We launched a revolutionary new digitized security label solution to help brands upgrade from analog, easy to replicate, and low value add holograms. And we made significant progress advancing our digital authentication offerings while in parallel growing pipeline, setting ourselves up to take full advantage of this nascent and exciting market in 2026 and beyond. We also continue to harvest the benefits of our recently completed corporate reorganization. Operationally, it has allowed us to increase our focus on the areas most likely to deliver this scalable and repeatable business we must always focus on delivery. 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 and positive non-GAAP net income in Q4 of 2025 even with our recent decision to invest in more resources to accelerate growth in our focus areas of retail loss prevention and digital authentication. 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 a 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 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 as they eventually become ripe enough to actively pursue. Our greatest near-term opportunity is retail loss prevention, and more specifically, our gift card solution. On this front, we made substantial progress in our march towards gaining widespread adoption, aided in large part by the industry's hyper-focus on finding a solution to the fraud that is creating an existential threat to their business. The global gift card industry is estimated to represent approximately $1 trillion of stored value. Having reached this impressive milestone due to the many benefits these cards provides all stakeholders, most importantly, consumers. Unfortunately, this large market opportunity has not escaped the attention of sophisticated state-sponsored bad actors, and industry growth is currently being negatively impacted by the ever more advanced attacks targeting this global currency. DigiMark's 28-year history working with the world's central banks to protect the vast majority of banknotes in circulation worldwide, combined with our decade-plus experience at retail front of store, ideally positions us to help this industry re-accelerate its growth. In addition to reducing fraud and the many direct and indirect costs of that fraud being borne by brands, retailers, and consumers, our solution also allows the entire industry to improve the marketing, merchandising, and giftability of gift cards. These three elements were critical pillars of the industry's historic growth, and all three have been negatively impacted by existing security solutions. Along with fraud reduction, the ability for the industry to reinvest in these three pillars to yet again supercharge sales is becoming another selling point of our solution. Our solution also allows for reduced packaging waste and improved sustainability, a value proposition that is resonating with some iconic global brands and is compliant with the ever-increasing number of regulations being put in place. Most front of mind currently in the U.S. are the Maryland and New Jersey laws. As more industry participants are exposed to our solution, additional benefits become clear, a wonderful byproduct of being the first adaptable, extensible, and technology-driven security layer in this dynamic industry. We provide a solution that is more secure than the highest security solutions on the market today, while allowing the industry to regain the use of the powerful growth tools they've had to abandon these past few years. Turning now to the results from our initial rollout, The first DigiMark-protected gift cards reached shelves in August. Major brands participating included Target, Home Depot, Nordstrom, and Blackhawk Network multi-retailer cards. The response has been extremely positive, and all KPIs have been easily surpassed. These KPIs include multiple metrics measuring the effectiveness of our solution, plus our impact on the industry's operational efficiency. 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 ever-increasing amount of fraud. We and our partners believe this positions us for a powerful demand-pull dynamic. The detailed results of our initial role have been widely shared within the industry, and we expect multiple major retailers to start selling DigiMark protected gift cards within the next few quarters. carrying an expanded number of closed-loop brands, as well as initial open-loop cards. As a reminder, closed-loop cards are gift cards that can only be redeemed at specific retailers. Open-loop cards are issued by the credit card companies and can be redeemed at any location where that credit card is accepted. As a reminder, 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. We are currently in commercial discussion with eight gift card manufacturers, as well as one additional direct customer. These discussions are being shaped, as they always are, by our desire to be an excellent partner to the industry and thus balance A, the dynamic that laggards in adoption will bear compounding costs of fraud, and B, the immediacy of a much broader rollout. Our plan is to ensure we contract for enough 2026 committed annual capacity so we can credibly address burgeoning industry concerns about whether there will be adequate capacity to avoid the potential for involuntary laggards, and then quickly move from commercial discussions to working with our initial partner or partners to flawlessly execute on the expected impending ramp of DigiMark-protected gift card production. The timelines to deliver this large ramp are very tight, and therefore our goal is to quickly move to the contracting stage and to only contract with a small subset of these eight printers right now, as we believe with the right partners, we can strike the optimal balance between our two goals. Turning now to our product authentication solutions, we closed multiple upsell deals with existing DigiMark Validate customers, reflecting both increased contract value and the expansion of our solution to new geographies and new brands, including the expansion of our solution to the sixth country of a global tobacco company, with operations in approximately 175 more. As we've repeatedly stated, when we solve our customers' most challenging problems, we expect to be an upsell and cross-sell company for a very long time. We also closed a paid pilot with a major pharmaceutical company that approached us with a pressing problem they've been unable to solve using other means. I am proud of how quickly and how deeply the team diligence to the problem, allowing them to find a potential solution using existing Validate capabilities. I'm equally as excited for us to successfully execute on the pilot because if we can indeed solve this problem, our solution should be widely applicable across the entire Pharmac vertical and other verticals as well. Finally, we also launched a revolutionary new digitized security label solution to help brands upgrade from analog, easy to replicate, and low value add holograms. This label can be authenticated by consumers and field agents with mobile phones and other devices, providing deterministic B2B or B2C authentication with analytics all in one place. Touching now on our digital authentication solutions, as mentioned on our last three 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, as opposed to making decisions that might lead to short-term revenue, but would come at the cost of our ultimate potential scale. Not only did we exceed our annual target in the first six months of the year as we shared last year, but we are now in a position to harvest the fruits of this decision in 2026 and beyond. The twin catalyst of the relentless advance of AI models and agents and the rapid progression of content credentials have 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 noteworthy 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 twin 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. After deep analysis across three vectors, market demand, our technological differentiation, and buyer synergy, we have narrowed our focus in the digital authentication space to four use cases. Multiple flavors of leak detection, internal compliance, piracy prevention, and royalty monitoring. Our pipelines of both opportunities and partners are growing prior to widespread marketing efforts, and we are now resourcing this area with the expectation it will be a significant contributor to our 2026 growth and beyond. We are confident in the opportunities provided in our three key focus areas and are excited by the results our increase 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, and allow these massive but not yet quite ripe for the picking opportunities to provide the potential for another layer of tomorrow's growth. I will now turn the call over to Charles to discuss our financial results.