Bruce Davis - Chairman, Chief Executive Officer Charles Beck - Chief Financial Officer

Good afternoon and thank you for participating in today’s conference call. Now I will turn the call over to Bruce Davis, Chairman and CEO of Digimarc. Mr. Davis, please proceed.

Thank you. Good afternoon! Welcome to our conference call. Charles Beck, our CFO is with me. On the call today we’ll review Q1 financial results, discuss significant business developments and market conditions, and provide an update on progress and execution strategy. We’ve posted these prepared remarks in the investor relations section of our website and will archive this webcast there. Please note that we may make certain forward-looking statements in this call, and in the prepared remarks we filed with the SEC and posted on our website under the heading “Safe Harbor Statement,” regarding revenue recognition matters, results of operations, investments, initiatives, perspectives on business partners, customers and prospects, industry trends and growth strategies. We also will discuss from time-to-time the information provided to us by our partners and actual and potential customers. We are providing this information as we understand it was represented to us. We do not verify nor vouch for such information. All such statements and information are subject to many assumptions, risks, uncertainties and changes in circumstances. Any assumptions we share about future performance represent a point-in-time estimate. Actual results may vary materially from those expressed or implied by such statements. We expressly disclaim any obligation to revise or update statements or other information we provide during this call to reflect events or circumstances that may arise after the date of this conference call. For more information about risk factors that may cause actual results to differ from expectations, please see the company’s filings with the SEC, including the Form 10-Q that we expect to file shortly. Any links included in our prepared remarks are provided for general information and context only. The content reference is not incorporated by reference and you should not consider it a part of this presentation. We do not verify nor vouch for such information. Charles will now comment on our financial results and then I’ll discuss significant business developments, market conditions and execution strategy. Charles.

Thank you, Bruce. Good afternoon everyone! First off, you may have noticed some changes to our income statement. We revised our income statement to improve visibility into the return on investment in growth initiatives targeting retailers and consumer brand owners and to facilitate more effective comparisons with our peers. We incorporated License revenue into Subscription revenue and reclassified a small amount of revenue from Subscription to Service. We’ve also incorporated Intellectual Property expense into General and Administrative expense. These changes reflect the evolution of our business from IP licensing to provision of software and services based on our auto identification platform. The focus of patent development has shifted from monetization to support licensing of our software. The designations of Barcode and Guardian are no longer relevant considering our approach to Platform monetization. Assessment of return on investment is facilitated via reporting revenue by target markets. The key market categories are Government, Retail and Media. Government includes services and subscriptions provided to the Central Banks and other government agencies. Retail includes services and subscriptions provided to retailers, brands, their suppliers and related solution providers. Retail is mostly what we used to refer to as Barcode revenue, but also includes revenue from Retail customers formally categorized as Guardian and License revenue. Media includes all other services and subscriptions provided to media, entertainment, education and other customers. Media comprises mostly what we used to refer to as Guardian and License revenue, but also includes Barcode for commercial print and audio for non-Retail customers. We anticipate adding other market categories as the business expands to facilitate your evaluation of our investment spending and returns. Given that Retail is the primary area of investment and driver for top-line growth, we will focus disclosure on Retail bookings in our quarterly reports. Bookings for Government and Media…

Thanks Charles. Our company has responded effectively to the pandemic crisis so far. The first stage of response focused on health and safety of our employees. The next stage focused on productivity of an entirely remote work force, providing tools, training and support to optimize the work streams. Both stages have been executed well. In parallel, we grew revenues, reduced expenses and secured interim financing via the Paycheck Protection Program. Our focus now is on assessing the effects of the crisis on our business prospects, short and long term. The pandemic has resulted in many changes in how the world operates. The path and pace of economic recovery and the shape of the new normal are uncertain. The effects on our business are difficult to predict. These uncertainties led us to apply for and receive a Paycheck Protection Program loan. This gives us a little more time to assess what the new normal will look like, the timing and nature of the path there, and its implications for our business. The PPP loan is having the intended effect of allowing us more time to assess how our business will go before making any significant changes to our business. As you see from the Q1 results, we have been reducing expenses wherever possible without reducing our workforce or disrupting the productivity of our employees. Given the nature of our work and skills required, keeping our team intact is very important to achieving our goals. Retail has been dramatically affected by the pandemic. We believe our importance has increased. Shoppers’ concerned about health and safety have affected how they choose to shop, with much more online purchasing and what they shop for considering the loss of income and uncertainties about the path forward. Automatic identification is a key to addressing necessary changes…

Thank you, sir. [Operator Instructions] We did just get one question in queue and that is from Jeff Van Rhee with Craig-Hallum.

Great, thanks. Thanks for taking my question. There’s a couple from me. Bruce, just one quick clarification. I think in the script when you were talking about the bookings that pushed from Q4 to Q1, you said “another company has gotten involved.” I'm not clear what that meant. Maybe you could just clarify on that and then I have two other follow-ups.

Yes, so our contract that got changed was with a supplier and now that supplier and another supplier are going to be participating together. The original supplier will be transitioning some of their responsibilities over to a different supplier. So the three of us are getting together and having discussions about how to have an effective collaboration. We’ll probably be making – I think we’ll be making an announcement about this sometime in the not too distant future.

Got it, okay. And then it terms of the barcode pipeline coming into the impacts of corona, can you just talk about kind of the developments of the near term deals you saw prior to the, you know some more severe impacts of corona and then any sort of up to date read on where those deals might be in terms of how they are coping, and I'm assuming they had pause, but just maybe a sense of how the pipe was going in at least.

Sure, so some things have paused and some things have accelerated. As I pointed out in the script, it's a bit schizophrenic, which you would expect because of the uncertainties in the economy and particularly in retail operations and the suppliers to retail. I would say on the whole there's a greater sense of urgency and an increasing appreciation of the benefits that we provide in what is expected to be the new normal. The new normal not capable of being entirely described just yet, but probably including people feeling more nervous about safety and health and there being a general desire to have “low touch” as an expression that’s being used now in the industry; low touch shopping, low touch operations. And then I think in a significantly increased need for efficiency because of lower productivity from the real estate place based retailers, and everyone in the supply chain and you certainly have seen in many places, the new spacing requirements and plastic shields and PPE, that's going to change the economics of many of our suppliers and customers in ways that cry out for greater efficiency, and auto identification is the classic tool of increasing efficiency in the demand and supply chains. So I tell you, it’s a little hard to tell, because it's only been about six or eight weeks now that there's been the full recognition of the crisis, but we have some new demand because of that, we have increased demand because of it and we have delays because of it. So it's a bit hard to sort out just yet. I do hope and I don't know how to predict how the health aspect of this is going to roll out as people try to move back out of shelter in place if another crisis emerges, who the hell knows. But if they do find a way at least through the summer months to regain some semblance of what things looked like in the past, I do think they’ll be enduring changes that again create increased demand for our platform.

Got it, okay. And Charles, I think you mentioned that the bookings – obviously you've changed the way you’re reporting them, that the bookings have been recast. Do you have the booking the way you – in terms of the retail bookings for last year's Q2, 3 and 4 handy?

Yes, I do and they didn't change more than a 100 grand. Some of its rounding, but I can – so it was a $900,000 in Q1, $1.8 million in Q2, $1.2 million in Q3 and $1.4 million in Q4.

Perfect! Okay great, thanks so much guys.

[Operator Instructions] And there are no further questions as this time. I would now like to turn the call back over to Bruce Davis. Sir, please proceed.

Alright, thanks again everyone for your support and as I said, thus far we've managed very effectively through the effects of the pandemic and we feel confident that we will do a good job continuing to manage through its implications to some new normal, but optimistic the new normal will be one in which we play a more important role, and the uncertainty that exists today in regards to the pace of negotiations and implementations because of the changes in the availability of labor and travel, and I think we'll work our way through it with the help of the PPP loan. It’s been a really helpful addition to working capital that will carry us through the most uncertain times. And so I look forward to talking to you again in the next conference call and thank you for your support, so goodbye for now.

This concludes today's conference call. Thank you, ladies and gentlemen, for joining us for our presentation. You may now disconnect.