Bruce Davis - Chairman, CEO Charles Beck - CFO, Treasurer

Josh Nichols - B. Riley Jeff Kessler - Imperial Capital Glenn Mattson - Ladenburg Thalmann Kevin Hanrahan - KMH Capital Advisors Robert Sussman - Bentley Capital John Grimley - TJW Capital Robin Knipp - Janney Montgomery

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 Q4 financial results discuss significant business developments and market conditions and provide an update on execution of strategy encompassing progress during 2015 and our goals, objectives and outlook for 2016. This webcast will be archived in the Investor Relations section of our Web site. Please note that during the course of this call, we will be making certain forward-looking statements, including those regarding revenue recognition matters, results of operations, investments, initiatives 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. Please appreciate that we are providing this information as we understand it was represented to us by these customers and partners and we do not verify or vouch for such information. Such forward-looking statements and statements of our partners and customers are subject to many assumptions, risks, uncertainties and changes of 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 any assumptions, projections, or other forward-looking statements to reflect events or circumstances that may arise after the date of this 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-K that we expect to file shortly. Charles will begin by commenting on our financial results. I’ll then discuss significant business developments, market conditions and execution of strategy. Charles?

Thanks Bruce. Good afternoon everyone. Revenue for the quarter was $5 million compared to $5.9 million in the fourth quarter of last year. Most of the difference was due to lower licensing revenues and timing differences when services were performed. Gross margin was 60% for the quarter, 2 points lower than the fourth quarter of 2014 reflecting the impact of lower license revenue. Operating expenses were $500,000 or 6% higher than Q4 of last year reflecting previously noted increases in staffing for sales, marketing and operations to support our market development activities offset in part by decreased spending in R&D and G&A. The net loss for the fourth quarter was $5.3 million or $0.62 per diluted share versus a net loss of $9.2 million or $1.23 per diluted share in the same quarter last year. The lower net loss largely reflects the impact of reporting a full valuation allowance on our deferred tax assets in 2014. Revenues for the year were down $3.5 million reflecting a $4.4 million decline in license revenue largely due to completion of payments from certain licensees. Growth in services and subscription revenue were not adequate to offset the decline in license revenue. We do not anticipate further significant declines for license revenue in 2016. Gross margin for the year was 60% inline with our budget assumptions at the start of the year. We cut operating expenses by 4% reflecting lower spending in areas outside of sales marketing and operations, areas where we recently increased staff to support customer acquisition and services and our expanded channel partner program as noted in our last call. Our working capital position is in good shape with over $39 million of cash and marketable securities and no debt. We invested $3.9 million of our working capital during the fourth quarter, which includes $2.7 million to fund operations and $700,000 for CapEx. For the full year, we invested $12.8 million of our working capital, including $9.7 million to fund operations and $2.1 million for CapEx. We expect to use working capital during Q1, usage of working capital during Q1 to be around $4 million to $5 million. Our legacy business and Counterfeit Deterrence, Copyright Protection and Licensing are stable and should grow at modest rates over time. We continue to support a number of licensees to build into play applications based on our technology. The 2016 work plan for the Central Bank is committed and formalization of the 2017 work plan is underway. We noted in the middle of last year that we would work to get the Guardian cash flow run rate to break even or better, which we accomplished in Q4 earlier than anticipated. For further discussion of our financial results and risks and prospects for our business, please see our Form 10-K that we expect to file shortly. Bruce will now provide his comments on significant business developments, market conditions and execution of strategy focused on our progress in developing the market for Digimarc Barcode and Discover.

Thanks Charles. We had a great finish to 2015. In our call a year ago, we've just returned from a successful NRF show that marked the first anniversary of the launch of Digimarc Barcode. At last year's show we announce that the first product from our first customer Wegman's that reached store shelves and that 85 of their stores were equipped with [digilogic] [ph] scanners with Digimarc Discover software. Digilogic demonstrated increased support including Digimarc software in its full line of scanners SGS, the industry leader in brand deployment was in our booth announcing support for our platform. We also announced an agreement with Shazam to create visual Shazam-ing based on our platform and the beginning of a collaboration with HP on linking printing materials to the Internet via smartphones and other mobile devices. One year later, the many investors who attended the NRF this year witnessed first hand the tremendous progress we've made, our broader portfolio of important relationships and the growing interest in our intuitive computing platform built on Digimarc Discover and Digimarc Barcode. For those, who did not attend progress in market development was evident in every dimension of our presence there, our booth, the number and quality of partner exhibitions and the scale and quality of prospects [indiscernible]. There were numerous announcements, demonstrations and testimonials prior to and at the show. First and foremost, we announced the landmark collaboration within industry association GS1. The U.S. operation of the organization that maintains global standards for barcodes. We will be working with GS1 U.S. to help the industry served by the association to make effective use of the Digimarc Barcode. GS1 U.S. is integrating the means to license Digimarc Barcodes into their Web site where they are branded DW codes so that their members can license the codes directly through the official association site where they conduct other barcode related business. GS1 U.S. who also market, educate, train, facilitate excess to related services to their 300 member businesses. One of the key objectives of the collaboration is to improve product identification for retailers and consumers, the brand certified accurate product information via Digimarc Barcodes. We're planning to officially launch DW codes at the GS1 connect conference, the annual knowledge and networking form for GS1 members and suppliers being held in Washington DC, June 1 to 3. We also had tremendous support of the show from global retailers in the scanning industry. Datalogic, Honeywell, MCR and Zebra all showcased products enable to read Digimarc Barcodes in their exhibits. We expect many product launches from these vendors this year expanding the global infrastructure to provide retailers with operational efficiencies made possible by Digimarc Barcodes. All leading retail scanner vendors are now on board providing support in most of the world's important markets. Microsoft demonstrated Digimarc Barcode as an element of its vision for modern point of sale scanning using a Datalogic Magellan 9800, Microsoft Surface 4 and product packaging so the attendees could experience the powerful combination of Digimarc's platform with Microsoft retail software solutions. We announced and expanded license agreement in collaboration with HP to deploy Digimarc Barcode's in HP's Link technology enabling a visible watermarking to create dynamic adaptive digital experiences from any printing materials including product packaging, photos, text books and educational materials. The new agreement enables HP to respond to customers increased demand for variable printing and materialized content in HP's targeted vertical markets. We announced prior to the show that global brand deployments supplier Schawk had joined our channel partner program to expand access to Digimarc Barcode brand enhancement services availability of the store brands and consumer products suppliers. With the addition of Schawk to our previously announced partnership with SGS, we now have the number one and number pre-media companies serving the world's leading brands. These partners lay a foundation for globalization for Digimarc Barcode enablement without material expansion of Digimarc's operations making quality of services available broadly and sooner that would be possible if we start to serve the customers directly. Our goal here is to expedite market development and gain financial and operational leverage for Digimarc. Our capability has further expanded with the announcement of Perrigo, the world's largest manufacturer over the counter pharmaceutical products for the store brand market that also adopted Digimarc Barcode. We also introduced a promising application of Digimarc Barcode for variable weight food product labels in partnership with Bizerba, a worldwide leader in manufacturing retail scales and weight price labeling equipment. The company employees more than 2500 employees worldwide and operates in over 120 countries. Our considerable amount of grocery purchase is involved variable weight items such as from butcher and deli departments. The barcodes in these products are often difficult to read, we tell us in consumers' lack of means to effectively communicate recipes and cooking instructions. Variable weight product labels enhanced with Digimarc barcodes can address both these circumstances delivering faster or more reliable scan to check out as well as enhanced consumer messaging. We announced an important supply chain application prior to the show, the smart mobile app for Walmart suppliers from Rockfish delivers real-time product inventory data directly to Walmart suppliers providing an overview of what products around store shelves and in the back room to facilitate optimum in-stock conditions. The app is used by dozens of Fortune 500 brands with 48,000 active users and more than 5000 Walmart operated stores and clubs. We feature several examples by leading brands of Shazam's visual Shazam-ing capabilities enabled by Digimarc. Further examples of enhanced display marketing were also on hand including PoP signage, cardboard and the file displays in dynamic poster advertising. Our customer showcase included sample packaging from the Kraft Times company, Perrigo, Wegman and New Seasons market. More recently another application new source audio launch, SourceAudio detect for tracking music usage and audio visual works noting that in their words, "Beta testing had been a huge success and we already have close to 3 million tracks watermarked via the service." SourceAudio detect is the first solution of it's kind that's able to determine that music is part of a show or a commercial, on TV for determination of licensed royalties. We announced the SourceAudio relationship in April of last year. Since the 2008 sale of ID systems, we have invested in building out and patenting an intuitive computing platform with unprecedented reach and performance. The key elements of infrastructure for Digimarc Discover and Barcode are the registration [indiscernible] with media objects, discovery of these objects by relevant computer interfaces and provision of application based on the discovery. As most of you that platform has these three layers. At the base is Digimarc Barcode, the most broadly applicable reliable efficient and a scalable means of media identification in the world, the second layer Digimarc Discover provide seamless multi-modal discovery of media using not only Digimarc Barcode but also conventional barcodes and QR codes to identify things. We worked hard to include prudential barcodes scanning the best of the class for smartphone users, Digimarc Barcode and Discover provide the foundation for the third layer, a growing application developed for community, the scope of which encompasses all things done today with barcodes and all things that could be done with barcodes in media that are not conventionally barcodable. Today this community includes licensees like Nielsen, HP, Shazam, Scanbuy Solution, [indiscernible], TerraMetrics, Verrance and [indiscernible]. We are improving the efficiencies of licensing of service delivery via our Web site and associated business processes to promote and serve a much larger number of application developers from around the world. Participation in our channel partner program increased significantly in 2015. Expansion and elaboration of infrastructure via our channel partner program is important and that allows us to focus our core competence and identification in discovery technologies, consistent with our goal of making efficient use of working capital and serving as force multiplier in sales and marketing and providing ready access to multiple sources of supply, fastening growth and globalization. Sources of Digimarc Barcode now include the two leading brand deployment firms and the world's largest supplier of private branded pharmaceuticals. Digimarc Discover has enabled in dozens of smartphone applications notably including Shazam and Scanbuy. We are aggressively marketing Discover to retailers to provide brands with a choice of third-party engagement for retailer application and to support enhanced consumer engagements. Wegman is our announced retail licensee. I mentioned in our last quarterly call that additional retailers and brands have begun enhancing product packages and labels of Digimarc Barcode albeit generally in small initial quantities. We believe we are making good progress in these engagements subject to the challenges of being a small supplier to a very large enterprises. The NRF was a great source of lead. More very important perspective customers are in development now. As you know, packaging is a subset of media that can be enhanced using Digimarc Barcode. Our channel partners have many brand relationships for some of which are visibility as limited by all stages of development of our channel program, competitive sensitivities among suppliers and other factors. The traditional barcode had a transformative effect on the global economy. We expect the Digimarc barcode to provide an efficient reliable, scalable and economical success of providing significant benefit for multiple industries. We are witnessing the beginning of the global application developer community that will build expansive value on our platform. Our financial model provides access to the platform and return from modest time and value based payments by the owners of the benefited media. We commonly discuss our $50 per product annual license fee for instance. We understand the scale of this opportunity alone is enormous representing hundreds of millions of items that could benefit from the platform. We will continue to report on progress in packaging because it is ill understood objective measure of progress. But I want everyone to appreciate that our vision of the relevance of the platform has done far beyond us and that I expect there will be increasing signs of this relevance as the market continues to develop. Digimarc Discover, Digimarc Barcode, the barcode of the everything and the intuitive computing platforms they enable a transformational effect on the global supply chain. As we broaden awareness and demonstrate that our intuitive computing platform can do everything a conventional barcode does but more reliably much faster and with no human artifacts, we continue on a path to profitable growth and significant appreciation in the value of our company. The establishment of our collaboration with GS1 was an epic moment in the execution of strategy for Digimarc Barcode; we are hard at work on implementation. Likewise, we are increasing the support for our channel partners and improving customer access to service this via our Web site the GS1 site. There is obviously much more to be done and continuing investment as necessary to meet our goals. The increased rate of investment carries within an awareness of the need to demonstrate a path to significant revenue growth and profitability. We are intently focused this year on increasing sales to our direct sales force GS1 and Digimarc Web sites and our channel partners. NRF was an inspirational show on every respect and a great source for many very important leads we are now in a month into following upon. There are numerous important accounts that we hope to close, newly enabled scanners to launch with market leading OEMs and new application areas under development. We anticipate providing more details on our next call at the end of April or sooner. That's it for the prepared remarks and we will open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Josh Nichols with B. Riley.

Yes. Hi, Bruce and Charles. So 2015 was the year lot of channel partners shipped growth and a lot of indications that the company's technology has proliferating quite nicely. What are some of the specific milestones that you look for in 2016 that would make that a success in your eyes?

Well, as I mentioned in the prepared remarks now that we have the basic infrastructure in place for each of the layers of the system, we now need to build up the application community serving clients and add clients. In order to do that effectively, we need to nurture each of the elements of the sales interface, the channel program, the direct sales capability on our web interface and GS1 web interface. So we continue to work on all of those areas and investing in them in order to begin to demonstrate revenue growth and margin improvement. So that's how you should measure our success. We are focused on beginning to deliver significant customer wins.

Okay, great. And then, regarding the channel partnerships, that's a real opportunity to leverage market growth and win some customers given that they've a large customer base as well. Are you seeing a lot of indications that they're helping drive sales, and any examples you could give?

I can't give any specific examples but they all have tremendous resources to benefit our company because two of the three major enablement partners are new that is Perrigo and Schawk. And three of the four scanning partners are new. Then GS1 is new. We've a lot of work to do to optimize their effectiveness. That's our obligation. So we're very focused on that right now in helping them to be more effective in representing us and serving their clients with a thorough system.

Great. And last question for me, I know you mentioned that you thought the barcode -- the testers of barcode that seem to be progressing as far as, you have people using it for private label as well as major brands for logistics and the back of store -- and back of the store as well as consumer engagement in front of the store? Any further detail you could provide surrounding that?

No. We're not at liberty at to discuss any of the early work of customers until they decide to announce it. There is a pretty broad range of early development work going on. And many of the studies that are being done relate to solving very significant problems that perhaps that none of us would have anticipated where it might be applied to early in market development. So that's why I pointed out in the remarks here that. We have to be careful not to think too simply about the needs of the market. We are in fact, we believe the natural successor to the conventional barcode which has an amazing array of applications built on it and that we can perform better than it does in those things. But we also have capabilities that are not present in the barcode enabling applications that have not yet be done that also interest people. And there is coalition of forces in the marketplace working in our favor as we retailers under increasing margin pressure. So the operational efficiency is critical and relatedly packaging is moving into a crisis situation in many sectors because of the inability of the real estate of the package to adequately communicate to the modern consumer, the brand message that should be communicated at the point of purchase and during the use of the product. And so, the head of NRF said in the keynote address that the show the retailers now the buyer in another words where ever the buyer is, this retail -- used to be a place you went to. But now, it's ever present. And it's symbolizing prior discussions that we've by the buy button. So the notion is anytime you find a brand impression, you will be able to buy it and in fact that's what is happening that more and more retail is moving to the point of the consumer rather than the consumer moving to retail.

Great. Thank you very much. I appreciate it.

Yes.

Our next question comes from Jeff Kessler with Imperial Capital.

How you're doing? Your collaboration with and your inclusion in GS1, you spoke about what they can do for you in a broad sense, can you get a little more specific as to what eth steps are for them. And also what are the limits that GS1 can provide, where do you have to -- where do you have to take on the responsibility that they has an organization cannot.

While GS1 is an industry association serving multiple industries and their objective in this relationship is to help their members to make effective and efficient and timely use of this platform. And so their main job done is to provide access and to educate and to serve as a voice of the customer for us. So that we can make good investments and to help the industry over time to make maximum use of the platform and things that are to be developed. Practically speaking, the exercise beings with the integration of capability to license Digimarc Barcode known as DW code in their environment into their web portal. And to then launch DW code at the major event of GS1 on June 1. And with those two significant market development activities comes along a lot of important work for quality assurance for members having to do with making sure that one -- someone represents that they own a barcode G10 as is called in the industry that they in fact do. And that the information associated with that in the DW code universes is accurate. And we're both committed to generating a minimum set of information for the benefit of consumers and the supply chain that identifies the product to which the DW code is being applied. And so those are all the kinds of things we are working on right now. There is a lot of work to do -- the ideal of the relationship with GS1 is to create a model that can be exported to the global community of GS1 member organizations. So GS1 is the foundation of good planning for globalization.

Okay. As we talked over the last year, as you built up the ecosystem and infrastructure to support this business. You've also built up more IP around it. Without getting to the specifics, I know you're not going to give us specifics, what types of new IPs, what types of new patent protection are you doing to make sure that as you move forward, you have protection as a first mover in this area?

Well, we've a very large patented state as you know. And we continue to file out of significant rates. And we're focused in light of the changes in the licensing market on building a significant sustainable competitive advantage for the platform. And so, whereas in prior years, we may have been focused on license income flowing from the patent activity. We are now quite focused and as you know we are very good at these things making sure that we have a sustainable competitive advantage. We think that there will be many innovations that we will come up within addressing the opportunities of early market developments. So there is no dearth of innovation here and we will continue our general practice of comprehensive patent protection for all of the innovation.

Okay. And just one quick final question on your licensing fees flattening out, can you go a little bit more into that what has -- what's essentially bottomed out there?

You're talking about the patent license --

Yes.

-- revenue streams? Well, we have the expiration of some license payments over periods of years and quarters that this happened to expire as you know through our conversations over the last few years. The patent licensing market became very challenging for everyone. And so with those changes in the marketplace, we made a conscious decision not to continue to press for license income because of our assessment that the ROI calculus had changed materially in favor of the targets. And we don't believe that will continue forever but it was a good judgment and is still our assessments of the marketplace that's very difficult to license for income purposes in the market. However, being able to protect our business from competitors who would see licensed use of our intellectual property, we feel quite comfortable about.

All right. Great. Thank you very much.

You're welcome.

Our next question comes from Glenn Mattson with Ladenburg Thalmann.

Hi, guys. Thanks for taking the question. Can you say what did Guardian do say sequentially in the quarter? Was it down or flat or up just directionally?

Top line.

Sure.

Yes, relatively flat. That business from a revenue standpoint it's stable at this point. Longer time we hope to grow the top line but at this point it's stable. We've really been focused on the bottom line improving operating expenses as well as margins, which led to my earlier comment about that business being able to generate some positive cash flow in Q4.

Okay. So I'm just trying to figure out what do you mean when you say -- we talk about revenue year-over-year, you about the decline in licensing but then you have a separate as far we talk about timing of -- for when services were provided, what exactly did you mean, when you say that? Is that referring to the subscription line?

No. That's not subscription. That's actual service plan. So when we talk about timing and services being provided, our work with essential banks primarily where most of the service revenue comes from and to relatively fixed budget and so in 2015, we ended doing more of that work in first half of the year versus the second half of the year versus last year, it was kind of the opposite.

Okay. All right. So then, when you just look at the subscription line, can -- if Guarding is flattening out, can you kind of explain the dynamics between why that line is going down sequentially every quarter this year but specifically into the fourth quarter here?

Sequentially, I don't think it moved materially.

It was down 130,000 which is 10% of the line sequentially?

I mean it's -- there is a lot little small things in there that don't intend to get that granular on but there is nothing material there a little bit of it would be Guardian. But, again, we are not talking about big number there.

Okay. And then, I imagined some part of the reason why that line is not growing even though there is a lot of activity and discovers because of the kind of deferred nature of the revenue recognition, is that -- does that play a factor as well?

Yes. That certainly has an impact any time we have a new booking there, the related revenue is going to get recognized over a period of time.

Do you expect that starting to flow through to the point now or say the first half of 2016 would be better than the back half of 2015?

From barcode specifically? Yes. As we build up that book of business, yes. We would expect that that will start showing up in the P&L.

And in order to ramp in the back half of 2016, say, when would you have to start signing some customers, but what's the timeframe from when you -- officially announce a customer to when -- when you start seeing an impact to that revenue line?

It's going to depend on the mechanics of the actual agreement, if it's a by per barcode type model or if it's more of an enterprise type model.

Right. Which one are you seeing more -- you're seeing more -- you're seeing activity in both models or is it one --?

Yes. We certainly intend to selling our both models. I mean, we talk about being in some early development with a lot of customers and early development you're not necessarily saw in an enterprise license upfront, you're still on a per barcode basis. But we have to convert them to a enterprise license as they scale up.

I can help out here a little bit. Glenn, it's hard to predict where some thing is going to go with respect to the options of an annual license versus purchasing barcodes. I would expect -- and we're encouraging actually a lot of clients to just go ahead and buy some, we don't care so much how many that is, as we care about them becoming familiar with the benefits of the platform. And you've some of them -- want to lock in the long-term. So they want to sit down and talk about enterprise agreement. So it's a mixture. And at any point in time either track of discussion could move to the other track. And that's why we don't try to predict short-term. It's really hard to figure.

Okay. Last, on the cash flow, I think Charles you said an outflow in Q1 of $4 million to $5 million.

Yes.

That's just a little higher than what I had but that's pretty close. But, is that, is Q1 normally the largest outflow quarter is that kind of a run rate or is that, you expect that to be the -- significantly lower than some of the other quarters?

I mean, it changes year-to-year to pay on timing of customers' receipts and vendor payments, CapEx all sorts of different components, so I won't read too much into that.

It's a function of revenue growth Glenn. The expenses we described them fair amount of particularity is the staffing expense. And we don't have any inventory. We don't have any significant seasonality in discretionary spending. So we just need to grow the revenues in order to reduce the negative cash flow.

Okay. But, would you expect $4 million to $5 million a quarter or is that kind of the -- just the -- some circumstances surrounding Q1?

We don't expect $4 million to $5 million in a quarter for any period longer than the first quarter. As we said before, we're focused on sales. We want to begin to generate significant momentum in that regard. We don't know exactly when it would begin or how it will begin, but, that's what we are focused on. So we are going to reduce that negative cash flow as soon as we can, as much as we can.

And lastly on the deferred revenue went up obviously in Q4, is that part of the deal with the Central Bank or is that related to in part to the Discover line?

It's not in the sequential change.

Yes. Sequential, yes.

Yes. So, it's a combination of a couple of things, one, the larger component is, we do have some annual billings in Q4 for the following year that related revenue gets recognized over 2016 in this case. But, also additional bookings from Barcode are adding to deferred revenue was well.

Okay, great. Thanks.

Thanks Glenn.

Our next question comes from [indiscernible] with Cowen & Company.

Can you hear me?

Yes.

Okay. Hi. So I'm wanted to expand that situation on the cash flow also a little bit more. The cash outflow in Q4 was -- I believe you said --

$3.9 million.

$3.9 million, so to be greater than that in Q1 something has got to be, I mean, even on flat revenue, the expense run rate would have to be higher, is that how I should be thinking about expenses?

A little bit of it would be expenses too. And we're creating a wide range here due to the timing of items. But, yes, we would expect a little bit more a ramping in headcount. We ended up -- last call we talked about ramping headcount in sales and marketing, we didn't ramp quite as fast as that we originally intended. That's a little bit of it.

Okay. So the Q4 expense rate is a little bit low relative to what it will be in Q1 and then it grows from that through the rest of the year?

No. We don't anticipate it necessarily growing materially from that point in time. We have a staffing plan in place that we talked about last quarter. We executed on most of that staffing plan but we still have some open positions that we're looking.

Okay. And if I understood it correctly, the legacy business is kind of flatten out at this -- but we don't know the exact rate but kind of flat now in the service business you said that the Central Banks planning is completely done, so how would that -- how does that look relative to this year on a full year basis and so whereas to 2015?

The Central Banks specifically?

Specific to the service business?

The central banks generally are low single-digit kind of annual growth rate, so we expect to kind of see that trend continue.

In the quarter -- it fluctuates from quarter-to-quarter without any significance, just as to do with the timing of work.

Okay.

Okay. And as far as the expense rate goes, in our last call, we were talking about hiring and we were in the midst of hiring, which means that the fourth calendar quarter of 2015 would not have the full impact of the hires that were done which would be -- which would make the Q1 a bit higher. But we also have a few more people that we want to hire. We don't intend to continue quarterly hiring for the foreseeable future. And so if the assumption you stated is not true, it's just that we expect Q1 to be a bit higher than Q4 and the amount of cash flow will be a function of some inconsequential timing difference as well.

Okay.

That's why we have the range.

Okay. Let me move on.

Our next question comes from Kevin Hanrahan of KMH Capital Advisors.

Good afternoon, Bruce and Charles. Charles just a housekeeping question on the ATM. I think on the last call you said it was completely, so does that mean you did note ATM since the prior ATM you did, which I think was a brown 38?

Correct. So we had a $30 million authorization on our ATM, we completed that in Q3 of last year. We did not have an active authorization in place.

So if you wanted to do it again you'd have to reauthorize that or re--?

Yes. You have to go back through the same process that we went through a year-and-a-half or so ago, it would be public filing about it.

Okay. That sounds good. I wanted to ask Bruce, if I can -- on the last call, I think you said you had Wegman's in full production and Four Grocers in pilot, was New Seasons one of the once in pilot or not?

I believe it was not. At the time we had the call.

Can you give us any update on the pilot programs?

Still going on. Well, I know -- I actually did not describe them as pilot programs, it's important for you to appreciate others on the call that I'm making an effort here and having some measure of success to just get on with business and enough with the pilots already. So people can do whatever testing they want to do. But, we believe they are just licensed [indiscernible] barcodes and get on with it. And so we are not selling pilots, we are not encouraging pilots and not everyone that were speaking to us thinking in pilot terms. And because we are in full production now in a couple of places, it's time to just buy. And in the last call, I was talking about really our direct sales activities and as the channel program as elaborated and as we provide better support for our channel partners, I would expect there to be many, many more engagements going on, some of which I may not even know about until they get settled until they come to us. And so that -- what I said last quarter, I don't intend to update every quarter but I can't update that statement from last quarter as we're continuing with those prospects but now we have more prospects.

More prospects, okay. So, would it be fair to say you got some wins or are you working in some wins that you can't announce to us?

Yes. Working on, it is a better expression, as I cautioned in the remarks, we are a little company and we are dealing with very large companies. And so I think given day when I might feel either things are stalled or things are going great, the next day maybe different. So when the business is done, when either contracts were in place for the POs have been issued, then I'm happy and contend, but I cannot tell you the details. And we've been reminded by a number of our clients about that. So they are quite serious but they don't want us to talk about their business with you guys. So, wish I could, but they are just -- they are quite firm about it.

Great. Can you answer a question about Mitek Systems, I think it's one of your partners. There has been a lot of news from them recently, which would be -- I think that would be a different party or business away from the retail. Can you talk broadly about that a little bit?

Yes. It's a good question, Kevin. I know I was trying to get out in the prepared remarks. We're our development platform, okay. The Digimarc Barcode, Digimarc Discover together provided development platform of unprecedented breadth. In our history, we have collaborated with some business partners on certain applications. One of those application of course is driver license authentication. And that is the problems of our former ID systems business now known as Morpho Trust. Mitek has been in the business of automating check deposits through use of imaging technologies. We have a quite cajole relationship with Mitek. Mitek and Morpho Trust have been collaborating to create identity authentication via smartphones based on the platform. So Mitek's relationship is with Morpho. Morpho's relationship is with us. But, we are all quite friendly and I understand what they are doing and I'm very supportive of it.

Okay. Thanks very much Bruce.

Yes.

Our next question comes from Robert Sussman with Bentley Capital.

I would like to follow-up on comment you mentioned earlier Bruce that you are finding either the trials or the installations more complicated than, you know, you are running into complications that you had not anticipate it. Can you discuss that?

I don't know what the source of your implication is, I didn't say that that I recall and it's not true. So, we're not running into unexpected complications anywhere.

Okay.

Maybe what you heard -- let me explain what I meant was that, the applications that are being proposed and explored based on the platform are more complicated than we anticipated.

Okay. That's what I heard. Yes. That's what I heard.

Yes. It's -- and I can't go into details but actually some of them are kind of astonishing to me actually. And they have to deal with global supply chain. And this is one of the wonderful aspects of the collaboration with GS1, they are experts in the global supply chain. And they're teaching us a lot of things. And they are members through the association will have the opportunity to have a lot of discussions in their forums that they have in various media about "hey, could I use this for that? or that or that?" We have been thinking I think collectively here in management and among the ownership fairly simply. We are going to make front stores operations more efficient and we are going to provide packaging with a more eloquent voice. Those are both true and profound, I think opportunities. But, what we're finding is a lot of other things that are much more complicated that the clients believe and the supply chain believe we maybe able to facilitate that's what I was referring to.

Okay. Now, I understand. So it's even applications behind you, it's applications beyond where you had thought of which may prove to be very good ones for your technology that could expand the market beyond what you'd actually thought about.

Yes. It's more opportunity not more problems that was the important distinction and those opportunities again given the licensing model that while we believe is the best model. The cost of access to the system is very modest and the benefit of any application is amortized against the cost. So we think we have an enduring and a robust financial model, it's still tentative. We are early stage market development but you can see the ideal here that they licensed the access to the system and then the application developers build on it. And so what we think that we will function in a manner similar to operating systems or DNS for -- really a foundational technology that a lot of stuff is built on some of which none of us can quite position yet.

Okay. You mentioned a few times that you're a very small company but you're dealing with some very large customers. Can you talk about what problems that presents, is it that -- it's hard to get their attention because you are a small company they don't know who you're and this is an important area of their business, is it that it's difficult to find the right people to market you in these companies, or is it just difficult to get them move along?

Getting attention is not our problem, in fact, I believe the level of visibility that we have in these giants is quite extraordinary and we all know for instance message that went out on Instagram last year. But, I can tell you that we've very senior level visibility in many multi-billion dollar companies right now. So the biggest challenge is actually efficient and effective use of working capital because the big companies have the different view of capital than we do. And so we have to choose where to put our resources. And so we have to do a continuous assessment of both the timing and the likelihood of closing a sale in investing in a particular account. And trust me, we have more account opportunities than we can service. So we are trying to figure out, it's a benefit that financial community or shareholders -- to show that we are worthy of the investment capital that we have. We are trying to bring home the business early and bringing home in an impressive fashion. And so that's the greatest challenge. The greatest challenge really is to figure out where we are to be applying our precious resources.

One last follow-up on that, what is the -- what are the major areas of working capital on your part, you have to invest to market these large retailers. What causes the capital, is it marketing, is it certain things that you've got to do, that you won't get paid for upfront what are they -- what are these items that used as an example?

Yes. It's staffing. It's our 170 or so employees. And so we could apply all the employees to one account sensibly, I mean the 170 employees is not very much some your dealing with the sort of scale of opportunity and we are in the kind of customers that we are dealing with. And we're obviously not doing that. And so on any given account the question is, the allocation of resource is not just account management with our direct sales force but channel management and channel partners and engineering and R&D product management and finance. And also, throughout the entire organization our legal department, we allocate those resources as precious resources. And we try to make really intelligent judgments daily about that allocation. And make good judgments again in light of our objectives and we are trying to be quite clear about our objectives here. We want to start to provide evidence of the success of the market development as soon as we can.

Can you give us some indication of what you think the biggest hurdles will be from going from working with customers to getting them over the finish line?

Well, I will answer that, but, then, I will answer that we were able to move on to the question because we are running out of time here. Our hurdles are really our customers' operational effectiveness, big companies seeking to embrace innovative technologies, have a lot of process. Most of that frankly is not advantageous for them, its risk management. They are trying to reduce risk of the cost of lost opportunity and so we've to sort of [indiscernible] to those gates and screens and it's from day one, I said that was what was going to be the greatest challenge. I'm confident in our technology and then our strategy inertia is the enemy of progress. So we have to work our way through that. It's challenging. But, we have been making quite extraordinary progress, I think that's why noted our finish to 2015 was really rocking. And the show was tremendously different from last year's show evidencing great progress in our market development.

Okay. Thank you.

You're welcome.

Our next question comes from John Grimley with TJW Capital.

Hey, Bruce. Just -- thanks for all the color you've given on the call. Just a quick question -- obviously what's in front of you now is at least, from what I saw in our app, the retail -- bricks and mortars retailers alone have a huge turn for you. But longer term, how do we think about the transition to some of the online retailers using digital watermarking and some of your core technology? What do you see of that?

Yes. This ties into my sort of vague illusion to broader universe of application. So the key to every retailer's profitability is ultimately efficiency because there are no significantly proprietary business models. Amazon does wonderful work, but eBay has got a similar kind of business and [indiscernible] similar business and that's similar business. So and then, Walmart and Cosco and Sam's Club and Kroger look alike in many respects. And those who operate most efficiently will have the best margins. And so for online markets, there are two opportunities for efficiency one is reach that is, how do I make potential customers aware that I have the product available for sale which would be the marketing communication aspect of things and the others logistics. And so we can use Amazon as an example because they've been publicly studied and commented upon, but they use a lot of automation in their warehouses. Yes, they still have a lot of human staffing requirements. While robots -- we love our stuff, are much more reliable and efficient easy to read by a robot than classic barcodes and so I would envision that over time we could we have a remarkable effect on warehousing and distribution which is the foundation of online profitability. So I think we have great relevance there. One of the things it's not widely known that we know is that much of the business of these online sellers is what's known as the marketplace that is the -- they're working with lots of small vendors much smaller than physical retail can generally accommodate. Well, when those small vendors send in a product they get through a registration process, it's called master file creation. And an unreliable master file creation creates enormous cost confusion and customer dissatisfaction, when it occurs. And so in our collaboration with GS1, we can help the online industry to reduce those risks and costs then provide a higher quality service at a lower cost. So it's kind of the stuff we can do for the online guys. And digital manufacturing overnight delivery services on and on. Again, we are going to stay focus to your working capital management purposes on the things we told you we're focused on but because of the nature of the platform and our desire to create this broader availability through the three sales interfaces that people will be able to experiment without us investing in experimentation. And that we hope will yield very important and positive unexpected results.

Great. Thanks. And then just last question, retailers or brands which ones are more active right now. I thought that the retailers were kind of -- once they go first with the store brands, the brands would follow but that didn't seem to be what I saw it our app, so I'd love your thoughts on that?

Yes. The answer is yes. They're both active. Brands are probably more active than most people would anticipate they would be. So, I think that's probably my best and honest answer to your question John. The brands are interested -- and they are doing a lot of stuff, this is where a lot of that complexity I alluded to earlier comes in. They've got a bunch of really interesting ideas of things to do with our platform that I don't think any of you probably are anticipating. And but, we are working on -- with them. And again, we have to find means to help with some of those application development but we want to get paid for it. So, if that -- it can be worked out then everybody will be quite happy.

Great. Thanks Bruce.

Yes.

We have time allotted for one final question from Robin Knipp from Janney Montgomery.

Thanks for taking the call. Bruce quickly, this is a simple one, can you expand it all on the applications of the integration with Rockfish and any progress that's been made since that announcement?

No. Not really. I mean they would have to say whatever they want to say. The application does -- it does, we all know Discover is multimodal discovery. So, it doesn't come to conventional barcode scanning as well. So, it has utility today and we think superior performance than the alternative supplier in the scanning function. But, it also is future proof so that as our Digimarc product moves on to the shelves, it will work even better.

Very good. Thanks.

All right. Thanks.

It is now my pleasure to turn our call back over to Bruce Davis for any closing remarks.

All righty. Thanks everyone for your interest and support. This concludes the call and we will look forward to talking to you again in the final days of April, if not sooner. Thank you.

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