Bruce Davis - CEO Charles Beck - EVP and CFO

James Ricchiuti - Needham & Company Josh Nichols - B. Riley Rob Stone - Cowen & Company Jeff Van Rhee - Craig-Hallum Glenn Mattson - Ladenburg Thalmann

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

Thank you and good afternoon. Welcome to our conference call. Charles Beck, our CFO is with me. On the call today, we'll review Q1 financial results to discuss significant business developments and market conditions and provide an update on our next business strategy. This webcast will be archived in the Investor Relations section of our website. Please note that during the course of this call, we'll be making certain forward-looking statements, including those regarding revenue recognition matters, results of operations, investments initiatives, perspectives on business partners, customers' prospects, industry trends and growth strategies. We also will discuss from time-to-time information provided to us Channel partners and actual intensive customers about their business activities. Please appreciate that we are providing this information as we understand it was represented to us by customers' prospects and partners, and we do not verify nor vouch for such information. Such forward-looking statements and statements of our partners and customers are subject to many assumptions, risks and uncertainties and changes in circumstances. Many assumptions we share about future performance represent a point of time estimate. Actual results may vary materially from those expressed or implied by such statements. We expressly declaim 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-Q that we expect to file shortly. Charles will begin by commenting on our financial results, I will then discuss significant business developments, market conditions and our execution strategy. Charles?

Thanks Bruce, good afternoon everyone. Revenue for the quarter, was $6.1 million, up from $5.6 million in the first quarter of last year. The increase was primarily due to higher service revenue, reflecting more program work from the central banks and a government agency contractor. Subscription revenue was flat, reflecting higher barcode revenue, offset by lower Guardian revenue. License revenue was higher primarily due to higher reported royalties from a patent licensee. Q1 Digimarc Discover and Barcode bookings were up 100% year-over-year, but down from last year at $200,000. Although we think bookings is a useful measure of progress, it does not capture all agreements. There were a couple of important agreements that did not have much impact on bookings. One is the master services agreement with a top 10 global retailers, that includes our first statement of work for our pilot project with clear milestones defining a path to production at scale. The master services agreement is structured to permit efficient addition of new projects. This agreement was not included in Q1 bookings because its payments are based on milestones, and we define bookings as the non-cancelable fixed value of a contract. Similarly, we signed our largest ever Guardian for images contract during the quarter, yet the effect on Q1 bookings of this multiyear agreement was not significant, because the contract has a 30-day termination clause. We continue to expect lumpiness in quarterly bookings in the early stages of market development, due to timing and varying provisions affecting bookings as just explained. Gross margin was 62% in the first quarter, up 1 point from Q1 last year. Service and license margins were essentially flat. Subscription margins were up 7 points, reflecting higher Barcode revenue and lower cost of service delivery. Operating expenses were $1.4 million, or 15% higher than the first quarter of last year. The increase reflects previously noted increases in staffing for sales, marketing, engineering, and operations to expand our capabilities and selling and delivering the Digimarc Barcode to retailers and brands. We hired seven employees during the first quarter and anticipate hiring an additional 20 to 25 staff in the next six months. Net loss for the first quarter was $6.2 million or $0.61 per diluted share, versus a net loss of $5.4 million, or $0.64 per diluted share in the same quarter last year. We invested $4.3 million of working capital during Q1, including $3.1 million to fund operations and $800,000 for capital expenditures. Cash usage was lower than last quarter due to the receipt of a large annual license fee that is built in Q4 and collected in Q1 each year. We ended the quarter with over $56 million in cash and marketable securities. We anticipate cash usage will be between $5.5 million and $6.5 million in the second quarter. For further discussions of our financial results and risk 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 executional strategy.

Thanks Charles. In the past couple of months since our last call on February 22, we been very busy dealing with the significant increase in interest from existing prospects and customers as well as new prospects that we discussed in the last call. The activity spend retailers brand and non-core prospects and involving applications addressing a wide range of product lifecycle operations and consumer engagement. We have expanded and improved our marketing and delivery capabilities as our share of voice has been increasing, along with our willingness to engage in Europe and Japan, opportunities have multiplied. While we continue to focus most of our resources on the domestic market, as promised in our financing, we are increasing our support for key foreign markets, to conduct an in-depth training during the quarter for the Japan study group leader DNP [ph]. Several members of the group exhibited at Retailtech Japan 2017 in March and report that the response was very favorable. The next point of recession is in June. I will be attending and meeting with members and perspective clients while there. The group is contemplating several proof of concept projects during the balance of 2017, and a launch of the platform in 2018. We recently opened an office in Cologne, Germany along with GS1 Germany and assigned a German speaking member of our senior technical staff to head-up planned services in Europe. Mr. Charles noted in his remarks, we entered into a massive services agreement during the coding with a leading retailer. We are just beginning work on supply chain assessment and mapping the implementation process. So far the customer and suppliers have been very responsive. The terms of the agreement and the statement of work are confidential. This is the second master services agreement we have entered into with a top 10 retailer. The other relationship is further along and involves lots of moving parts and is taking some time to mature. There have been some encouraging developments in that relationship lately. We are diligently pursuing supply chains strategies that will support scaling our business with both of these accounts. Now that we have our foot in the door with numerous leading retailers and CPGs, we need to build sustainable and scalable support for large scale global production. We have developed a good understanding of the significant complexities inherent in managing these enormous customers and educating, training, motivating, maturing quality in their global supply chains. Much of my focus lately has been on enhancing our Company's capabilities to address these opportunities and the associated challenges. But operational excellence is that the core front of execution strategy. The company must continue to evolve to keep pace with progress and market development. I believe we have made excellent progress in this regard. At this stage of development, we need to deliver with quality to those accounts we have, close on sales with prospects and grow our share of wallet with all these companies. We have been adapting the leadership of our organization to meet the requirements for continuing progress and evolution of the emerging market for Digimarc Discover and Barcode. In July of last year, we hired 25 year of tech veteran Heidi Dethloff to head Marketing. In Q3 we expanded our Board of Directors, adding two accomplished executives from the consumer products industry. Since then, we have restructured management, emerging product management and engineering to improve efficiency and accountability and creating two new executive positions. Our new client services leader who joined in Q1, Scott Wilcox, a 25-year veteran. A media executive, he is responsible for all of our delivery systems including in-house and partners. Our most recent augmentation to critical leadership is Aimee Arana, who brings more than 20 years of retail sales and business development experience to Digimarc. Aimee joins Digimarc in 1990, which she was Vice President and General Manager of the North American Women's division responsible for managing customer relationships directly to sales teams and driving sustainable growth. I described our 2017 priorities at the Needham conference in January. At the top of the list is adding customers and growing bookings. This requires closing more business, shortening sales cycles and expanding production with undisclosed customers. Improving supply chain support as well as our own internal business processes will foster more speed and scale in accomplishing these goals. We have relationships in place with industry leading suppliers and relevant industry associations in our target geographies. Our focus now is more on improving the effectiveness of these relationships, and less on adding more partners for a while, despite continuing pressure to extend the supplier network. We have enough important relationships in place to get those significant business done. Regardless of what we do we remain cognizant, as should you, of the challenges associated with gaining footholds for our transformational platform and helping customers to revise business processes to exploit the benefits of the platform of scale. Our work on these matters are defining the standard operating procedures for globalization of the next generation of automatic identification pioneer of the original barcode. Macro technology trends continues to be favorable. Lately augmented reality has been the big buzz in the tech. Most of the demos that you see presume the essential step, reliable efficient identification with the thing being augmented. Get that wrong, and the augmentation is problematic. In real world applications Digimarc Barcode can provide that first critical step in the process, reliable and efficient identification for all media. We are participating in number of financial conferences during Q2, including conferences sponsored by Needham, B. Riley, Craig-Hallum, and Cowen & Company, and numerous industry events. You can find dates and details of our participation in the event section of our website. The basic building blocks are in place to make progress then and make public relationships with leading brands and retailers. We continue to improving the tools, training and technical support for our supply side partners and expanding awareness and understanding of the platform with customers, business partners and policymakers. We will continue to add expertise and develop and refine our internal business processes to meet the needs of customers and partners. Our engagement with industry leading retailers, brands, licensing authorities and credit associations as well as our supply chain partnerships are growing in number and effectiveness. We have a strong balance sheet, effective working capital management, expanding institutional knowledge and are making progress and implementation of requisite software training and support services, fostering progress in key performance indicators of increased bookings and providing other evidence of growing adoption to the industry and the financial markets. That's it for our prepared remarks for today. We'll now open the call to questions.

Ladies and gentlemen the floor is now for your questions. [Operator Instructions]. Our first question comes from James Ricchiuti with Needham & Company.

I wanted to pursue the master services agreement that you alluded to, and I realize there are things you are not going to be able to talk about. But Bruce, can you maybe discuss when you first began to have discussions with this retailer, and how long it took before you were able to reach certain milestones and hammer out another agreement?

It actually was not terribly long. We've found enthusiastic response and a starting point for a relationship. And so it just a matter of months and putting together and master services agreement. And the reason for the master services agreement is -- and it's something that both happens that once we've demonstrated our confidence as the supplier, that there are probably many things we can do together. So rather than do an agreement specific to an application area with the MSA, with the statement of work structure, which is structurally identical to what we have with another top 10 retailer.

And the other agreement that you have, can you maybe just discuss when that was secured and maybe how it's progressed?

It's difficult for me to comment much on it because of the sensitivity of the customer to disclosure.

Okay, maybe just going back to the one, the more recent one. Can you maybe help us understand what prompted this customer, this retailer now, why now? What was the catalyst for it?

Yes, I probably can't go down that route without being sort of inappropriate with respect to my relationship with the account. There was a specific impetus, but I'm not comfortable saying what it was.

Can we maybe revisit what's been happening with the two supermarket chains that you have been working with that have begun converting over some of their private label programs to the Barcode, to the Digimarc Barcode. And to what extent are we seeing maybe these early adoptions that have helped demonstrate the potential, the technology to other customers, our prospective customers.

I believe you're talking about Wegmans and New Seasons?

Yes

They are both excellent early customers and collaborators. Wegmans obviously is renowned for the quality of its marketing and focus on consumers, and is an acknowledged industry leader in innovation. New Seasons, obviously much smaller entity, a local company and in the case of New Seasons, their focus actually, they are very customer centric too, a lot like Wegmans. And so they are looking what we have as a means of enhancing the experience that trick out for the consumer. They will certainly take operational efficiency benefit, they don’t have a mobile app at this point in time. And so their whole goal is to just improve customer experience. Wegmans has a larger agenda, and as has a larger and more involved account. So we're making progress and implementation with both of them and again, we let our customers speak for themselves, so we don’t go into any level of detail that they have already publicly disclosed.

And two final questions and I'll jump back in the queue. First question is it sounds like your hiring plans have gone up a bit, since we spoke in February. Is this hiring more in the international markets, because you see some opportunities? And then the final question, and this is may for you Charles, maybe how would you think about operating expense over the next one to two quarters. Thank you.

I'll take first part of that. The hiring is mostly domicile domestically, serving all of the geographies for the time being. And the work that we're doing now is in building scalable business processes for globalization and that comes from increasing confidence that the value of what we have is becoming well understood and acknowledged. And so, that’s sort of shift all of our ambition over to trying to figure out how to scale this in a high quality and cost effective manner for clients. And so we've learned a lot from our relationship with Wegmans. They've been extremely helpful to us and candid in our relationship. And now we are beginning work with some very large companies who have very complex supply chains and have lots of overhead associated with quality assurance for their products. So we need to be able to articulate how such processes ought to be supported. Again, our strategy is not for us to continue to scale our business to serve those needs, but more to define the infrastructure that the supply chain needs to provide to its client, and then to educate and train and motivate, and provide quality oversight for the suppliers, serving their clients. So that's -- the bulk of our work right now is trying to get the supply chain prepared to take this on for the very large clients, so that we don’t have to play as much of a front-line role as we've played in the early market development. Charles?

Yes, and then on the staffing side, I don’t know necessarily want to put specific dollars to, but, and we're looking to hire 20 to 25 staff in the next six months. Several of those positions there, we expect to be hired shortly, so would have an impact to Q2 and some of it will fall into Q3. I think it used kind of an average assumption of cost of labor that they kind of layer on with the incremental cost.

Okay, and Charles, is the central bank revenue stream, how stable is that? How much visibility do you have in that and how big a contributing factor was that in revenues this quarter?

Yes, so central bank is a significant component of the service revenue, and we also had an uptick in the amount of work that we have from our government agency contract, but that's relatively small in comparison to the bank. So the majority of the service revenue is related to the banks. As far as visibility, we know what our minimum budget is for the year. They provide that actually two years in advance. We have a stated salary in place. Generally what happens is there is usually an uptick of additional work that comes in through the year. We have some visibility there but it's, the majority of the revenues associated with that contract is known at this point in time. So there's only upside.

And Jim we need to move on to the next, if you don’t mind. Thank you.

Our next question comes from Josh Nichols with B. Riley.

I was wondering, any update you could regarding what the Company is doing as it pertains to the FDAs Safe and Accurate Food Labeling Act and updates on that front?

Yes, it's -- obviously, it seems the administration kind of put things up in the air for a while, but the Secretary of Agriculture has been confirmed we understand and the budget has been put in place for the regulatory studies that were contemplated. And so we expect them to start moving soon. So there's been a bit of a hiatus due to the change in administration. But now it looks like they going to get down to doing some work. We don’t know yet what their posture will be. Of course President Trump's general position on regulation has lightened up, not to make it heavier but the GMO legislation was driven by a need for preemption of the Vermont state action. So I don’t think that they'll just not do anything, but I'm not sure what it is they will do in the relation to the range of regulatory effect they could have based on the law. So we're digging in. We're quite involved and staying in the tune with what's going on, and trying to help convert some department to make good judgments on how to serve the consumer interest that's involved here.

And the last question from me. Anything you could say broadly as it pretends to the MSAs, regarding kind of the size and the scope of the statements for?

Well, the nature of the agreement is such that we can add to it quickly. And so it doesn't have, like a fixed scale. It's quite the opposite, is how it's flexible scale. And it's a good model. I like it. It's one that the customers appear comfortable with. So we get all -- there is a lot of call it [indiscernible]. There is a lot of work to do to get qualified as a vendor with these companies, involving IT policies and security and then insurance and on and on and on. And so, we wade through that as quickly as we can, and then we then have the general terms settled in the MSA, and that then leaves just really just statements of work and pricing to the appendices. And so that's the structure we have in place in these two agreements I alluded to in the call.

Our next question comes from Rob Stone with Cowen & Company.

Hi Bruce, I wanted to follow up on a comment that you made on the call. You talked about being at some level of engagement with all carrying of the top 10 global retailers and six of the global CPG top 10, if I remember the stats correctly, and I wondered if you could just update us on that situation? If you've added to that list, and I know you can't go into individual examples, but some color on if things are progressing, in general, what's driving that? Is it a desire for cost savings or brand engagement or some other factor? And then as you get down deeper into the next level, and you talk a lot about standing up to supply chain, what are the attractions and deterrents for these various partners that you need to bring along with each of these big companies?

Okay. With respect to sort of the general market update, it's only been a couple of months since the last call. So there haven't been dramatic shifts so I would say. We continue to be engaged with most of the biggest players in the world at some level. The -- and I'll segue that to sort of motivations if you like. We have been defining initial set of solutions that we have come to understand our interesting to those companies. And obviously the tent poles of strategies are easy checkout and consumer engagements. We've also talked about in the consumer engagement area, a smart label, yet another area of interest. And then we have talked previously, [indiscernible] the printer scale label application. And we've alluded in our prior calls to there being other applications that various companies are asking us to do as proof of concept and there is maybe a handful of those which we can't get into, that would again lead us down a rabbit hole of trying to give you more details when we can. So I'm viewing those solutions as we’re defining them as kick starting the application developer community, and again, I count be wrong in this assumption, but I'm assuming that once the platform has been embraced by industry leaders, that other people will want to build things for them rather than us building most of the stuff ourselves. If I'm wrong it's okay because it's just -- it’s a bit different model, but it should be quite a healthy profitable business. So with respect to easement [ph] of the prospects and the early customers, they have different orientations along that solution range. And so they don’t all start with easy checkouts or all start with consumer engagement or all start with smart label or printer scales. They have a hot button for instance, and that’s often driven by a leadership personality within the enterprise. So if someone says, yes, but I really need what you guys have, please show me that you can make it effective and that we can integrate it into our supply chain and we're also going to be up and running. So it's really ad hoc with respect to solutions as to how we start from company to company. We have a surprisingly broad range of early engagement with CPGs in relation to what I have come to understand as the financial industry prospective. Most people have felt that. Retailers can get on board first and then they are going to encourage their suppliers to get on board, and that’s really not turning out that way. There is a lot of pressure on retailers and brands to become digital, to digitize their business, to modernize it. And as we present the benefits of our platform to these enterprises, we can address many of the desires that they express, and particularly at senior levels of the organization, about where they would like to go with things. Because we provide a range of opportunities addressing the two key variables affecting retailers and their suppliers, which are operational efficiency and consumer engagement, and without laboring on the point because I've made it before, that’s where the action is. Everybody needs to be as efficient as they can be, but for place based retail, you got to make it engaging, you got to make it fun an interesting. And then I think that’s where again we're blessed with our first significant customer, with Wegmans because they get it. They do great job. They are industry leaders in that regard. But they are also wanting to get operational efficiency out of the platform. So we think we have the way to solve that appears to be a dilemma for these enterprises of how do you get more engaging cheaper. All right? And we think we're the answer, that we can do both of those things and we can do it across a wide range of business characteristics of these large enterprises. So that’s -- its really, it's an ad hoc, sort of nose under the tent, foot in the door, get well improve ourselves, build out the share pocket and that’s why I'm very pleased have Amy on board, because Amy is skilled and the art of closing the sale and building the share of pocket with the customer. So that's what we need to do now. We have enough interest. We have enough prospects and early customer engagement. We need to become more relevant to them and we need to do that by enhancing the capabilities of their supply chain to deliver this benefit to the enterprise and then you know our model is that we have a license that we would like to receive for having created and continuing to support the platform and that’s how we intend to grow our bookings and revenues on the path to profitability.

So against an industry backdrop of pricing pressure for the last year or plus, the margins coming down, is offset [ph] implementation a hurdle or does the market situation actually drive a greater urgency to do something about efficiency?

Well, one of the challenges of market development for any breakthrough technology is there is no established ROI. So a fair amount of early work involves, sort of proving the obvious. One of the great virtues of our platform is it's pretty obvious that we make identification better. Quantifying it is not possible in the early stage as market develop. We've done experiments. We've done right papers. We've showed everybody stuff. They still want to sort of see it in action. And so that's part of this early stage market development that may be if not well understood by some in the financials, it's a bit of the brand. We've got to show that we can have an impact on last year. It's a significant one, but then that information needs to be disseminated and one of the sensitivities that we're all aware of here and bound by is the desire for the competitive advantage and confidentiality, dearly held by the some of these large enterprises. They just don’t want to tell other people what they are doing. And our more publicly acknowledged customers as regional retailers have -- it’s like a more prospected competitive position than the global enterprise. And so it's not something that we can talk a lot of unfortunately, and so the involvement that we have with the large enterprises, for the most part we think will have to be incidentally disclosed. This will just -- people will learn about it in the industry first and then the financial markets will learn about it, and obviously to the extent we can pass on and amplify publicly available information, we'll try to do that without jeopardizing our business relations. And that's where the Japan play group is different. Again, they are not publicizing all of their findings outside of the group, but within the group there is a sharing and there is maybe 30 of them now in the group. And then in Europe, with help of just one Germany, we're hoping that they can share some information that will be helpful to the industry there to embrace the platform more quickly than we have experienced here in the U.S. So we will see.

Perhaps quick question Bruce if I may. Can you just quickly summarize for us the fact that the two chains that we know are going into full production, how many others have done at least some form of production of barcodes deal for limited shelving or pilot program? Just some rough numbers will be helpful.

Yes I can't give you a reliable number Rob, because when someone asks us to do 2 or 6 or 12 whatever, if I give that number to you today you'll ask me next quarter what's the number, and I don't know where they're going with the program, alright. So I need to -- pause and they're going to…

Packages. I just meant how many active relationships in that regard that have done at least some form of production.

I don't have the number top of mind. I would say not hundreds. It's tens, probably 30 to 50.

Okay. Thank you.

But don’t hold it. I haven't counted it actually, frankly. I just look at reports. There is a pile of them. I look at who's in the list and how big the list is.

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

Great thanks. Bruce, just a couple of questions. I guess last quarter you had talked about cost that retailers communicated with you in Q3, that they wanted to begin pricing implementation discussions. Just to clear, is that the one that's signing this MSA here?

Yes.

Okay. So can you just in simplest terms talk about this MSA and sort of give me the quick two or three bullet points on why you think this one -- I guess how it varies from the other and in particular, obviously I'm most interested in the timeline to revenues/certainty to revenue. Can you just -- I realize your hands are tied somewhat, but just help me understand how this is different than the prior?

That's a trickier question than we probably understand it to be. Let me see I can give you some substantive response. So the newer customer has a pretty tight focus in terms of entry point. And the other customer has a broader sort of posture. So I don't know who will actually go faster because we're just in the early stages with the second of these. But the first customer, just there is a lot that we can do for them and they've been exploring lots of different things and that's created complexity that doesn't yet exist in the second situation.

Okay got it. And is it -- so if this is the model that you prefer or you like this structure, just to read it back to you is this unit unlikely that we see large enterprise deals upfront that show up in the deferred revenue balance?

Let me see if I understand the question correctly. If everyone went this route? Is that sort of the premise of the question?

Well, it sounded like you like this structure, which seems to have incremental scope of work that you gradually layout and build and go perform. And I think you've talked previously about larger customers, likely wanting to sign large enterprise license deals, that in fact would show up at signing on the deferred -- on the balance sheet and the deferreds.

Yes, I haven't changed my perspective on the market. I still think that this tipping point I've talked about will come into effect at some point. And when it does, I think everything changes, and I don't know when that happens. But prior to that I would expect most customers would not want to put down a bunch of money, I'll call betting them to come. But when competitive pressure comes into play, I think some will as means of mitigating costs. So my answer depends on time frame. The master services agreement format actually doesn’t in any way negate those opportunities for a lot of payments. In fact it's kind of the -- it's like -- it's a middle ground between what I've said could be one approach, which is all buying in one other time until I'm comfortable that I'm embracing that long-term versus I'll pay you a liquidated amount, so that I don’t have to go one at a time. This is sort in the middle if you like. It’s a flexible implementation that once behind us allows us to do business very efficiently. So, I like it because of efficiency, but I don’t think it has much impact on the general economic patterns that will emerge.

Is it a reasonable basis for us to think that store brands remain the starting ground where most are going to get their -- that initial scope of work probably in most cases and then understand there's all kinds of complexities in terms of building a model, because you have a bunch of revenue streams that you've outlined that are likely to show up there. Does the most logical remain $50 a SKU and work it along that math or asked differently, has your thinking changed it all in terms of what the structure of these contracts look like and what the revenue potential is and is to be based off.

I think the $50 license fee remains a key tenant of the economic model, but what's been happening, we're trying to our arms around, and that is that we think there is service offering that we ought to be pricing that will create a significant revenue stream. And our initial application is what I call the tent pole application are ones that we're not charging an incremental price for, although our business partners, who are enablers of those things, some are charging and some aren’t, and the amounts vary a bit. And when they are charging, they generally will share what they charge. But for some of the solutions work that we're being asked to do that today we have classified internally as custom work or solutions under development, that are not generally marketed yet, we're contemplating that we may price them to, as supplements to the basic license fee. Because in our strategy we would like to other people to be doing them and us collecting the basic license fee, but if we're doing work and we're investing the R&D and we're providing the ongoing support for the application, then we would expect to be paid for those two. So the basic business model that you're familiar with may get elaborated and we're right in the middle of that right now, trying to figure out what that ought to look like.

Just two last brief questions from me then. Just if you can explain very quickly in terms of the skill sets that you're hiring in this next wave of hiring? I'm sure it's a little bit of everything. But where it is concentrated? And then secondly the GS1 relationship, can you dial that in a little more specifically in terms of the traction that you're seeing and can you quantify the volume of events, lead flow, some way to give us a sense of comparison of momentum in terms of that relationship?

So on the hiring front, a lot of the staffing will go into our product development and client services areas. And it's consistent with what I was just saying, both in the prepared remarks and in the Q&A here is that we're building infrastructure models and that we can export to the supply chain. And so we're bringing more people in to get that stuff done. But also to the extent there is just sustained interest in us building solutions, we need people to build them and support them. So we're going to step-up some building those exportable models and then we're either going to keep them or export them, but in either case we'll be I think in good shape. As far as the GS1 relationship, when you say GS1, of course there is GS1 U.S. and GS1 Germany and GS1 Japan, so far and then GS1 Global. So the purpose of all of those relationships is strategic and that is that we want to be supportive of the global standards for identification of things. And GS1 is the worldwide licensing authority for that. And so we keep them very well informed. They are very helpful to us in understanding customers and segments, and we go on during calls together in both domains, U.S. and Germany. The Japanese, just one as a government agency. So they are not allowed to do such thing. They provide more of an oversight function. And so as we build scale, one of the ways to provide comfort to customers in embracing the platform is that we are in fact supportive of those standards. So it's a key strategic goal, and we have excellent working relationships with both of the entities, those in Germany and the U.S. and the just one Japan organization is just really at our request providing some oversight to make sure that we're again being supportive of global standards.

Our next question comes from Glenn Mattson with Ladenburg Thalmann.

Bruce, you managed to just hit on this. I missed part of last the question but between signing the agreements and generating some of your revenue, just exactly like can you talk about how much work needed to be done? What's the gating factor at this point between the agreement and the actual revenue generation?

Is that a general question? I'll take it as a general question. While I'll answer generally because again I'm not going to go into details with specific of agreements. So generally we're in new technology. We're in the innovation. We need to demonstrate that we can perform within the existing business processes and describe that a patience is necessary to embrace the platform. So early work with all of the customers relates to what impact do we have on their business process. And how can they adapt the business process to accommodate this new technology. So that's the gate if you like at the start of every relationship, unless and until we become routine, which is always a way. So that's where we are with the.

So that's work that still needs to done. That's not work that would have been done before these agreements are in that?

It's work that will always need to be done. It's an ongoing requirement of supporting the market. We we're -- I know everybody likes to be impatient about how fast things go here, but we're very young in this market. And we have tons of work to do. So I'd say it's an enormous opportunity. So that will be ongoing. It's not like we're going to -- we've got it done three months ago and we don’t just sit on our hands here. And a lot of that has to do really with business process reengineering. And so if I could just briefly provide an example, what I mean by that, we met recently with one of the leading, world's leading design firms. And if we were allowed to start at the ideation phase of design, then the entire process becomes more efficient then and more reliable. In most cases, we start with an existing design for a package, often an iconic design. And our job is to imperceptibly enhance it and to convince everybody in the supply chain that it's okay for us to intrude. So that's early stage activity that will not be relevant later on in the development of market. So we need to educate the people involved in the early stages of the process about a new model if you like, which is becoming obvious the industry that the package design of the 20th century, which focus largely on catching a consumer's eye on the shelf is just one application in a growing a number of applications of package design, and that we represent the outline guard of design, leading to new requirements, having to do with direct home shipping, easy reorder, increasing government regulation, the desire for smartphone enablement to shelf edge, cross-selling within the store, revitalizing the center store, all of those things have to really be thought about at the beginning of design. So much of our work right now is not that. Much of our work is trying to show people that we can fit into an existing design. So there's a ton of opportunity that needs to be exploited at the early stages of design, which is one of our infrastructure builds that will be exportable.

Our next question comes from Robin [indiscernible].

Thanks for taking the call. Bruce, I've noticed last few months, more and more visible barcodes that are scanning with the discover app are returning CPG specific content. So whereas three months ago I was getting mostly generic Google search results for most UPCs, now when I scan products from Coke and Pepsi or Smuckers for McCormick or Procter & Gamble among others, I'm getting directed, directly to their websites or more interactive slide presentations if you will. Can I assume that these are more than just early stage work that we're doing with these companies?

I wouldn’t listen too much from that. Its more indicative of progress in building digital assets, that can be related in consumer engagement models and it is telling you about the stages or development of relationship with those accounts. One of the problems that the industry has got to address in order to take advantage of our consumer engagement capabilities is, when the consumer stand, what do they get and you've been observing a rapid progress by industry to provide some meaningful engagement, not really just Google link somewhere. But don’t take too much away from what that means in relation to us.

Then let me reframe the question in a slightly different format. When I get to some of the slide decks if you will from some of these CPGs, they are truly engaging and I can see, how it wouldn’t make a difference to the customer, whether it's in the future inserting $0.50 off coupon or whatever, is that part of your ongoing discussion.

Those concepts are -- yes, those concepts are parts of all of our discussions.

Our next question comes from [indiscernible] Capital.

Guys couple of questions. First just following up on Robin's question Bruce, but we're using the Digimarc discover app, not a generic app, how are they in your registry?

Can't really go into that.

Okay, and then secondly, just talking about of the work fees, on this new MSA. Could you give us any idea as to the of size of the milestones or how big the segment work might me, if all milestones are hit and over what time? Any more quantitative data on that.

No, that will be inconsistent with our general posture of not giving financial projection. So -- and it would also be a violation of our NDA and also problematic in the trade. So no.

Even over what time these milestones? I mean are we talking, roughly is it six months to prove something out, is it three years to get project launched? Any more color on that.

We're just getting started Riley [ph]. So I know what the schedule is but I'm not going to tell you the schedule, so that you can then hold me accountable for when I don’t have any basis for assessing it. It's not many years long, but we will see how it goes. It involves the supplier and the customer and we need to built the rapport with both of them and see how effective our process will be. That will then affect the pace. So we're trying to move pretty quickly and so far it's been a great start, but its young. We're just getting on. So I don’t have confidence to try to project the pace.

So the milestone are not necessarily based on time. They are based on milestones, I guess…

They are performance. They are performance. They are proving things as opposed to meeting a date.

And why the milestone format is, and I guess as my next question which is, are the milestone is dependent on proving out the technologies? So question relates to whether you get, or is it based on the quantity? So basically buying barcodes or whatever the deliverable is in buckets. Is it more -- I guess I'm going to get answer my question but.

Yes, it's both. So it’s showing that we can ramp ahead of the scale, hoping of a big volume.

Okay, but what would be the risk there? You do how many trillion bank loans are in circulation over the years. I'm trying to understand, is it more testing the customer supply chain as opposed to your ability to.

Yes, so it's about supply chain. And each of these large enterprises has a complex supply chain, no two or which are the same. So the first step in engagement with these big companies is usually do a couple of prudence and this is what it looks like and how it performs when they go get cool okay now can you work with our supply chain.

And I'm assuming the proofs have been done. You don’t record an MSA [ph] just to do proof right? or would they?

The MSA doesn’t address such things. There would be statements of work. So the MSA is just general terms and conditions. So the statement of work is not about showing them a couple of samples.

Got it, okay. All right, I guess you've mentioned early on it. Can you give us any -- it's unclear obviously what the first MSA is or when it was signed et cetera, but it doesn't seem to be necessarily progressing at lightening -- is there any reason -- I think if you could comment about the optimism on this one in particular and things seem to be going better so far. Can you just give any other color on why you feel optimistic on this potentially being a faster progression?

No I don’t think it'd be appropriate. It's just we've been getting a little better movement lately and maybe we'll find a way to move to large scale production and public awareness. So we have stalled. We're making progress. It's just complicated.

And they get lag. Okay, it's fair. And let me take it off [Indiscernible].

No that's was -- we will need to move on to next person in the queue in a moment if we have one more question.

Yes, I have one last question. Is there any reason why they would do MSA in a statement of work if they weren’t contemplating additional statements of work in the future? Or is this something that -- I mean doing an MSA as the statement of work is two separate documents or as part of an appendix of the document, they could describe it as -- I assume that it means a plan on further statement that works depending on how you deliver the first one?

Yes, they are assuming that we are going to do a lot of stuff together.

Our final question today comes from the line of Jim Ricchiuti with Needham & Company.

I was just wondering if you can maybe talk a little bit about the resources that are required to support these two MSA clients, particularly the second one. Can you give us some sense as to the kind of resources you might be allocating? Professional resources?

Yes, I'll try to give you a general answer to that Jim. It's a good question and it circles around the core theme of this update, and that is that our strategy is to equipped the supply chain with training and tools and support, and have them basically run with this, and send us money. So that necessarily involves us proving that stuff out. So we've got to do bunch of work. And do the work first hand that is delivered ourselves so that we can show it works and give it to them and hopefully they take it over. What we don't know yet and that was the uncertainty I was expressing earlier is how readily they take it over and when they take it over. So how much work we out do ourselves versus them doing at. And that goes compact around to the business model and charging people for what we do if they want us to do it which haven’t been contemplated. So that can be revision in our basic strategy here. So we're in the security situation where we have really impressive lineup of supply side partners and they vary in the level of investment they're willing to make. And yes, we're getting pressure to add more. And so we're basically pushing back and we're saying, well, let's go revenue is growing here. Let's get the financial community comfortable that we're on the right track here before we add a lot more suppliers. And so that then leads to a negotiation between the end user, the retailer or more CPG and their suppliers and us. And so I don't know the outcome of those negotiations. There won't be a single one. There will be in fact different outcomes. And so we have in most recent supply chain partnerships the West Rock announcement with us and they've been awesome. They're really committed to this and working real hard. Then we've got many other suppliers who were involved in the process where for us they're waiting to get pushed more by a client and so they're waiting for some tools from us or they want to try to get bigger margins. And so there is a lot of work involved in managing supply chain partnerships, and I said that from the beginning, that sophisticated [indiscernible] are putting a bunch of logos on a slide isn't very meaningful. We have to really work hard to get those guys to a point where they're making some nice margin from working with us. So that's where we are now. We're just in the midst of really improving our support for the suppliers so that we can scale this thing. And that's where most of the investment and most of the staffing is being applied right now, and it will either endure and get paid for directly by the end users, or it will enlighten greater supplier participation, which will deal nice economic benefits. So I think we see a way to win either way but it's really uncertain about how that transition occurs and exactly when it occurs. So that's where we are now.

Bruce, can you say whether some of the planned staffing additions, the decisions you're making are directly related to this most recent MSA?

Not very much. Actually, the motivation is coming from an abundance of opportunity that I referred to in the last call. It's just after the show and after our involvement with the FMI executive conference in Phoenix. Just things seem to kick into gear. So we've got too much to do right now frankly. And so we need to manage our working capital responsibly, which we care deeply about, but we got to add some more resources so that we can meet these requirements and show the top line growth that you guys are waiting for. So it’s a result of having a lot of opportunity.

This does conclude our question-and-answer session for today's program. I will hand the call back over to Bruce Davis for any additional or closing remarks.

Okay thank you very much everyone for your continued support and confidence in the company. We greatly appreciate it. And we will be in touch soon with another update. And again, I want to remind everyone there is an abundance of financial conferences coming up, where either Charles or I will be present, providing updates as of the date of those conferences.

Ladies and gentlemen, this does conclude Digimarc's first quarter 2017 conference call. Thank you for participating. You may now disconnect.