Financial Data and Key Metrics Changes - Ending ARR for Q3 was $15.8 million compared to $18.7 million for Q3 last year, reflecting a decrease due to the DRS contract lapse [20] - Total revenue was $7.6 million, a decrease of $1.8 million, or 19%, from $9.4 million in Q3 last year [21] - Subscription revenue accounted for 60% of total revenue for the quarter, decreasing 13% from $5.3 million to $4.6 million [21] - Operating expenses were $12.8 million for the quarter, down $4.5 million, or 26%, from $17.3 million in Q3 last year [22] - Free cash flow usage was down from $7.3 million in Q3 last year to $3.1 million in Q3 this year, a decrease of 58% [24] Business Line Data and Key Metrics Changes - Significant progress was made in advancing the gift card solution and product authentication space, including upsell opportunities and a paid pilot with a major pharmaceutical company [4][14] - The company launched a new digitized security label solution to replace low-value holograms, enhancing product authentication capabilities [5][16] - The focus areas include retail loss prevention, product authentication, and digital authentication, with expectations for growth in these segments [6][19] Market Data and Key Metrics Changes - The global gift card industry is estimated to represent approximately $1 trillion of stored value, with increasing fraud impacting growth [8] - The company is positioned to help the gift card industry re-accelerate its growth by reducing fraud and improving marketing and merchandising [9] Company Strategy and Development Direction - The company aims to deliver positive free cash flow and positive non-GAAP net income in Q4 2025 while investing in growth areas [5][24] - The strategic focus is on scalable and repeatable business models, particularly in retail loss prevention and digital authentication [19] - The company is building a trust layer for the modern world, addressing the growing need for authenticity in both physical and digital interactions [25][26] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to re-accelerate ARR growth in 2026, driven by increased penetration of the gift card solution and growth in digital authentication [20] - The company remains focused on optimizing long-term potential rather than short-term revenue, particularly in the digital authentication space [17][31] Other Important Information - The company expects to rebuild its cash balance via operating cash flow throughout 2026 [24] - The reorganization has led to a meaningful reduction in operating expenses and cash usage [5][23] Q&A Session Summary Question: Update on Holy Grail - The company is progressing with recycling opportunities in Belgium and Germany, with Belgium being a full-country pilot [27] Question: Impact of retailer contract renegotiation - The company still maintains a relationship with the retailer, but the prior contract has led to a significant downsell [28] Question: Thoughts on California AI-related law - The law did not include digital watermarking language, and the company believes it does not go far enough in addressing trust and authenticity [29][30] Question: Ramp-up of retailers using Digimarc protected cards - The ramp-up will involve winning more partners, adding retailers, and expanding geographies [33] Question: Changes in Sales organization - There have been no personnel changes in the sales organization, and the team continues to move forward with their roles [34]

Financial Data and Key Metrics Changes - Ending ARR for Q2 was $15.9 million compared to $23.9 million for Q2 last year, reflecting a decrease due to lapsed contracts [21] - Total revenue was $8 million, a decrease of $2.4 million or 23% from $10.4 million in Q2 last year [23] - Subscription revenue accounted for 58% of total revenue for the quarter, decreasing 28% from $6.4 million to $4.6 million [23] - Operating expenses were $13.1 million for the quarter, down $3.7 million or 22% from $16.8 million in Q2 last year [24] - Free cash flow usage was down from $6.9 million in Q2 last year to $5 million in Q2 this year [27] Business Line Data and Key Metrics Changes - Significant progress was made in launching the gift card solution, with the first Digimarc Protected Gift Cards received by a retailer [9] - A multiyear committed deal was signed with a large European packaging company, expected to generate near 7 figures of ARR starting next year [12] - Upsell deals were signed with three existing Digimarc Validate customers, reflecting increased contract value and expansion into new geographies [13] Market Data and Key Metrics Changes - The company is focusing on three core areas: retail loss prevention, product authentication, and digital authentication, with strong demand in the gift card sector [7] - The company anticipates a reduction of up to $3 million in annual revenue due to contract renegotiations with a large retailer [18] Company Strategy and Development Direction - The company aims to build a scalable and repeatable business model, focusing on delivering trust in every interaction across physical and digital worlds [30] - The strategic shift allows the company to be less reliant on any one customer and to move more quickly with the market [19] - The company is committed to achieving positive free cash flow by Q4 2025 despite expected revenue impacts from contract renegotiations [20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the opportunities provided in the key focus areas and the positive results from increased focus [19] - The company is well-positioned to lead in the digital trust space, especially with the rise of AI and the need for robust authentication solutions [29] - Management acknowledged the challenges posed by contract renegotiations but remains optimistic about future revenue growth from new products [20] Other Important Information - The company completed a corporate reorganization in Q2, resulting in a meaningful reduction in operating expenses and cash usage [6] - The company is seeing increased interest from brands not yet included in the initial rollout of the gift card solution [11] Q&A Session Summary Question: What is the GAAP OpEx run rate at the end of the quarter? - The non-GAAP operating expense run rate was $8.9 million for the quarter, with expectations for further reductions [33][34] Question: Do you have visibility into the forward year for the Central Bank business? - The company generally has at least twelve to eighteen months of forward-looking visibility but will not provide guidance unless there are material changes [36][37] Question: Was the European customer deal signed in the quarter, and did it impact reported ARR? - Yes, the deal was effective during Q2 and is included in ARR, with potential for growth in future years [40][41] Question: How many card vendors are there to work with for the gift card business? - The company will predominantly go to market through a relatively concentrated industry of gift card manufacturers, with significant collaboration with gift card networks [49][52]