Bruce Davis - Chief Executive Officer and Chairman of the Board Charles Beck - Chief Financial Officer and Treasurer

Rob Stone - Cowen and Company Josh Nichols - B. Riley FBR Jim Ricchiuti - Needham & Company Jeff Van Rhee - Craig-Hallum

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, everyone. Welcome to our conference call. Charles Beck, our CFO, is with me. On the call today, we'll review Q1 financial results, discuss significant business developments and market conditions and provide an update on execution of strategy. We'll archive this webcast in the Investor Relations section of the 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'll also, from time to time, discuss information provided to us by channel partners and actual and potential customers about their business activities. We are providing this information as we understand and as represented to us. We do not verify nor vouch for such information. Such forward-looking statements and the statements about partners and customers are subject to many assumptions, risks, uncertainties and changes in circumstances. Any assumptions we share about future performance represent a point-in-time estimate. Actual results may vary materially from those expressed or implied by such statements. We expressly disclaim any obligation to revise or update 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 we expect to file shortly. Charles will begin by commenting on our financial results. I will then discuss significant business developments, market conditions and execution of strategy. Charles?

Thanks, Bruce. Good afternoon, everyone. Revenue for the quarter is $5.6 million, down from $6.1 million in the first quarter of last year, due to lower license and service revenue, partially offset by higher subscription revenue. License revenue was down year-over-year, reflecting the impact of the fully paid-up license we entered into in the third quarter of last year. For an exchange for a $3.5 million license fee, we waived any future royalty obligations from this licensee in one of the licensed fields of use. Service revenue was down due to timing of program work with a government agency contractor. Subscription revenue was up, reflecting higher Digimarc Barcode revenue, partially offset by lower Guardian revenue. Digimarc Discover and Barcode bookings were $500,000 during the quarter, more than double our bookings from Q1 last year of $200,000. The growth in bookings was largely due to the collaboration agreement we entered into with a leading CPG that we mentioned on our last call. The purpose of the agreement is to determine how to most effectively implement Digimarc Barcode at large scale in a range of applications. It provides for annual fees to Digimarc, which escalate over the term of the agreement. The client has the right to terminate for convenience, thus, only year one fees are reflected in Q1 bookings. As a reminder, we define bookings as the noncancelable fixed value of the contract. We continue to expect lumpiness in quarterly bookings in the early stages of market development due to timing and varying provisions affecting bookings. Gross margin for the quarter was 61%, essentially unchanged from last year. Operating expenses were $1.6 million higher than the first quarter of last year, due to increased staffing in sales and marketing, engineering and operations to enhance our ability to deliver the benefits of Digimarc Barcode to retailers and brands. Net loss for the first quarter was $8.1 million or $0.72 per diluted share versus a net loss of $6.2 million or $0.61 per diluted share in the same quarter last year. We invested $4.1 million of working capital during Q1, which was at the lower end of the range we provided on our last call. We used $3.6 million to fund operations and $500,000 for capital expenditures. We ended the quarter with $63.7 million in cash and marketable securities. We anticipate cash usage will be between $7 million to $7.5 million in the second quarter. Our projected cash usage for Q2 is higher than Q1 as Q1 was favorably impacted by the collection of the remaining $1.75 million of the $3.5 million license fee we recognized in the third quarter of 2017, as well as collection of a large annual license fee that is billed in Q4 and collected in Q1 of each year. We intend to hold around the Q2 level of operating expense until we see sustainable uptick in the top line. Cash flow will vary some from quarter-to-quarter depending on timing of disbursements and collection. We believe that we have sufficient resources supporting identified programs for specific customers to drive near-term revenue growth. We are focusing resources on these opportunities. There are many factors affecting the timing of revenue growth. We are doing all we can to shorten the critical path. For further discussion of our financial results and risks and prospects for our business, please see our Form 10-Q that we expect to file shortly. Bruce will now provide his comments on significant business developments, market conditions and execution of strategy.

Thanks, Charles. This is our third update covering first quarter activities, and the first update was immediately post-NRF at the Needham conference in mid-January. The second was our Q4 call on February 21. I don't intend to repeat what was covered in these previous updates. Our strategies for market development is, generally, well understood. The focus is on securing relationships with the world's largest retailers and consumer packaged goods companies. Four years into the execution of strategy, we have contracts with two of the top 5 largest retailers and one of the top 5 largest CPGs in the world. Having achieved these milestones, we are collaborating with these companies on how to scale their use of our platform in terms of volume and breadth of applications. We want them to serve as object lessons for the rest of industry regarding the transformative effects of our Intuitive Computing Platform. We're also working with two regional grocers, Wegmans and New Seasons. Our global plan is to develop and mature our delivery capabilities and improve value at a smaller scale to inform growth strategies with the largest retailers. We want to establish case studies with them to provide statistical proof of return on investment from use of Digimarc Barcode. We've augmented and aligned our sales, marketing, client services and development teams to foster success in these accounts. Wegmans was our first customer and has been a great partner in pioneering this significant transition to the use of Digimarc Barcode in retail. We are closing in on substantial completion of enhancement of the private brand packaged goods. Approximately 3,000 package designs have been enhanced with Digimarc Barcode. Nearly 2,000 are on the shelves. Less than 3% of the total brand portfolio are incomplete due to continuing research and development, consideration of redesign or experimentation regarding packaging materials and printing processes. Cashiers have not yet been trained. Our work with Wegmans has taught us much and given us confidence that Digimarc Barcode can be effectively employed in most consumer products' packaging. And global trend data indicates to us that checkout is improving, consistent with our assumptions. At this stage of on-shelf availability, we estimate that Digimarc-enhanced package goods represent a single-digit percentage of items processed at checkout. Even with this low percentage of total throughput, we believe we may have sufficient enhanced product to statistically prove our efficiency model. We're working with Wegmans to provide that statistical throughput performance. Thermal private brand represents a significantly larger share of items scanned. So, as they expand their thermal on their fresh foods, the effects of Digimarc Barcode on checkout will become more obvious. This is generally true throughout the grocery industry that the majority of item movement at checkout for private brand products is fresh product bearing thermal labels such as bakery, deli meat and partially prepared meals. Prepared foods is the key driver of growth in the grocery industry. These products along with thermal labels applied to nontraditional package formats, presented challenges for checkout due to orientation constraints, condensation, crinkles, tears and print defects. The addition of multiple Digimarc barcodes to these labels improves first pass read rates and reduces manual key entries, improving throughput and accuracy of sales and inventory data. Wegmans was the first to test Digimarc-enhanced thermal labels for fresh products. Our proof-of-concept use a single model of printer in each of key suppliers, deployed in the produce department of a few stores. Based on early results, we are adapting our formula for use of other models of printers at Wegmans store so that they could scale the deployments. As you know, our platform has three technical layers: identification, discovery and applications. Enterprise transformation will not follow a strict regimen. Instead, as we are given opportunities to enhance media and our software is implemented by scanner interfaces at the enterprise and its suppliers and customers, the more applications can be built, providing financial and operating leverage to our customers. Wegmans has already built many applications to leverage their investment in Digimarc Barcode for packaging. Store associates and all devices have been equipped with our software for use in shelf management and price audits for Wegmans' private-branded packaged goods. Digimarc Barcode makes this work more efficient because store associates don't have to pick up and turn each product to read the barcode. We have a team focused on wrapping up this first phase of implementation of our Intuitive Computing Platform at Wegmans, including developing strategies for challenging package designs and form factors, develop new firmware for more thermal printers, enabling all in-counter scanners, putting in place multiple layers of data verification with Wegmans' POS software vendor and recommending upgrades to Digimarc-enabled handheld scanners for cashiers that will improve scanning from what is known as bottom-of-the-basket items, where reading barcodes can be cumbersome and slow. The first phase of implementation of our platform at Wegmans is focused on enhancement of packages and thermal labels. As we finish up this phase, we hope to be able to share with industry the effects of these improvements on checkout efficiency and accuracy or automatic inventory replenishment, health and well-being of cashiers, productivity of store associates and on-shelf inventory and price checks and customer satisfaction. Through our collaboration with Wegmans, we developed many important capabilities and refined our delivery model to prepare us for the challenges of delivery to much larger retailers and to global consumer products manufacturers. New Seasons has intended to play a role similar to Wegmans with the advantage of being local. Wegmans is concentrated in the northeast of the U.S. New Seasons is in the northwest, where we are located. We are not as far along with New Seasons but expect to follow a similar path with similar objectives. Beyond this proving ground, substantially, all our retail industry efforts involve the world's largest retailers. Our involvement with global leaders is growing in scope and numbers. Walmart, of course, tops the list. We continue working diligently with Walmart and its suppliers on applications of platform at a much larger scale than Wegmans. The process begins with enhancement of packaging with thermal labels. Many applications are enabled by the enhancement of these media. The work of numerous suppliers is involved in enhancement, discovery and application development. Changes in Walmart's business processes that are necessary for implementation and optimization are being mapped out and implemented. I think we can make a real difference in their operational efficiency and customer satisfaction as they embrace more innovation in pursuit of better serving their customers and associates and growing revenues and profits. I wish I could provide more details regarding our work, but I can't due to confidentiality restrictions. We expect to have Digimarc-enhanced hang tags for apparel in stores with another large retailer, Ditto. We have a well-defined path with them from proof of concept to pilot to rollout. We have begun enhancement work for private brand consumer packaged goods for this retailer and are preparing to present a plan for thermal label enhancement to them. We're working with another large retailer and its suppliers on a plan for implementation of our platform beginning with enhancement of private brand packaged goods and thermal labeled fresh products. As I mentioned on our last call, we've entered into a multi-year collaboration agreement with a leading consumer packaged goods company. We're off to a good start studying how to best cost-effectively deliver the benefits of our platform to them and the rest of the industry. More recently, a significant number of other leading consumer products companies have expressed interest in evaluating our platform. We would like to have similar collaborations with a few other category leaders to guide our development of this segment to the addressable market. Our top priorities are to complete enhancement of private brands at Wegmans, progress from beta to roll-off of thermal labels and generate statistical proof of ROI and deliver increasing evidence of value to Walmart and other industry leading retailers, expand our footprint to more stores and more solutions. And our near-term focus is on nurturing a few industry's leaders' enhancement of private brands and deployment of thermal label solutions, supporting fast checkout, consumer engagement, associate productivity and other applications among early adopters as case studies and successful implementation, deriving best practices from our experiences with them and applying these practices to scaling industry leaders. We believe this is the optimal path to near-term revenue growth. I believe that the basic building blocks are in place to work with industry leaders in the U.S., Germany and Japan to begin scaling the market. Our teams in foreign markets are assessing customer and partner opportunities. We've identified good prospects in Europe. In Japan, our continuing involvement with a study group and recent participation in the retail tech conference there have identified a number of interesting opportunities. We are considering near-term budget and resource contention in addressing foreign versus domestic investment. At this point, it looks like the best course of action for the near term is to demonstrate a clear success in the U.S. before materially increasing our rate of investment in Europe and Japan. We have an abundance of domestic opportunities vying for available resources. We don't want to spread ourselves too thin or unnecessarily duplicate domestic proof-of-concept work overseas. Thus, we are filtering at shaping core market development in ways that will not significantly burden our working capital without reasonably predictable near-term revenues flowing from the investment. We expect to have more to say about this later in the year. Our balance sheet remains in good shape. We're continuing to develop and refine our tools and processes, expand our institutional knowledge and implement requisite software training and support services to foster progress in key performance indicators of increasing bookings and providing other evidence of growing adoption to industry and the financial markets. We'll be doing several capital market updates in May when presenting at the following investor conferences: the Needham Emerging Tech Conference on May 15 in New York, the B. Riley Annual Institutional Investor Conference on May 24 in Santa Monica, the Craig-Hallum Institutional Investor Conference on May 30 in Minneapolis, and the Cowen Annual Technology Media and Telecom Conference on May 31 in New York. For those of you who want to follow our progress more closely and continuously, I suggest you consider our many public communication channels, including our social media channels that are accessible via our website, presentation at industry events, the Digimarc Perceptions blog and Digimarc Digest, our monthly newsletter. In addition, we update and refresh our website on a regular basis with new content and product information. That's it for our prepared remarks. Now we'll open the call to questions.

Thank you, sir. [Operator Instructions] Our first question comes from the line of Rob Stone from Cowen and Company.

Hi, guys. The first question is for Charles. If I heard you correctly, I think you said that you expected to maintain operating expenses about the level of Q2 run rate for a while until you see a significant change in the top line. How should we think about Q2 directionally from the level of expenses you just reported?

We were kind of referring really to cash flows, so our range of cash outflow being $7 million to $7.5 million is kind of being the run rate until we see significant revenue growth. From an actual pure OpEx perspective, there will be a slight bump from Q1 to Q2, but not a significant change.

Okay. Bruce, I didn't quite catch the – all the Wegmans numbers as you went very quickly through that. The total number of SKUs that have been prepared, I think, it was 2,000 in stores, and then I missed the part about what's still left to do. I guess, the tricky packages, could you just repeat that?

Sure. We've completed 3,000, and our audits indicate about 2,000 are on the shelves. And Wegmans, because private brand portfolios ebb and flow a bit, they don't have a fixed number, but they believe it's somewhere between 3,000 and 3,500. And because we have a small number in the Q that I referred to, the 3%, so I would say that the total is somewhere between 3,200 and 3,500 probably. So, we're 95% done.

Okay. And I believe you were in pilots already in the first quarter with thermal labels with Wegmans and New Seasons. How long do you think it will take to sort of be satisfied with that? Or is it going to be an iterative process as you add more printers and tweak the software and so forth?

Well, based on early results from Wegmans, we're engaging in development of firmware for additional models of printers in order to increase the deployment of thermals. So, you take that as a sign of success. I think we're not engaged in any sense in kind of a formal POC with a KPI. We just wanted to see how it would go. We've concluded it went well and that we want to now enable more printers.

Okay. And then finally, and I'll – before I'll jump back in the queue, you mentioned some rolling out hang tags for apparel with another retailer this quarter. Is that a pilot? Or how should we think about what's meant to happen next with hang tags?

Well, I think, technically, you would call it a POC. So typically, retailers go from sort of laboratory testing and various other kinds of technical tests to a proof of concept in store, then to broader deployment either across more product or more media as we would think on that and/or more stores. And that will be the pilot, and then a rollout will follow the pilot. In this case, the products go into all the stores, but it's a limited amount of products.

So, it's a quicker process to do hang tags, I guess, than branded packaging and so on. This is something that's separate from the product itself, and it's just going on the hangers. It just seems like that's another category like fresh that can be a quicker uptake or correct me if I'm not thinking about that right.

No, you got it right, Rob. It's way, way quicker and can be automated, we found in our work with this retailer, and so it can move quite quickly. And so, what you should expect to see as we continue through 2018 is a conscious increase in the number of customers. But within the customers that we're working with, more media being enhanced, more discovery being enabled through work with various – well, you think of the scanner interfaces, leading to more applications. And so much more work has been in grocery so far. That is not in any way any kind of limitation that we experienced. It was – it's like a bit of a coincidence where we started. But we believe that we can apply Digimarc Barcode to all categories of private brand products, and many of them would be significantly easier than packaged goods. So, thermal and soft goods labels and tags are examples of things that are easier than packages for us.

So, what is the key benefit that you're looking or that the customer's looking for in the apparel hang tags? Is it customer engagement or easier checkout or some combination of the above or something else?

Their focus is on improving the efficiency of checkout. With the – with barcode on a tag that has to be found on one side of the tag in – generally, in one place, on one side of the tag, there's a fair amount of wiggling around that is required to get it to read. And so, by using Digimarc Barcode, the exercise becomes easier and the barcode reading more reliable, and many of those tags have relatively small 1D barcodes, which can sometimes be inherently difficult to scan as well. So, it's about efficiency in the beginning, but we do see a nice opportunity for consumer engagement down the roadways without any additional encoding.

And that's typically being read by the same POS scanner in the checkout? Or do you need additional handheld scanners for this as well?

By using Digimarc Barcode, there'll be less reliance on handheld required and we believe more in-counter scanner use, which will again be more – because the scanners are more – a little more powerful than your senses and easier to use. It should speed up checkout, but they can use the in-counter more than the handheld in relation to what they do currently.

Great. Thank you.

You bet.

And our next question is from the line of Josh Nichols from B. Riley FBR.

Hi, guys. So, I know that proving out the ROI seems to be a big push here, and now that you have a good chunk of barcode-enabled packaging at Wegmans, although still small percentage of the overall scans, like could you talk a little bit or help quantify what type of ROIs you're seeing specifically as we move this out into the real world? And then also, I realize it's early. But could you talk a little bit about how much of an improvement in ROI you think you guys may see with things like thermal labels, which could be even better or with improved ROI compared to traditional barcode packaging?

Yes. So, I guess, I would say there are differences of opinion in the market about the necessity for the proofs. So, let me tell you what I mean by that. I think there's a general presumption in industry that we won't have substantial benefits of effects that will outweigh the cost of Digimarc Barcode. Everybody, of course, likes to see statistics, but nobody likes to publish them to the industry or the capital markets. So, there's this tension between us wanting statistics because we think we'll have good proofs and unwillingness of anybody to publish. And so, our studies have demonstrated a lift of usually in the sort of 20% to 30% range on IPM. And I think, based on my own observations at Wegmans that we're likely to do better than that, but we haven't gotten the statistical proof yet because the number of on-shelf items in relation to general item movement is still quite small, and thus, we're working with Wegmans to use an external resource for credibility purposes to construct an experimental model that can see if we can measure within reasonable confidence levels the improvement in performance that we deliver. But as I pointed out, we've got a bunch of sort of loose ends to tidy up here along the way. So, if we did the proof right now I actually think we would see a statistically relevant benefit. But I believe after we get thermal done and we train cashiers and we get handhelds in there, the benefit's going to be unavoidably obvious to everybody. And so, with some larger retailers in the U.S., I don't know that, that's terribly relevant that we tried to extract statistical evidence from Wegmans. And over time, as we progress with the larger retailers, they may choose to disclose because of similar interests to get industry onboard. But what we found in the foreign markets, both in Europe and in Japan, is that they're looking for some kind of evidence like that. And so, my remark about the allocation of resources between domestic and foreign opportunities is that I don't want to repeat proof of concepts in the foreign markets that I don't need to do if I can be a little bit patient there. But for those who, like some larger retailers in the U.S., don't feel the need to wait for that, we're happy to move forward as long as they're willing to compensate as far as – for doing that. So that's where we are in both Japan and in Europe in relation to the U.S., all of that in relation to the relevance of statistical proof in the industry.

And then I was going to ask – seems like you're getting some good traction on thermal labels starting up to be a good Barcode growth driver for this year. Could you talk a little bit about how much cheaper and/or faster it is for retailers or grocery stores that want to implement thermal labels as opposed to traditional – having to go through traditional package redesigns? And also, is that something that you're seeing an exceptional amount of specific interest in as you go out and talk to some of these clients?

Yes. So thermal labels, I would phrase it as thermal label supply chain is much less complicated than any packaging supply chain. And again, there are differences between retailer private brand and global brand supply chains. But with respect to thermal, the process is quite straightforward. The retailer will propose a design or design change to the printer vendor. Then, the printer vendor typically makes the change in design and delivers what is commonly referred to as a template or a label design that runs then back through approval we have with the retailer, including legal compliance. Once done, that's it. And so, it's – and of course, the aesthetic element is much less a part of that process than in the case of consumer-packaged goods. And because the labels are monochrome, there's no sort of debating about color matters either. So, we are in store with Wegmans and New Seasons and one other retailer right now. And as I noted in my remarks, we're preparing to present thermal labels to another large retailer, and they're aware we're coming with it and anticipate receiving the proposal. So, I think that thermal's going to move quite quickly as we gain traction with the large retailers that we're working on.

And then last question from me, you talked a little bit on the last call about bidding on some of these like larger proposals. Particularly maybe in the second half, you may have to do a little bit of staffing ramp-up. Any additional updates you could provide us just on the progress?

Well, the only thing, I think, I could say, Josh, is that what I'm trying to indicate in the first quarter here and our several updates is the way in which the scaling of accounts is expected to occur. And so, in the technology layers of our architecture, the more media that you enhance and discover interfaces that you enable, the more applications can be built and the higher the ROI on the cost of enhancement. And so, we're getting an opportunity, I think, to demonstrate that this year with a number of retailers in the sense of adding now thermal labels to packaged goods and then moving from packaged goods in private brand to soft goods. And then there are other categories of private brand products at large general merchandisers, and I'm hoping that we'll be moving into them before the year ends as well. So, when we start to think from the retailer perspective, they can do 27 contracts with us or one because each of those enhancements has associated with license costs and the application development has software license costs. And then the integration of the applications into their business processes has consultant costs. So, they can choose either to do lots of contracts or one. And we think that the strong preference will become doing 1, and that's consistent with the general trend in the IT industry today toward subscription agreements. And that's obvious across many different IT services and infrastructure companies. So, I think it's pretty clear where it's going. How quickly it gets there is, of course, the question we all want to have an answer to. And we're just trying to expedite movement in that direction as best we can, but obviously, it's not up to us. It's up to our customers, how and when they want to do that.

Thanks, Bruce and Charles. That’s all from me. I look forward to seeing you guys in May and have a good one.

Thanks Josh.

Thanks Josh.

[Operator Instructions] Our next question comes from the line of Jim Ricchiuti from Needham & Company.

Hi, thanks, good afternoon. Wonder if you could tell me what the headcount was for your professional staffing at the end of the quarter. I believe you said it was, what, 207 at year-end.

It's 210, and there are several ways of looking at it. Pure headcount was 210 at year-end. We're at 226 right now.

Okay. And the other thing I'm trying to understand a little better, Bruce, maybe you could help us, reconcile your comments about resource allocation with the retailers you're working with. I just want to – so if we think about thermal, you are working with Wegmans and New Seasons and I think – just help me. Maybe I misunderstood this. Is there a third retailer on that in that area?

In which area, Jim?

I – you mentioned, I believe, in thermal, Wegmans, New Seasons and a third retailer. Did you say that?

Yes, we're in stores with a third retailer.

Okay. Now that third retailer, again – because you can't identify these retailers, it gets a little – I think you could understand it gets a little confusing. You've talked about another large domestic-based retailer apart from Walmart. Is this other – this third retailer, is this a separate retailer?

I can't let you back into a specific identification. Very cleverly phrased question, but I can't answer it. Otherwise, I'm, by default, answering the other side of it. So, it's another retailer. That's all I can say for now and it's in a limited number of stores.

Okay. Is there any way, Bruce – again, you can't identify these retailers, talk specifically about their plans, but maybe you could just comment to us about how well – what is your understanding of their time line? Is it – has the time line – do you feel comfortable that you understand the time line well enough where it's – you feel that the information you're getting from these potential customers is reliable, accurate?

I never depend on what I'm told by customers in terms of timing, okay? So that's the answer to that part of the question. What we try to do is do our best not to in any way impede progress, right? So, we don't want to be on the critical path wherever we can not to be there. I would say that all of our customers believe they're moving it as quickly as they can, right? And so, there's this interesting difference of perspective between the capital markets and industry. Those in the industry who develop a detailed understanding of what we're doing think we're moving in lightning speed, and everybody in capital markets thinks we're moving at a snail's pace. And so, we're doing a lot work to lay the foundation of specifications that can be translated, we hope, fairly easily into global standards. We are committed to being successful with conventional visible data carriers. And so that's the work that I can't really describe adequately and – nor would many people at capital markets be interested in them. But that's what – when you deal with really big enterprises, they have very well-established business processes associated with global standard data carriers. So, we're just sort of sliding in here as a potential successor, and that means that we have to be – we may have to be quite careful of how we do that. And that's what takes time. It's coordination with suppliers and the sort of business process study and modifications that are necessary to accommodate the new carrier.

I also have a follow-up question to some of the earlier questions that Rob was posing in the hang tag area. Can you give us any further color on the type of apparel retailer? I mean, is this a mass fashion type apparel retailer? Is it a broader department store type retailer with large apparel offerings? Is it a – is there any – I'm trying to understand what the applications because you mentioned that this has more suitability for an in-store scanner. When I typically think of apparel retailers, the smaller apparel retailers of which may operate many stores, I thought they typically have handheld or some type of fixed scanner that's not an in-counter scanner?

Yes. It's not a small retailer, and so they have both in-counter and handheld. And there is currently more reliance on handheld than this particular retailer would like, and so that's part of the efficiency model that we hope to deliver. Can't tell you who it is. But even with handheld, again, you could imagine, the next time you're shopping for apparel, watch how they work. We will make every scanning interface more efficient, reliable, but we also will make it easier to use the in-counter where it's available.

Have you had any discussions as to whether this is of the interest to some of the retailers you're working with in other areas? By that, I mean in fresh and in some – just because some of those retailers also, in addition to having large grocery and fresh food departments, also have a fair amount of apparel.

Yes, yes. So, the strategy, Jim, is to limit the number of customers that we're trying to serve in the short term here, to have a responsible working capital strategy so that – as Charles said, we don't want to continue to increase the investment rate without showing top line response to it. And so, in order to do that, we want to narrow our focus on number of customers to very important, very large customers and then to begin wherever they want to begin, but to bring each of those large customers the benefits being demonstrated with the other customer in terms of applications. So...

Again, just so I – sorry.

So, let's say, we started packaged goods with someone and then we started with soft goods with someone else and let's suppose they both have a need for both of those things. Then, refining the delivery process at scale with one allows us to deliver effectively to the second one application by application. So, you can see how we build consistent with the model that you know we have, we build more value on the basic layer of identification of Digimarc Barcode by spreading the nature and volume of the products that we're enhancing and by spreading the software necessary to discover the barcode, allowing for more applications to proliferate more value to be delivered. So that's the model. It's meant to scale our value within key accounts and to get the key accounts enter into large subscription-oriented contracts with us and then work with them to refine our processes, to develop our specifications, to move towards standardization and to deliver then a more efficient model to the rest of the market at really nice margins for us, right? So, we'll become better at doing it by working with them. We appreciate their investment in our development of the market. But then, as we spread it to the rest of the customers, we should be able to continuously improve how efficient we deliver it and we also will have the ability to price it in a way, I think, that's very attractive to our shareholders.

Got it. Thanks very much.

Yeah. Welcome Jim

[Operator Instructions] Our next question is from the line of Jeff Van Rhee from Craig-Hallum.

Hi guys. Most of what I need has already been touched. Just a couple left. Charles, on the seasonality of the cash flows, can you just refresh how you'd envisioned, generally, the cash flow lumpiness from here to the end of the year?

Yes. Q1 was impacted by about $3 million of collections that don't repeat throughout the year, one of which was a nonrecurring, the license fee, the $3.5 million license fee, which we collected half of that. And then we also have a large annual license fee that has been recurring over the years that we always collect in Q1. So, if you back those out, we're closer to the $7 million, $7.5 million run rate that we anticipate for Q2. And as I mentioned, we don't anticipate that changing significantly until we start seeing some revenue ramp. It will fluctuate a little bit quarter-to-quarter depending on payments and collections but within a relatively tight end.

Got it. Okay. I missed that last part. And then, Bruce, at Wegmans, I think, you called out in talking about kind of the proof of – not the proof of concept but the statistical measurement of the ability to impact operations. I think you referenced the fact that they haven't done the training at checkout, and then I – obviously, you went into detail on roughly 3,000 SKUs. But I think, you said you felt like at this point, even with that SKU count and without training at the checkouts, you believe you could demonstrate to statistical significance that you are impacting the operations. Just touch on that for a second without the operators of the checkout being trained. Just what gives you that conviction? I guess, I'd love to hear a little bit more there.

Yes. Wegmans shares some information with us that helps us to understand our impact. We have not made a proof to the management there of the improvements in efficiency. That's the purpose of giving a credible resourcing to put in place a design that will have a clear outcome. And I think we're ready to do that whenever they're ready to do that, even though we're at a relatively small level of penetration with packaged goods being the minority share of private brand and the majority share being thermal and having very little thermal done, but most of packaging done and with both of those done, still not happening, the rest of the non-private brand items enhanced. I think we can demonstrate statistically – I have a bit of a background in statistics. I feel like we're getting pretty close. But we want to hire an expert, bring him in and help us and – to make a good assessment. So, the information that I see indicates to me a favorable impact, but I would say just me, not the customer. So, I'm not trying to state their view. But there's a kind of clear inexplicable difference between stores in which the firmware is up-to-date and running in the scanners and those that aren't. And as you know, some of the stores are not running the scanner software. So, we have an A/B test environment, and so we can look at how are the enabled stores have been and the ones that aren't enabled trending. And I see what appears to me to be a clear positive trend consistent with our predictions based on very small sample size in relation to the universe there and not scientifically calculated. So that's how I – it's my impression. I actually think, when we get done, when we get thermal done and we get all the product done and we get their cashiers trained and we get handhelds in place, we're going to have a marvelously successful outcome. I think people will be amazed. I think it will be better than what we're predicting, but that's just my feeling. It's not been proven yet because, obviously, we still have more work to do to finish up what I view as Phase 1. Phase 1, I view, is really the fundamental efficiency of checkout value proposition, right?

That's helpful. And then just last from me, the – I think you referenced the booking, a $500,000 CPG booking in the quarter. Just can you expand a little bit, what are they paying for? Or how are they paying for it? Is this just essentially them committing to paying you for a certain number of sort of consulting hours, if that's the right word, to work with them to develop applications for their environment? I'm just trying to get a sense of how that's priced. And then you referenced it escalates. Again, same kind of question. How does it escalate? How does that contract structure now and evolve over time?

Yes. I can give some general comments, Jeff. Obviously, I don't want to go into detail of the confidential agreement with a single customer, but the model there is one I will spend a little time describing, which I think will answer many of your questions. So, as you know, late last year I said, I'm tired of doing free work for the – what I refer to as the global brands, the big consumer packaged goods companies. And so, one of them said, look, we really want to work with you. We believe in this platform, but we've got a whole bunch of questions and we've got business process questions to answer. We've got supply chain organization kinds of thing. We've got all kinds of stuff because it's a very big company. Now – and we said, well, we'd love to work with you, but we really need to feel we've got some skin in the game here from you and that we can demonstrate a little bit of that good faith to our shareholders. And so, we appreciate if you send a little money our way because their rightful view is that they're investing quite significantly. And so, I'm very grateful for that and I appreciate it. And it's real. But I just said, look, despite all of that, I still – I'd like to have a contract, like you to send us some money. And so, we have a multi-year agreement with escalating annual subscription fees. And the beginning of that contract, which we're engaged in now is a collaboration to figure out how to scale the benefits of our platform for their enterprise and in that exercise, to help us to develop a model for the consumer-packaged goods industry. And so lately, a bunch of other consumer goods companies have expressed interest in platform, and we're – our ideal would be that we get a couple few more, not a lot, to join in either in open collaboration or in parallel with them to help us to figure out how to accommodate what has become a very elaborate, complicated, rigid supply chain if you like. So, they have a lot of rules and regulations and hands offs and sign offs and on and on and on. And as I mentioned earlier, when we come in and we say, okay, we're the data carrier in town, we have to go through lots of process with those kinds of companies, more process than with packaged goods for private brand because the investment in packaging by those companies is magnitudes larger per SKU, so they take everything quite seriously. So, it's a wonderful relationship. We're in our first year, so far so good. And I would like to have a few more.

Got it. Okay. Thank you. Thanks Bruce.

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

All right. Thanks, everybody, for your support and your participation in the call today. As I said, we've got a whole bunch of updates coming up and that can be webcast – will be in – all of our investor decks will be posted, and we'll look forward to meeting face to face with those of you who are attending each of the many conferences during the month of May. So, thank you all and we look forward to talking you again soon.

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