Greetings, and welcome to the Digimarc Corporation Q3 2025 Earnings Conference Call. [Operator Instructions] 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 McCormack, 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 prepared remarks in the Investor Relations section of our website and will archive this webcast there. For those of you dialing in, this is a reminder that we are simulcasting a presentation that Riley and Charles will walk through today. If you would like to follow along with the 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 Digimarc'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 the 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 3 focus areas are retail loss prevention,…

Thank you, Riley, and hello, everyone. Ending ARR for Q3 was $15.8 million compared to $18.7 million for Q3 last year. The decrease reflects $3.5 million from the DRS contract that lapsed in Q2 this year. Excluding this headwind, ARR grew $600,000 year-over-year. That growth, however, was largely muted by higher other customer churn and are choosing to be strategically price aggressive on products outside of our focus areas. As I've stated previously, we expected these impacts as we sharpened our go-to-market focus. We believe the churn is now largely behind us, except for the renegotiation of the retailer contract we mentioned last quarter, which will reduce ARR by $3.1 million in the fourth quarter. Despite this headwind, we expect ARR to trough in Q4 and to reaccelerate thereafter into 2026, largely from increasing penetration of our gift card solution and growth in digital authentication. Total revenue was $7.6 million, a decrease of $1.8 million or 19% from $9.4 million in Q3 last year. Subscription revenue, which accounted for 60% of total revenue for the quarter, decreased 13% from $5.3 million to $4.6 million. The decrease largely reflects the impact of the expired DRS contract I referenced on the prior slide. Service revenue decreased 27% from $4.2 million to $3.1 million, reflecting lower government service revenue from the central banks as expected, given the lower 2025 program budget we have discussed on prior earnings calls, and no revenue from HolyGrail recycling products in Q3 of this year as those projects concluded earlier this year. Subscription gross profit margin was 86% for the quarter, flat with Q3 last year. On the last earnings call, I shared that we expected to see a downward blip in our subscription margins for anticipated costs we would incur to migrate our customers from legacy platforms…

Thank you, Charles. In the wake of the relentless acceleration of AI models and agents, a vacuum of trust and authenticity is being created. Trust is fast becoming the only currency that matters and the future will belong to companies that make that currency scalable. We believe Digimarc is ideally positioned to lead that charge. We are focused on delivering a future where humans and intelligent systems alike can verify what's real, protect what matters and move forward with confidence. We are focused on filling the ever-expanding vacuum by positioning ourselves to deliver trust in every interaction, spanning both the physical and digital worlds. We are building the trust layer for the modern world, a layer that is needed now more than ever and is forming a massive opportunity we were created to deliver. Operator, we'll now open the call for questions.

[Operator Instructions] Our first question comes from the line of Jeff Bernstein with Silverberg Bernstein.

Just a couple of unrelated questions. One, can you just give an update now on HolyGrail? What's happening there now?

Yes. So Jeff, it's in our slide. We gave an update on what we're doing and not just HolyGrail, right, across all recycling opportunities. So as we announced a couple of quarters ago, Belgium is getting going and there's conversations in Germany. And actually, we included a link in our deck. You can click on some more details on both of these.

Okay. And so these are still -- Belgium is a full country pilot essentially, right?

Yes. Jeff, if you go to the website, you can see all of this. It's on flexibles, but yes, it's across all of Belgium.

Yes. Got you. Okay. All right. And then you mentioned the impact in Q4 of the retailer contract renegotiation. Does that mean that there's still some revenue there or there's still something going on there or is it just that the contract lapsed and there's the impact in Q4?

Yes. We still have a relationship. It's still a value customer. We're not going to talk about any customers by name or details, but I would point you, Jeff, to what I shared in the last call in my prepared remarks and an update Charlie provided today, but they're absolutely still a customer, and have wonderful opportunities with them across loss prevention specifically in the gift card space.

Got you. So -- but that prior particular contract is over, not being renewed?

Correct. We have a contract renegotiated that led to large downturn. So yes. But we still have other contracts open with them, Jeff.

Right. Understand. Understand. No, that's perfect. And then just interested in your thoughts around the -- I guess, it was AB 853 in the final version or whatever, but the California AI-related law that got passed that had some digital watermarking language in it. And what, if anything, it means? Or is it sort of really a long-term kind of opportunity?

Yes. Unfortunately, this one did not have digital watermarking language in it. They talked about a couple of requirements that might play on this space. Our belief is a couple of things, and this hasn't changed, is that, first of all, there is not a single system of trust and authenticity in the world that is based on, I guess, fakes or synthetic content being marked as such, right? It's always an opt-in because that's where the value comes if it is removed. So one, I would -- our belief has always been that, yes, it might be important to label certain things as AI-generated. But really what's important is giving human beings the ability to optionally to not mandate, right, respect privates to mark their items as authentic. That's how systems of trust and authenticity work. And then two, without having a permanent tether, right? So what this law is talking about is metadata. And metadata right now -- until Internet is completely re-architected, which I don't think is going to happen in the next couple of hundred years, metadata is stripped out. So excited to see governments take action in terms of a step in the right direction. I don't -- our belief is this doesn't go anywhere near far enough and the previous bill from last year would have addressed all of these concerns, and we'll see how this plays out. But I would also point you to, Jeff, when we talk about our digital space, right, you'll notice that providence and authenticity is not necessarily an area we're focused on right now. That's for a couple of reasons. This might be an area where good enough for the time being is good enough, but more importantly, regulations are not quick catalysts for revenue. So even when a regulation were to take place and -- look, we've seen this in your first question about recycling, right? PPWR passed a couple of years ago, it still takes the time. So we're not looking for regulation to drive business. I think regulation is a nice sort of cleanup, maybe to get the last 10% or 20% of the market. But we're focused on selling things that actually people are really interested to purchase themselves because of an immediate ROI, not because some government says something because some other government is going to say something else.

[Operator Instructions] Your next question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group.

This is Vijay Homan on for Jeff Van Rhee. Just kind of a quick one. You've got the first few retailers using Digimarc-protected cards. Just kind of curious how that's going to ramp? Is that about winning more partners, adding more of their retailers, adding geographies? Just kind of what will be the drivers of that ramp? And what are the steps that are going to take you from A to B?

Yes. Great question, and the answer is all of the above, right? So our focus in the industry and our partners' focus is on lighting up more and more retailers, lighting up more and more brands for those cards to flow through those retailers both in the U.S. and other countries in North America and countries around the globe and also cards that aren't necessarily sold through these existing channels today. So the answer is all of the above. What we've talked about with our initial rollout was the results, and that's giving the confidence -- the industry the confidence to take this in a broader direction across multiple different vectors.

Okay. Got it. And then just one more. You kind of -- you made some executive changes to the sales org obviously with Tom Benton leaving. If you could just walk us through some of the go-to-market changes that have come out of that and kind of some of the additional steps you foresee taking?

Yes, I'm not sure what you're saying in terms of what's the go-to-market. Can you ask the question maybe more directly where you're trying to get at?

No, I was just curious if there's any updates there. Just anything kind of that's changed now that the personnel is different.

No, nothing has changed. We still have the full rev team and marketing team moving forward with their jobs.

There are no further questions at this time. This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.