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Edited Transcript of DMRC earnings conference call or presentation 24-Jul-19 9:00pm GMT

Q2 2019 Digimarc Corp Earnings Call

Beaverton Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Digimarc Corp earnings conference call or presentation Wednesday, July 24, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce L. Davis

Digimarc Corporation - President, CEO & Chairman

* Charles Beck

Digimarc Corporation - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Ilya Grozovsky

National Securities Corporation, Research Division - Senior Equity Analyst

* Jeffrey Lee Van Rhee

Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst

* Jeffrey M. K. Bernstein

Cowen Inc. - VP

* Robin Knipp

Janney Montgomery Scott LLC - VP of Wealth Management

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Presentation

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Operator [1]

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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.

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [2]

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Thank you. Good afternoon. Welcome to our conference call. Charles Beck, our CFO, is with me. On our call today, we will review Q2 financial results, discuss significant business developments and market conditions and provide an update on execution of strategy. We have 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 on 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, prospects, industry trends and growth strategies.

We will also discuss from time to time information provided to us by channel partners and actual and potential customers about their business activities. 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 that 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 referenced is not incorporated by reference and you should not be consider it as part of this presentation. We do not verify nor vouch for any such information.

Charles, will now comment on our financial results, then I'll discuss significant business developments, market conditions, and execution strategy. Charles?

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Charles Beck, Digimarc Corporation - Executive VP, CFO & Treasurer [3]

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Thanks, Bruce. Good afternoon, everyone. Q2 revenue increased 14% to $6.2 million from $5.4 million in the second quarter of last year. The increase is largely due to high subscription revenue, which increased 45%, reflecting the impact of increased Discover and Barcode bookings over the past 4 quarters.

Service revenue was up $200,000 during the quarter, reflecting timing of program work with the Central Banks. License revenue was down $100,000 due to lower royalty reporting from licensees.

Discover and Barcode bookings during the second quarter were roughly 750% higher, coming in at $1.7 million from $200,000 in Q2 last year. Growth in bookings for the quarter included $750,000 from our contract with Walmart, signed on April 26. The Walmart agreement and 2 other new contracts made up most of the bookings during the quarter. As a reminder, we define bookings as the noncancelable, fixed value of contracts. We expect to continue to experience lumpiness in quarterly bookings due to natural variations in timing and provisions of contracts during early market development and expansion into adjacencies. Gross margin for the quarter was 65%, up 59% -- up from 59% last year, primarily reflecting the impact of higher subscription revenue.

Operating expenses increased by 5% from Q2 last year, primarily reflecting the impact of routine annual compensation adjustments for our employees. We've kept headcount relatively flat over the last 6 quarters. We plan to make 5 to 10 new hires in the second half of the year to address growing demand and delivery requirements.

Net loss for Q2 was $7.9 million or $0.68 per diluted share versus a net loss of $8 million or $0.71 per diluted share in the second quarter last year, reflecting higher revenues, partially offset by higher expenses.

Our working capital position improved considerably. We raised $19.6 million of net proceeds under our ATM program during the quarter from the sale of 336,000 shares at an average price of $60.61. We incurred commissions and fees of $700,000.

There's $9.7 million remaining on the $30 million authorized under the ATM program. Given the great success in generating more working capital in Q2 and taking into consideration the current share price and program underway to explore potential investments at sources of capital, we don't plan to resume sales after the quarterly blackout period expires. We will exercise customary care in determining the best course of action regarding the remainder of the authorization should a change in relevant circumstances or resumption of sales under the program.

We invested $7.1 million of working capital during Q2, which was just above the top end of the range of $6 million to $7 million we provided on our last call. Working capital usage was higher than anticipated due to routine repurchases of our common stock in support of our employee-restricted stock program at significantly higher prices than in prior quarters due to stock price appreciation during the quarter. As is common with public company stock plans, we repurchased shares from employees to cover their tax withholding obligations, resulting in a cash outlay by the company and forfeiture of shares by the employee.

The higher stock price during the quarter resulted in a larger tax withholding obligation. Except for the effect of share price appreciation on repurchases, cash usage would have been in the lower end of the projected range, around $6.2 million. During the quarter, we used $5.5 million of cash to fund operations and $400,000 for capital expenditures. We ended the quarter with $50 million in cash and marketable securities.

We anticipate cash usage will be between $7 million to $8 million in the third quarter, absent a significant increase in share price. Cash usage is expected to be higher than Q2, largely due to timing of vendor payments and customer receipts, which is consistent with our history where Q3 is typically the highest quarter of cash usage in the year.

For further discussion of our financial results and risks and prospects for our business, please see our Form 10-Q that we expect to file shortly. Bruce will now provide his comments on significant business developments, market conditions and execution of strategy.

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [4]

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Thanks, Charles. We had a great quarter. Among the financial highlights, revenue is up 14% over last year; subscription revenue up 45%; service revenue up 6%; gross margin up 6%; commercial Barcode bookings up 750%. Besides Walmart, we had a big design win in plastics recycling and increased working capital by $20 million through sales of new shares at an average prices of $61. All of those in the context of substantial appreciation in share price so far this year.

We rolled into the quarter on the heels of announcing a multiyear contract with Walmart to enhance products -- fresh labeled -- Fresh Product Labels and private brand packaging, and provide enabling infrastructure to enjoy the benefits of our ICP with respect to these media. Prompt high-quality implementation of these programs is our top priority.

The focus on the agreements is on Fresh Product Labels. We're making good progress preparing for launch. A successful launch of our enhanced labels in Walmart U.S. stores will include activation of Discovery throughout the relevant infrastructure at Walmart, revision of business processes where necessary, education of associates and engagement with consumers. We have a solid plan to accomplish these things. Walmart and other North American retailers are focused on waste and shrink reduction benefits of Digimarc Barcode and Fresh Product Labels.

These benefits implicate traditional markdown procedures, necessitating modifications to inventory management and POS software and business practices. We are mapping general structural requirements in our work with Walmart and other early adopters.

Benefits of faster, more reliable scans in-aisle and at checkout are important. Nevertheless, domestic retail progress is centering on waste and theft reduction. We have a great development team leading the evolution of this important area of store operations modernization. Successful Fresh Product Labels at Walmart should create a waterfall effect on the industry. Even before we launched with Walmart, momentum is building with 3 pilots in place, verbal agreements for pilots with 3 more retailers, and active discussions with several others.

Regarding Walmart private brand packaging, we've done considerable work training and orchestrating suppliers. Much of our preproduction work centered on growth rate. Our agreement contemplates movement to production in all areas of general merchandise. In support of this objective, Walmart has provided general notification to its private brand suppliers that it wants Digimarc Barcode included in all private brand packaging. This is an epic moment for us. We've been given the opportunity to perform on the world's largest retail stage, literally all the world will be taking notice. As the world's largest retailer, Walmart has an enormous global supply chain. As we're stepping up to the world stage, I think, you can appreciate better, why I believe that establishing some equity-based strategic relationships with much larger IT suppliers makes sense at this moment in the evolution of our execution of strategy.

It's a daunting task, but the synergistic effects of mobilizing the supply chain should be pretty amazing. Globalization of our platform is becoming a reality. This is a really important step in execution of strategy for us.

The third leg of our work with Walmart, building pilot programs with leading CPG suppliers is advancing. There are already some products on shelf and a growing pipeline. The primary interest of participating CPGs is improving on-shelf availability. Digimarc's role is to facilitate more timely and accurate information gathering by store associates and robots. Our initiatives in manufacturing quality assurance and recycling add impetus to the decision by CPGs to begin enhancing products.

There is also continuing interest in fostering better consumer engagement in track-and-trace solutions. We and our partners have a couple of supply chain programs being developed to improve efficiency and accountability throughout the supply cycle. The growth in applications builds the case for enhancement. Over time, I expect we will overcome all resistance with compelling demonstrations of the value of modern package designs that incorporate Digimarc Barcode.

The penetration of Digimarc Barcode into private brand portfolio for our first major European retailer is continuing apace. We are proposing that they consider adding fresh product label enhancements in anticipation of the European launch for the labels later this year. Other European retailers are tracking progress. We are discussing potential pilots with the retailers in Germany, Italy and the U.K., to begin later this year.

Given limited resources, we are focusing on a few key opportunities in Japan. One of our strategic partnership objectives is to get help serving that market.

We met with the leadership of our central bank customer consortium recently and reaffirmed our powerful collaboration to deter the counterfeiting of the world's leading currencies.

Now as you know, we scored a significant win in technical trials for improving sorting of plastics in Q2. Digimarc Barcode offers the potential to more accurately identify plastics and other recyclates by enhancing the substrates, labels and shrink sleeves of plastic packaging to contain multi-applications unique identifiers. The technical trials were led by a team of industry experts in a 3-year program known as Pioneer Project Holy Grail.

Phase 1 was completed with the report on the technical evaluations. Holy Grail 2 is being formed focused exclusively on digital watermarking as the technology of choice, providing unique identity to plastic products and their labels and for enabling the sorting and recycling ecosystem. There appears to be strong interest from Phase 1 participants to continue. Outreach is underway to increase participation to include more CPGs, both global and private brands, and numerous relevant trade associations. Approaches to governance being discussed include trade association leadership, and/or consortium approach such as what is in place for our banknote counterfeit deterrence program.

In any case, we prefer a long-term business model which is administrator overseas development of global standards, regulatory frameworks, and license administration. In this model, we would supply access to our platform in development, testing, compliance and consulting services, much as we have done for the last 20 years to deter banknote counterfeits. Unlike that program, where license rights were liquidated early in the development cycle while we were a fledgling start-up, we anticipate ongoing substantial licensing come from use of our platform and ancillary income from other applications in the demand and supply cycles that are enabled by the package enhancement. There's considerable regulatory and market pressure to continue to make rapid progress in reducing plastics waste.

European authorities have led the way in establishing aggressive targets and backing them with financial penalties for noncompliance. Industry leaders are responding with promises of progress to forestall or mitigate the effects of increasing regulatory pressures. Improving plastics recycling is an important new opportunity for users of our Intuitive Computing Platform, extending the range of applications to provide benefits throughout the demand and supply chains from birth to rebirth. In addition to intrinsic benefits of contributing to reduce plastic waste, this new area of business provides an additional points of engagement with brands driven by compelling external pressures.

Each additional application benefiting the product life cycle increases the motivation to make Digimarc Barcode, a required feature of product packaging design. Our current recycling market development activities include seeking funding for R&D to demonstrate industrial capability and to support supplier development and testing of solutions. Synchronizing our investments with legislative and regulatory waves, rising consumer consciousness, global commitments by brands and retailers, and infrastructure developments. Assisting in the formation of HG2 and creation of a governance structure for licensing and program management.

Serving as a technology provider and trusted adviser to the HG2 consortium, coordinating closely with the program administrator. Working with industry to enhance all types of plastics and enabling the waste sorting industry ecosystem. All the time fielding inquiries and continuing to educate and evangelize the key industry trade groups and regulatory bodies.

Securing funding is our #1 priority. Such funding would allow us to increase the resources that we can dedicate to these projects, accelerating the time line by which the recycling ecosystem can incorporate and deploy the platform. We are pursuing many potential sources, including grants from government agencies, dual systems operators, trade associations and foundations involved in addressing the global plastics crisis, HG2 members, and license fees from early adopters among suppliers and end-users. Once adequate funding is secured, we have dual developments thrust, in enhancement and discovery.

Several CPGs are already engaged on the enhancement side. We are engaged in discussions with numerous plastic packaging suppliers as well. TOMRA, the largest sorting equipment supplier in Europe has been a great partner so far in demonstrating improvements in sorting of waste streams. The European community has been the point of the spear in addressing improvement of recycling. Nonetheless, we are encouraged -- encouraging some retailers and CPGs and their suppliers to develop a parallel initiative in America, leveraging the foundational work already done in Europe. There are some packaging projects in process where the circular accounting goals could be integrated into undisclosed work-in-progress for other supply chain benefits.

The work we're doing in Europe should translate well into the U.S. market and other geographies. We are aware of leading indicators of a shift in U.S. political perspective regarding plastics and recycling. Two members of Congress recently announced their intention to introduce comprehensive legislation to address the plastic waste crisis. They released an outline of the bill last week that they intend to introduce in the fall. Stakeholders are invited to submit comments by August 21. We intend to participate. While the timing of substance of legal changes are uncertain, increasing government activity like this will fuel discussions with affected parties who will seek to deter or minimize legal intervention through promises of industry self-regulation. And once we prepare to comply when and if legislation becomes effective.

There is a busy schedule of upcoming industry events that we will provide in our prepared remarks for those who want to continue to monitor developments. In another area of early market development, there are 2 ambitious supply chain initiatives underway. As you know, WestRock is engaged in prospective customer with Digimarc-enhanced plant stakes and Labels.

They are now seeking alignment from leading growers to orchestrate a modernization program from farm to home. We've been doing R&D with a major produce supplier and its technology providers along similar lines. We are now seeking funding to advance pilots and production. These are very interesting and complex problems where our platform may materially improve supply chain performance. These applications have not generally been anticipated or modeled in the public equity market.

If successful, moving to the next stage, with either or both of these programs, we should be able to provide details regarding total addressable market estimates and business cases soon.

I mentioned in our last call that we are seeing growing interest in audio watermarking for authentication. Advances in technology are undermining the trustworthiness of all media, and affecting media that are relied upon for decisions of great importance to society and the economy. Digimarc Barcode is uniquely qualified to help. Digital watermarking has been proposed by several commentators as a means to mitigate deepfakes media threats.

Digital watermarking is specifically mentioned in draft legislation. We're working with our government relations team to educate policymakers about the technology and its potential contributions to mitigating these threats. We're also engaged in discussions with the concerned source of political news and relevant technology suppliers to assess how our platform might be employed to address their concerns. We see deepfakes as a leading indicator of the need for all the media having a digital identity.

It is the dawn of an era in which all media can be photo shopped, undermining credibility in a frighteningly pervasive manner. Momentum is picking up in many different areas of engagement now that we are moving to production with industry leaders. These predicted indirect group network effects are contributing to the tipping point to create value creation for our business and foreshadow our beginning to realize economies of scale.

Our supplier partner should now begin to assume more responsibility for application development and maintenance and system integration. We must continue to focus most of our investment on improving basic functioning of the platform and the quality of our support for these suppliers.

So key takeaways today include the Walmart contract signaling achievement of one of the key milestones of our strategy. We're making good progress in our programs there. Good work in these areas will lead to more opportunity. The key supplier program represents a proving ground and on-ramp for CPG adoption of our platform.

Our current generation of fresh product labels enables dynamic pricing of physical retail, offering to reduce food waste, provide unprecedented low prices to value-conscious customers and increase profits, simultaneously.

The recycling initiative bookends manufacturing quality control in demonstrating the extraordinary full product life cycle support that our platform can provide to consumer product manufacturers.

We are resource-constrained in serving existing demand. We expect demand to increase significantly. Equity-based strategic partnerships are attractive as a means to accelerate growth. On the financial front, bookings grew 750%, and we raised $20 million of working capital at more than $60 a share.

That's it for our prepared remarks for today. Now we'll open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ilya Grozovsky with National Securities.

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Ilya Grozovsky, National Securities Corporation, Research Division - Senior Equity Analyst [2]

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So I just wanted a little -- to delve into the Walmart a little bit. You guys have -- you announced that about 3 months ago. So from that time, other than the revenues from Walmart, what -- how many of the Walmart suppliers have come to you and said they want to work with you and integrate it into their products. Or can you give us a little bit of color on kind of the derivative plays from the actual Walmart?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [3]

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Thanks, Ilya. That's a -- the answer to that is more complicated than you might think. So let me explain why and then tell you what I can tell you. So as we advance in the execution of strategy, we plan for suppliers to take over more of the activities involved in delivery services based on the platform. So many suppliers and, what we call end users or CPGs in the case of packaging would go to their suppliers of pre-media services. And so we might not know all of them that are being contacted. There was a general notice sent out to all private brand suppliers for Walmart recently. I don't know how many there are. I would imagine thousands or tens of thousands. And so the ecosystem is filling up with awareness of the need to learn more about Digimarc and to get onboard. So we've seen a rising -- I'll call it rising temperature, if you like, throughout the supplier community associated with getting going on Digimarc Barcode. Because of the size of Walmart, the awareness becomes extremely broad.

But all of those suppliers supply other customers than Walmart. And so that means that as they become more expert, they can provide operating leverage into account acquisition in the rest of the industry. That's why I say it's such an epic moment for us. So I don't have a number, and I can't have a solid number for you, but there is a lot of interest, a lot of communication going on across the board in the packaging area. On the fresh label side of things, the community of enablers is the printer companies. And we're working with all of the major suppliers in that regard. So there wouldn't be a wave of additional printers showing up as we have the industry leaders already engaged. With respect to the discovery side of things that is the scanners vendors and POS vendors and so forth, again, we are already engaged with the major suppliers, major global suppliers. We are trying to figure out how to deal with some inquiries from geographies, outside of the core geographies that we've targeted. So we're still struggling a bit with how to deal with those situations. But we found some situations what looks like we may be able to provide the platform benefits without substantial direct involvement, which, again, would be consistent with mature state of the evolution of the model, but we're, I think, just getting to the point where we might be able to contemplate such things.

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Operator [4]

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Our next question comes from the line of Jeff Van Rhee with Craig-Hallum.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [5]

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So several for me, Bruce, just - I guess just sort of along the lines of prior question, when you look at the pipeline and the momentum with respect to the largest potential revenue impact, how -- where do you see the most momentum? I mean, I think, you gave a lot of color, but I am just trying to mentally rank order. I mean, you've got retailers as I would break it down, you got your retailers, you've got your CPGs who may be doing it for their own packaging. You may be -- have CPGs who are trying to do it for production packaging, filling type engagements or recycling. Those seem to be kind of the 4 core use cases. So I guess, to simplify the question, how has the pipeline of those use cases changed in the last 6 months?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [6]

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It's gotten considerably more complicated in the past 6 months. And so the growth can come from many different places, and all of them out there risk with respect to timing. But we clearly now are engaged with industry-leading retail. And so we expect more retailers to be coming on board. They can come on board with respect to packaging or labels or both. And you know the economics of each of those offerings. We have a couple of supply chain projects in the works that weren't contemplated much longer than 6 months ago.

Those will have some financial impact, we presume. Our position on recycling, right now, is we want someone to be putting up some money, and if we're successful that could have a significant impact as well.

And then the CPGs are developing more interest. As I note here, we have this model for the platform license fee associated with a SKU of $50 per year, where as more and more value gets added to that basic enhancement, the $50 becomes more and more tolerable and the decision to move to Digimarc is easier to make. And so that will continue to cumulate. And as it does, I don't know what effect it will have in terms of the speed at which these things are accomplished. And then we have some areas, new areas that are opening up that may involve additional revenue opportunities.

Layered on top of all of that is the ongoing examination of opportunities for equity-based strategic relationships. And those relationships may have income aspects to them. I expect that we would prefer that in all cases. And so that may have another impact. And so there is a cumulative effect of the growth of the use of the platform here consistent with the notion of network effects that is going on this year. So it's a very interesting year, but it creates larger opportunity, but greater ambiguity in terms of sort of where the largest share comes from. So I hope that answers your question adequately, Jeff.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [7]

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Yes, I appreciate that. Just, I guess, sort of pivoting, you covered a lot of content really quick. So at the risk of being redundant, can you just go back and revisit the ATM, you paused it. I mean you use some, still got some remaining. And then in several cases around the plant stakes and some of the similar initiatives, you mentioned on a number of occasions strategic funding, you clearly are emphasizing there. But just kind of revisit that decision to pause the ATMs, why now is definitely the time around strategics. And then you mentioned specifically as it relates to WestRock instance or others that you might seek funding for that specific to advance production in that specific instance, like how narrow could the strategic funding be to particular use cases? Just maybe, fill in a few gaps there?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [8]

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Okay. Those are lot of questions, I'll try to keep my answer manageable. So we don't have any plans to resume the ATM at this time. And it's a combination of circumstances. The share price, the extraordinary success we had during Q2, the balance sheet condition, the spend rate that we're operating under and the program to engage strategic investors. Plus these new initiatives, market initiatives where we're going to see how it works here. But we're taking the position that show us the money. And again, this is all, if you like, a natural development in the evolution of the execution of strategy because this is a platform that we're providing. And so as we become, more obviously, the platform supplier and we engage more companies in investing their capital to build them the platform, we will gain a lot more financial leverage. And so it's a little hard to characterize it just yet. But as I said, I think, we are getting to a point where we may be able to model some things better before year-end. And we hope to find more business with existing customers as well. And that, of course, is dependent on how well we execute on the business we have, which we're very focused on doing. So with all that context and continuing the ATM just because we have authorization didn't seem appropriate.

We thought we would just pause for a while here and carry on with all of these other opportunities to find capital from income sources and investment sources.

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Operator [9]

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Next question comes from the line of Jeff Bernstein with Cowen.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [10]

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Bruce, couple of questions for you. So you guys just did a webinar with Adobe about brand image protection and tracking. And I was wondering how old that relationship is or what exactly is going on with you and Adobe, if there is anything formal there? And then I have a couple of others.

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [11]

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Well, we've had a relationship with Adobe forever. And it has always been a healthy relationship, although not at the scale that we think it will be someday.

And so we're engaging with them on a number of different activities. The one you saw had to deal with the digital image copyright protection and license management. And so you know that they're very important to us and they are the foundation of all of our image enhancement tools. And so we will continue to work hard to engage more closely with them. And I'm excited about what that increase collaboration could mean for us if we can convince them to allocate resources in our direction.

They are big, very successful. I admire their work, quite awesome. And we want to demonstrate that we're a worthy partner in many aspects of their business. So we think that we have relevance in lots of areas, as I indicated in the Capital Day presentation. So you can envision that we are continuing to work on developing a broader relationship with them.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [12]

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Great. Great. And then if you could just give us an update on the hangtags opportunity? What's going on with the current customer? And anyone else looking at that?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [13]

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Yes, we're continuing to deliver to Costco. And you might imagine we're suggesting it to some other general merchandisers. So that's about all I can say about others at this point in time. It's nothing announceable.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [14]

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Got you. And then to the extent that people are able to find non-private label products in Walmart that are Digimarc labeled, are those actually in production? Or could it be that those are part of the pilots?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [15]

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Well the pilot is production, it's limited production. So the way that all of the companies that we deal within consumer products operate, retailer and manufacturers, is they -- sort of 3 stages with a new technology like ours. There is the -- it's like laboratory testing, which can go to some stores in a very limited fashion and that's called proof-of-concept. And then pilot means limited production. So it's the intermediate step on the way to full production. And the reason that I do a pilot is to determine the effects of scaling on what was demonstrated in the proof-of-concept. So the products that are in the stores are real products in real production, but just limited production, may be limited in the sense of a particular SKU or in some cases, where channel segmentation is common, they could be delivered to a particular retailer.

And so the big retailers like Target and Walmart and Kroger and Costco and so forth. Some of the products they have are built specifically for them.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [16]

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Got you. So just because we found a product from a CPG you haven't talked before does not mean that, that is a win yet, that could still just be in a pilot?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [17]

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I would like to think we earn the business every day. So I do think we will become routine and standard as we have in most of the areas in which we've operated historically.

So for a while, yes, I would say that will be true everywhere that there could be a reversal. But I think that's unlikely.

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Operator [18]

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Our next question comes from the Robin Knipp with Janney.

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Robin Knipp, Janney Montgomery Scott LLC - VP of Wealth Management [19]

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So Larry Logan mentioned in his recent remarks at a conference that the next step of the Holy Grail 2 in total to take 6 to 12 months. I know there's lots of pressure from the industry to increase the recycling rights, but could this really be ready and could we really have products ramping into production by the start of next year? And then I have one follow up after that.

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [20]

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Well, Larry was talking at an industry event. I think, he was trying to encourage everybody to hustle. I wouldn't take that as a project time line that you can bank on.

We'll go as fast as we can go. The hang up for us is whether we invest your capital in it or someone else gives us some capital to invest in it. My preference is towards b. So we're not speeding things up right now. We're kind of impeding progress as we look for capital. And by capital I mean primarily income, but it could be income and/or investment capital" from the recycling industry. But we want them now to say, "Okay, you have your design win," we -- a large group of stakeholders have determined that you have relevance. So we're just saying, "Okay, fine, where is -- show us the money." And that will not speed things up until the money is secured.

So again, I wasn't present at Larry's presentation, but I want you to be conscious of our approach to this particular market opportunity. We think it's a very large one and a very good one, but we have been able to make the progress we have and enjoy the access to capital that we've enjoyed because we are prudent in the scope of our activities and recycling is a big businesses with lots of players. And much of the activity is in Europe, which is remote and serviced by a small office of ours. So we'll go as quick as they want to go, I guess, would be the fairest answer I could give you.

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Robin Knipp, Janney Montgomery Scott LLC - VP of Wealth Management [21]

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Okay. Fair enough. And then just as a follow up, in same vein, I understand there are many, many different ways to meet around access to your platform as far as the recycling app is concerned. But on the Q1 call, you said that there was no reason to think that the per SKU cost would be less than $125, does that still hold true at this point?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [22]

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Yes, it's a straw man. Again, we're open for business. And depending on what kind of -- I call it governance structure, you understand where I'm getting at. Recycling needs global standards and it's populated by very large companies. And I don't think we want to do it as a hobby. And so we're trying to talk to various very large companies and trade associations and government agencies into finding some collaborative structure, where we can license our platform and then be a service provider. I think that's the ideal model. But if they want to give us enough money to grow a big headcount associated with serving that application market, fine, it's okay.

It's just not our preferred approach. So in that case, then we would enjoy profitable participation very early, and could develop a very large income stream without making a large investment. So that's the preferred approach at this point in time. Whether that's metered at $125 or $150 a SKU or so much per ton or a license based on scale of business or recyclable material, there's a whole bunch of other models that could be applied. But I think as a means of estimating addressable market, that's fair. And that's what I intended to say previously and still believe to be true.

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Operator [23]

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Our next question comes from the line of Jeff Van Rhee with Craig-Hallum.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [24]

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Just a couple of quick follow-ups, Bruce. Just -- first to the last question, just to be clear, you said your vision is to -- you're looking for collaborative structure that can license, you don't really want to be a service provider. Just expand on that because I would assume that's what you're doing, right? Licensing the technology. When you say be a service provider, are you talking about actually providing the process help to get sort of packaging migrated over to the solution or some other variation of service? Maybe you can just clarify what do you mean by service provider?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [25]

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Yes. Yes. There is this -- I call it ambiguous space between general licensing of the platform and the specific application supporting recycling of plastics. In that space, someone needs to determine how to effectuate the enhancements in molds, okay? Because that's how we will get into plastics. Well, we're not experts in molds. And there are probably thousands of providers using them. So who wants to do that work, okay? It is an example of what's in the -- that's interstitial, where I would like someone else to do it.

And then, we -- someone needs to build the firmware and the, I'll call it, the module that enables the improved sorting of materials and waste streams in large recycling facilities. And there are at least tens of thousands of recycling facilities in the world. And there are major suppliers like TOMRA and major players like waste management, who buy equipment and supply equipment in that area. Well, I would prefer not to learn about all of those things. I would prefer to have someone developing the requirements, giving them to us, having us do some R&D and delivering back basic software development kits into that market place, as opposed to us building that software. So those are areas where there is a, if you like, a fairly wide range of involvement that was possible. So we're arguing for minimal involvement in those processes. And yet, what we found in early stages of market development is that the end users, the stakeholders, the primary sources of income, want us involved because we're the experts and they want to hold us accountable. And we want to be involved because we want to ensure high quality. Over time that should become less relevant. That is that we should be able to build great tools for the suppliers in all kinds of product markets and let them adapt them to the requirements of that market. So that's the ambiguity right now as who's going to do that work in the middle there.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [26]

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Okay. Great. Yes, that make sense. So then just the second, back to the bookings number. I mean you went through it and kind of gave the bookings number. So you had 2 other new contracts in the quarter. Obviously, I know you are always protective of names, but talk about some incremental detail, geography, use case. Is this retail, is this CPG, a little color on the 2 incrementals?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [27]

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Yes, I don't think we're ready to do that yet. We expect to be publicly disclosing information before year end in those relationships, but I don't want to start down the path of trying to facilitate guessing on it. So unfortunately, I don't think I can...

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [28]

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Without talking vendors or size or anything else? Are you able even just to give a, at least some sense of what the use case is? Whether we're talking CPGs or whether it's a retailer -- thermal retailer, IPM, checkout, I mean, anything along those lines?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [29]

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I think I prefer to wait.

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Operator [30]

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And at this time this concludes our question-and-answer session. I would like to turn the call back over to Bruce Davis. Sir, please proceed.

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [31]

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All right. Thank you very much everyone. We appreciate your continuing support and confidence in the company and look forward to talking to you again soon.

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Operator [32]

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