Bruce Davis - Chairman and CEO Charles Beck - CFO

Rob Stone - Cowen and Company Jim Ricchiuti - Needham Josh Nichols - B. Riley FBR Jeffrey Van Rhee - Craig-Hallum Ilya Grozovsky - National Securities Glenn Mattson - Ladenburg Thalmann Jeff Bernstein - Cowen

Good afternoon, and thank you for participating in today’s Conference Call. Now, I would like to turn the call over to Bruce Davis, Chairman and CEO of Digimarc. Mr. Davis, please proceed.

Thank you. Good afternoon. Welcome to our conference call. Charles Beck, our CFO, is with me. On the call today, we’ll review Q3 financial results, provide our preliminary views on 2019, discuss significant business developments and market conditions and provide an update on execution strategy. We will archive this webcast in the Investor Relations section of our website. Please note that during the course of this call, we will be making certain forward-looking statements, including those regarding revenue recognition matters, results of operations, investments, initiatives, perspectives on business partners, customers, prospects, industry trends and growth strategies. We’ll also, from time to time, provide information given to us by channel partners and actual and potential customers about their business activities. We are providing this information as we understand and was represented to us. We do not verify, nor vouch for such information. Such forward-looking statements and 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 conference call. For more information about risk factors that may cause actual results to differ from expectations, please see the company’s filings with the SEC, including the Form 10-Q that we expect to file shortly. Charles will begin by commenting on our Q3 financial results followed by our preliminary reviews on 2019 and then I’ll discuss significant business developments, market conditions and execution strategy. Charles?

Thanks, Bruce. Good afternoon, everyone. First off, I want to address the rationale for issuing the earnings release ahead of schedule. There was a glitch in the release process that transmitted the release shortly after market close yesterday. We identified the issue within 5 minutes and recalled release, however, at that point, the information within the release had become public. To ensure we did not disadvantage any shareholders, we decided it was prudent to make the release public to all shareholders before the market open today. We considered moving up the earnings call, but the logistical challenges outweighed the benefits. Q3 revenue was $4.9 million compared to $8.7 million in the third quarter of last year. The decrease in revenue was due to the $3.5 million upfront license fee and 300,000 of royalties reported in Q3 of last year. As a result of renegotiation of the patent license, wherein we waived any future royalty obligations from a licensee and one of the license fields of use in exchange for the upfront payment. Discover and Barcode revenues doubled from Q3 last year. These gains were offset by lower service revenue due to timing of program work, which we expect to make up for in Q4, and lower Guardian revenue. Discover and Barcode bookings were higher at $600,000 versus $100,000 in Q3 last year. We’re continuing to experience lumpiness in quarterly bookings in the early stages of market development due to timing and varying provisions of early contracts. As of today, bookings for Discover and Barcode are $2.6 million for the year, which is already more than 60% higher than total bookings for all of last year of $1.6 million. Gross margin for the quarter was 61%, down from 76% last year, reflecting the impact of lower license revenue. Operating expenses were 5% higher than the third quarter of last year due to staffing increases in sales and marketing during late 2017 and early 2018. OpEx has stayed relatively flat for the past 4 quarters, as we slowed the pace of hiring until we see significant top line growth as we continue to drive operational efficiency. Net loss for the quarter was $8.3 million or $0.73 per diluted share versus a net loss of $4.2 million or $0.39 per diluted share in the same quarter last year, largely due to the licensing deal done in Q3 of last year. We invested $7.4 million of working capital during Q3, near the midpoint of the range we provided on our last call. We used $6.3 million to fund operations and $600,000 for capital expenditures. We ended the quarter with over $49 million in cash and marketable securities. We anticipate cash usage between $7 million to $7.5 million in the fourth quarter. Everyone is intently focused on growing revenues from key accounts. Much of our efforts revolve around orchestration of suppliers and identifying and supporting customer business process changes to scale implementations. We’re doing all we can to shorten the critical path to top line growth. We have some preliminary views of planning assumptions for 2019 to share. We expect service revenue to be flat to modestly higher and to vary quarter-to-quarter based on timing of when services are performed. It looks like license revenue has stabilized around the current rate. Guardian revenue made trend down modestly as we continue to focus on maximizing contribution margin from this area of the business. Discover and Barcode bookings will grow significantly in 2018. We expect growth to continue, but still anticipate a wide range of potential outcomes for this key area of the business. We think the most likely outcome is the continued acceleration in bookings trends, consistent with our momentum theory of market development. When bookings will accelerate due to a tipping point in the market remains hard to predict. The range of potential outcomes is largely a function of the nature and timing of key account developments and the effect of adopting by market leaders on the rest of the industry. The translation of bookings to revenues will be affected by revenue recognition principles as applied to specific contract structures. As we signed more and larger contracts, the application and revenue recognition rules and policies will become better understood. In the meantime, there is a wide range of possible revenue recognition outcomes as well. Given our assumptions about revenue composition, we expect margins will improve several basis points from 2018, reflecting a higher concentration of Discover and Barcode revenue. We expect operating expenses to be up single digits, reflecting the full year impact of 2018 hiring as well as 2018 cost-of-living adjustments. 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 strategy.

Thanks, Charles. Bookings and revenues for Digimarc Barcode for retailers and CPGs have grown this year, but not enough. Despite significant percentage growth, the absolute level of these measures are not high enough yet to support our work capital investments, not yet reached the inflection point and market momentum that is a tentpole strategy, at which point, we expect revenue growth will accelerate. We are doing what we can to step up the pace. We’re improving our tools as evidenced by the recent release of Digimarc Barcode for Adobe Illustrator and integration of our quality management software with workflow and management leader Esko. The illustrator software and Esko’s integration will improve enhancement efficiency for prepress professionals. We’ve trained 90 professional artists of 20 prepress partners to do enhancement. We have extended other supplier relationships with leading point-of-sale scanner vendors, fresh-product scaled printer suppliers, machine vision companies and packaging print suppliers. And we launched an online learning system and service portal to support them. Some of our retail customers have begun giving us detailed item movement data. This proving very helpful to them and to us by informing research and development activities on highest impact items and helping customers and their suppliers to focus selection of packaging for enhancement on the highest impact items. The improvement in tools, process, training, support and analytics are making us more efficient. This is an important development of making progress toward our financial goals. Acceleration of growth will be heavily influenced by the pace and outcome of the pending contract negotiations with certain customers and prospects. In the meantime, we are restraining the rate of investment. Our operational focus is on account management and delivery. Our customer focus is on large-format grocery and general merchandise, including the warehouse club channel. And as you know, we can support many enhancement store operations and shopper engagement for these retailers via our Intuitive Computing Platform. This leads to variations in implementation plans from account to account. Carriers of focus include packaging, thermal labels on fresh products, hangtags on apparel and shelf labels. Important applications include faster checkout, more reliable product labels and better shelf inventory management. We’re making progress in packaging enhancement with Digimarc Barcode with several retailers. We’re making progress with soft goods as well. Test results for the Digimarc enhanced hangtags for apparel in stores have been good. The products are in the stores and are looking and working well. We are told that the customer has informed supplies that hangtags going forward should be Digimarc enhanced. The volume of hangtags submitted for enhancement has increased significantly. The retailer that began use of our platform hangtags have begun testing of private packaged goods. The first enhanced private brand packaging has been printed and is now at the converter aisles with stores. Our presentation regarding thermal labels to IT management of this retailer was well received, and next up was to work with store operations to gather information, setting the stage for a pilot program. Scheduling the pilot is depending on continuing success with hangtags and assessment of early private brand packaging pilot results. We’re working with another large retailer and their suppliers on a plan for implementation of our platform, beginning with enhancement of private brand packaged goods and thermal for actual label products. Contract negotiations are continuing with this retailer. Digimarc Barcode for thermal labels is live with 2 retailers. We’re actively marketing across the industry. Financial and operational leverage is magnified by CPG participation. The application focus of the CPGs is on the manufacturing quality control and consumer engagement. The manufacturing quality control application that we have developing cooperation with a leading CPG and their machine vision supplier has been presented to a number of other CPGs and seems to be gaining traction. Several CPGs are piloting the solution as we package it up for general commercial release. Our collaboration with a leading CPG on business process is bearing fruit as we plan for first production of high visibility brand product moving to stores in the next quarter or so. Our focus with them is on how to efficiently scale the Digimarc Barcode enhancement process. The next stages of our work together are to begin shifting responsibility for enhancement to their existing packaging suppliers, as we move product and test environments into retail stores. Another CPG has several SKUs on the shelf at a large retailer in a silent pilot, with a plan to follow along with a dozen more -- dozens more SKUs all in support of the various consumer engagement programs planned for 2019. CPG interest has increase recently due to some outreach from a large retail customer. A pilot program has been proposing following 5 major suppliers to this retailer to the deliver Digimarc enhanced products to the shelf in the first half of 2019. We’re encouraging several other CPGs supplies that we’re working it to participate in the pilot. The objects of our developments of our platform requires that we orchestrate many aspects of account management, including customer and supplier resources. The business process changes govern the pace of our progress with accounts. Given the relative scale of Digimarc to our key customers and their suppliers, this is quite a challenge to get everyone rowing in the same direction. As our software and support mature, we’re becoming more sophisticated and efficient, and our supplier relations have started improving. Our supplier partners are stepping up their marketing and sales activities. For instance, at a recent trade show, PACK EXPO, three suppliers, Berry Plastics, Polytainers and Cheer Pack featured Digimarc enhanced packaging in their exhibits. I was very pleased to see an article today in the trade publication Packaging News Australia about a Halloween promotion by Arnott’s, Australia’s second largest supplier of snack foods, to activate their holiday campaign using Digimarc Barcode on packaging and Digimarc Discover. What is notable here is that the program required no direct support from Digimarc. It was conceived and executed by Fuel Communications and shops. It provides how globalization can occur as our execution strategy matures. All these developments should allow us to move more quickly to close accounts, conduct pilots and transition to production. As you know, our vision assumes that in a mature state, partners can act autonomously in building value on the platform and they or their client will send money to Digimarc. In Europe, planning for the packaging pilot with a large supermarket chain that I mentioned in our call has transitioned to planning for rollout, without a formal pilot stage. Our supplier partners are also leading this initiative. This is an ambitious project. Although, everyone seems to be on same page, the contract is not yet done. Elsewhere on the European scene we have some recent developments regarding plastics recycling that may become quite important. The board of directors of the influential Consumer Goods Forum issued a statement last Sunday, calling for the consumer goods industry to play a leading role in eliminating plastic waste and endorsing the Ellen MacArthur Foundation’s new plastic economy initiative. The foundation has been funding work, known as the Holy Grail project to identify means for improved sorting of plastics in recycling facilities for many years. We have been told that the research has narrowed to digital watermarking and chemical tracers. The digital watermarking option is built on our Intuitive Computing Platform. The Holy Grail team is headed by a principal scientist for package research and development at Procter & Gamble. Notable participants include Danone, L’Oreal, PepsiCo, Henkel, Constantia Flexibles, Tomra Sorting Solutions and the European Association of Plastics Recycling and Recovery Organizations. Earlier this year, the European commission reported to the European Parliament that scaling up new technology solutions, such as digital watermarking, to allow much better sorting and traceability of materials with few retrofitting costs. The workgroup intends to publish its recommendation for a global industry standard in May of 2019. The head of Digimarc’s European team has been asked to speak at a conference in Berlin on December 6 concerning our platform for plastics recycling sorting. The conference entitled, Recyclability and Secondary Raw Material Used in Packaging, is sponsored by the German Federal Ministry for Environment, Nature Conversation and Nuclear Safety and other agencies. The use of Digimarc Barcode in plastic consumer product packaging is beautifully synergistic with our general strategy, adding value for CPGs to embrace our platform. When coupled with our emerging manufacturing and quality control solution, it completes the full cycle of product package life cycle support that our platform provides. I visited our other key geographic market, Japan, in August, where commercial activities are beginning to take shape. While there I presented an update to the largest audience ever of study group representatives. I also met key partners and with executives from two important retail prospects. One, a large grocery chain in Japan has completed a successful proof-of-concept and has planned to go live with Digimarc enhanced products on shelf in Q4. I had a productive high-level discussion with another retailer and will be returning to Japan in a few weeks with a specific proposal for implementation as a follow-up to that meeting. During the quarter, one of our greatest allies in Japan, Dai Nippon Printing, wants to brand protection service that includes a proprietary formulation of Digimarc Barcode. They publicly disclosed a forecast of $8 million for the new service for fiscal year 2020. We have no opinion on the forecast, however, we see it as nice -- we believe it’s nice to see commercialization of the platform underway in Japan with a valued partner. It’s another sign of progress. We hope that we will begin joint R&D with a global leader CPG in Japan in Q4, following several months of scoping and negotiation of contract terms. CPGs have been struggling with how to improve consumer engagement via packaging. They don’t want to be beholden to intermediaries like Google or Shazam, nor do they want retailers like Wal-Mart or Amazon in the middle of the brand experience. This foretells moving the Discovery via scanning or image recognition into the lower levels of the camera stack and smartphones. Our work with Microsoft has demonstrated operating system integration of Digimarc Barcode detection. Apple’s recent integration of QR code reading into the iOS was another sign of growing receptivity to making auto identification native in the future set of smartphones. Our Intuitive Computing Platform architecture has long presumed this outcome. We are encouraging the growing number of CPGs that we’re working with to help raise development priority of auto ID for smartphone makers. As most of you know, this is an important aspect of the endgame envisioned in our strategy. We have put in place the basic building blocks with industry leaders and their suppliers in key geographic markets, with most of our resources focused on U.S. retailers and CPGs. An important question on everyone’s mind is when will the inflection point occur. I’m not satisfied with our progress thus far this year on growing bookings, and publicizing evidence of progress among early adopters and details about collaboration with our industry leaders. Never the less, my experience has strengthened my belief in the wisdom of the top-down approach to market development. I have witnessed instances of the powerful influence that these industry leaders can have on suppliers and competitors. To succeed, we must deliver value and scale to these leaders. When we do, I’m confident that the market will move in the big way, supporting our financial and strategic goals. Management is obsessing about creating these tipping points. Much of our work concerns orchestrating customer and supplier resources to accommodate a new data carrier and mission critical highly managed aspects of complex supply chains. We are making progress and doing all we can to make more progress faster, including capturing experience and process, expanding our quality tools and improving enhancement efficiency, and buttressing our account management with seasoned leadership and thoughtfully organized account teams. Digital transformation is atop the C-suit, our target markets. We have no doubt about the relevance of our platform to this transformation. Intelligence gathering interfaces are proliferating toward societies and economies around the world. Reliable, efficient, identification of media is a critical element to the foundation for this massive new information processing architecture. We recognize that the key measures of performance for capital markets are bookings, revenues, cash flow, and number and scale of client engagements. Customers are focused on demonstration of ROI, functional and aesthetic quality of enhancement, efficiency, impact on business process and TCO. As we address these key performance indicators of investors and customers, we endeavor allocate capital wisely, while improving our customer engagement, supplier management, software development and training and support. We are becoming more sophisticated in all aspects of successful execution of strategy, as our understanding of the platform, markets and ecosystem matures. As yearend approaches, we are doing all we can to bring home the business. We’re also getting ready to the National Retail Federation show, January 13th to 15th at the Javits Center in New York City. I look forward to providing a detailed update to the Capital Markets fresh from the show at the Needham growth conference being held January 15, 16 also in New York. Our priorities for 2019 are to move the market leaders to levels of implantation, where they will influence the rest of the market to adopt, which should accelerate growth in bookings and revenues. That’s it for our prepared remarks. Now I’ll open the floor to questions.

[Operator Instructions] And your first question comes from Rob Stone from Cowen and Company.

Being one of those pesky capital markets people I wonder if I could just ask you to summarize the status by now of how many customers with -- how many retailers with product in store -- you don’t have to say which type -- how many with whom you are in contract negotiations and the same 2 data points for CPGs?

Product in store, I believe, is 4. And we have negotiations going on with two. Actually, and there will soon be another with product in store that I mentioned in Japan. And then with respect to CPGs, it’s actually getting to be a pretty big number in terms of, I’ll call them, early discussions, pilot programs, and so forth, not necessarily large-scale contracts. But we have 1 contract with a global leader. We’re hopefully in the final stages of the contract with another one. And we have another 5-or-so CPGs that are interested working with us in the pilot program we referred to. And we have several more of that we’re doing various things with, including setting up pilots for the manufacturing quality control, and a couple of CPGs who are interested in security applications, who will probably not get disclosed in the foreseeable future. So I think, that’s my best top-of-mind answer to your question, Rob.

Okay. And following up on the plastics recycling commentary, it’s earlier days for you in Europe than it is in the U.S., where you’ve been chipping away at this problem for quite a while. And centrally planned bureaucratic efforts tend to move along at a pretty slow pace. But do you have a sense of by when the regulators envision this new program being implemented, if they’re going to decide on something by May of next year or propose it?

Well, the reason that I have disclosed it for the first time publicly is that there seems to be a tremendous surge in support going on that is represented by the statement from the Board of Directors of the Consumer Goods Forum on Sunday from their meeting in Paris. The CGF is a -- is really the CEO level global leaders of consumer products industry. And so when they put out that statement, I felt like things are getting pretty serious. The study group that has been looking at means of improving plastics sorting, has actually been examining our platform for about 10 years now. So we have much behind us. I haven’t talked about it because I haven’t felt it was ripe enough to be meaningful in terms of the interest to capital markets. But now the committee says that they’re going to issue a statement in May of ‘19. And with the CGF now behind them, it looks to me like something is going to happen. And as far as I know, there are only two options under consideration, us and chemical taggants. And so it’s time for us to become more public about the virtues of our platform. And as I noted in the remarks, it’s synergistic and supportive of the strategy that we’ve described to the CPGs all along of full product life cycle support from a single platform. So that’s why I brought it up and that’s what the schedule is as I know it. In terms of implementation, that I can tell you my theory, I don’t have any detailed insight on any company’s product plans, but I believe that the plastics issue is growing in perceived significance globally by governments. And so one of my thoughts is that if the committee does issue a decision, I wouldn’t be surprised if the European Union began to talk about incorporating it into regulation. Because they have an ambition in the EU to have demonstrated significant improvement in plastics recycling by 2025. So they’re really getting worried over there about the effect of ineffective plastics recycling on the environment and people’s health. So that’s as much as I know at this point in time. Our Head of European operations is going to be speaking at this conference in a few weeks. I think that we’ll probably bring back some fresh information from that that may be useful, and if we do, then I’ll communicate it in January.

So looking at the merits of the two options, I guess, taggants would be added directly to the material itself before packages are made, and hence would be in any of the various containers made out of that batch of raw material, whereas watermarking is added at the level of labeling. I suppose, I don’t want to put words in your mouth, but looking at the cost benefit analysis for the brands and retailers that have to participate, the chemical taggants would have no other parallel benefit in the supply chain, whereas watermarking of individual products has all sorts of other benefits that we’ve been talking about for a while. Can you shed any more light on the pros and cons of either solution?

I can, and thank you for raising the point about labels. It actually is about Digimarc Barcode in plastic and in labels, which is profoundly significant. So we’ve long envisioned and how research and development on the application of Digimarc Barcode to surfaces through micro-topological variation, which means basically that the signal becomes part of the mold. And so there would actually be Digimarc Barcode in the plastic and in the label. And we are doing some demonstrations and some tests here in Q4 with Europeans, demonstrating that we can not only encode the plastic, but encode the label and then have the two of them synergistically identified in the plastics recycling process. And so that would be a major advantage over taggants, in that there are labels that cover much of the plastic surface in the plastic waste as it’s being transported along belts through recycling facilities. Huge advantage that we provide over taggants is the same advantage we provide over RFID, which is there is 0 marginal cost per unit. And so we’re much more economical at scale. And then the retrofitting of manufacturing facilities would be substantial of either approach, frankly. But the addition to chemical taggants would be subject to lots of controversy, I think, in the sense of adding chemicals to reduce the ecological danger of chemicals. So I think we have a good shot. And we also have the efficiency argument that you just made, which is that the chemical taggants have just one purpose only, and our application would have many purposes, including improving the manufacturing application, which is gaining quite a lot of interest in the CPG market, where today, are work is focused on labels; and in the future we may be able to identify both the substrate of the packaging and the labels in the manufacturing quality control process as well as in recycling. So I see lots of strong arguments in our favor. And we intend to participate more directly in these deliberations and to enlist the help of the leading CPGs or interest from in our platform to also help with achieving favorable decision from the committee.

One quick housekeeping one for Charles, if I may. What sort of percentage increase should we be thinking about for cost of living increases relative to OpEx next year?

Generally, pretty small, and CPI kind of Level 3%.

And your next question comes from Jim Ricchiuti from Needham.

Bruce, a lot of information that you gave us. And I’m wondering if we look at over the next one to two quarters, which of these customer programs or applications that you’re working toward, perhaps have the greatest potential to get to this elusive tipping point that you want to get to?

Yes, it’s still quite an actuarial exercise to try to figure that out. Any of the big players exerting influence or being seen as a competitive influence could cause a groundswell of activity that would create surge. We also are going to be putting quite a lot of effort into packaging for general commercial release, the work that we’ve done on manufacturing and quality control in the past, just been now about 1.5 years of work R&D on that. And we’re going to see -- the early indications of interest are substantial, and so I don’t yet know how to forecast that in terms of volume, but we’re going put a big push on it. And then with the large players, they sometimes still are, kind of, I’ll call it, meandering, in trying to figure out the implementation approach for enterprise transformation. And if we can get them squared away, and get them running down the path, then that could also be a significant impact on our revenues. So those are the kinds of factors that I think about, and I don’t know how to quantify the likelihood of one versus the other at this point.

You talked about supermarket chains, food retailers and discounts. I don’t recall in the last few conference calls if you’ve actually called out warehouse -- the warehouse club channel. And maybe it’s because I haven’t -- it had slipped my mind. But the reference that you made to that, the activity in that area, is there anything you can say about that or whether that’s something relatively new?

I had mentioned it or called it out in last quarter’s call. What I’m trying to do to be as transparent as I can be and helpful as I can be is to talk generically about what we’re doing with retail in more detail than I ever have, but without specific attribution. And so I hope you recognize that’s what I’m trying to do, trying to give more information, not less. But I wanted to describe the channels in which we’re operating, and you guys can make whatever inference you like from it. but it’s large-format grocery, general merchandise and warehouse channel.

I appreciate the transparency to the extent you can. You also -- if we think about the international opportunity, there are some things going on, interesting things, that you just alluded to in Europe. Yet it sounds as if there is the potential for things to move a little faster in Japan over the near term, is that fair to say?

Well, they’re both moving faster than the U.S., which is what we would expect. And that we have a great team in Europe. We have one gentleman working with a longtime partner of ours in Japan. And then they’re all doing excellent work in trying to move the market quickly to commercialization. And so Japan is really heating up right now, as my remarks indicate. But in Europe we think we have retailer who is a very significant retailer who is saying, "Well, we’ll just sort of merge the notion of pilot with production. Let’s just go." And what’s terrific about that situation, and a couple of situations in Japan, and the situation in Australia, is that our suppliers are beginning to take a leading role. And in the U.S. one of the problems that we’ve had is the customers have asked us to play the leading role and we’re too damn small. So I’m excited about getting proofs out of these experiences of the strategy, because the strategy is that we enable the suppliers, the suppliers serve the clients. We don’t directly serve the clients. So we are where we are in the U.S., I think, because of where we began. That is that we were seen as the innovator and thus held accountable for developing the application of the platform within the business, but then we’re small and we are trying to deal with these big elephants and it’s hard. So I hope we can bring back some overseas, some lessons learned the U.S. marketable the right way to do it, frankly.

And your next question from Josh Nichols from B. Riley FBR.

There’s been a lot of news circling of late about the expansion of Amazon Go stores, Microsoft as well, now you even see like Sam’s Club getting into the cashierless space a little bit. What are your thoughts on that as far as implications for the industry, potential opportunities for Digimarc and impacts that may have?

I think it’s all terrific, Josh. I think we need to do a better job of articulating our vision of a more cost-effective convenient means of serving the public as these concepts represent they serve the public. So we’ll see if we can do a better job of articulating that for the product market you guys will observe. But in any of these situations that are going on, ranging from the QR codes use in China, to the Amazon Go use of, largely, of cameras in the U.S. market, if the consumer can take a package off the shelf and just point their phone at it and press a buy button, I don’t know that you need to get a lot more convenient than that. And so the QR, you’ve got to -- still have to reorient the package and figure out where the QR code is and line it up to your viewfinder. And in Amazon Go you have to deal with them chronicling every aspect of your behavior in that physical space and then using it to market to you in ways that you haven’t yet probably imagined. And we don’t know yet whether the Amazon concept can scale. It’s obviously extremely expensive and all of the stores are quite small. And so we are pleased to see SAM’s starting to step up and say, okay, we’ve got to find a more efficient way to help our consumers shop. And then when you move to even larger formats, we think the notions that are represented in Amazon Go are not economically feasible and would take a couple of decades to implement in the existing footprints. And so we think we’re more efficient than QR, and more economical and easier to implement than go, so we got to get out there and make it happen. And that’s the point about our responsibility to scale our accounts. We’ve got to help them to be focused and to appreciate what we can do, and to articulate that very well with them and then to guide them to success. And when we do that’s where the inflection point occurs on that particular aspect of the application environment enabled by the platform. So we know what you need to do, we just need to get it done.

And then last question from me is, I know you mentioned before that one of the near-term opportunities that the company might be able to capitalize on is thermal labels, just given that they are relatively easy to implement, monochromatic and whatnot. Any updates you can provide on that front?

Yes, we have the solution now available for -- it’s called general release. So it’s ready to go and we’re marketing it to the industry, so we’ll see whether assumptions are well founded. But it is a less complicated supply chain. We do have steadily growing synergies with our suppliers. And again consistent with what I’ve been saying about some of the suppliers stepping up and building their sales and marketing, we’ve made some internal adjustments in our resources here to align our partner relationships more closely with sales to try to encourage that. And so this is a great opportunity for us to work with scale printer vendors to get them to help us to market this effectively to industry, and to be able to offer not only to the largest players, but also to some of the smaller sized players to achieve scale.

And your next question comes from Jeffrey Van Rhee from Craig-Hallum.

Bruce, back to one of the prior questions. Just trying to winnow through this really long list of opportunities and try to, sort of, figure out which ones are at the front of the line. I think the prior question you tried to focus maybe on the customers. And I wondered maybe from a different perspective, as you look at the next six months pipeline of potential size bookings, can you classify them as the use case, which use cases tend to look like the most material and the most sort of next six months-ish in terms of opportunity? Just trying to figure out sort of prioritization of what is that at the front of that stack. Because it sounds like a very full sort of pipeline with respect to quantity opportunities, but it’s just really, really hard to tell what you’re seeing at the front end of that.

Yes, there are three applications that are the focus of our attention. It’s thermal labels, manufacturing and quality control for CPGs and the improved checkout for retailers. It’s the notion I was just describing in some detail response to Josh question. So those are the 3. There are others, but that’s, if you want the focus in terms of where the opportunity resides, in my view, that’s where it resides.

And so, I guess, you’d say those three are sort of neck and neck? You can’t really discern one from the other as to which is the near-term opportunity?

No, as I said a few minutes ago, the handicapping of one versus the other is challenging because we’re somewhat indifferent to the starting point, as you know from our strategy. We want to get started with an account in an area of greatest interest to them and then expand our footprint. So we’re trying to exert influence on our customers and some listen more than others. We are -- again, we’re pretty small. And so we try our best. But they’re going to trend toward whatever their hot buttons are, and so we try to arm wrestle them being smart about how to move forward. But they’re going to do what they want to do, and we’re going to try our best influence them.

Okay. Shifting gears, I guess, over to the sales side. You put new leadership in place in April. Can you just talk to what the out of the gate changes have they made due to that addition to the team?

Yes, yes. So we hired Aimee Arana from Nike, and we’ve hired couple of senior folks from IBM. And we’ve been restructuring our entire company around the sales organization. In all of our planning quite explicitly, internally, we work backward from sales in how to close sales more quickly and to scale more quickly with the accounts that we close. So we’ve got now strong experienced leadership that is driving all of those changes in the organization. So it’s been quite a profound change.

And then, I guess, last for me. I think several quarters back, you had alluded to your desires to get your hands on a data set from point-of-sale to get a sense of the increased throughput at the registers due to the technology. Is the data set there? Have you been able to get any increased quantification to build that in more blatant ROI case for future customers?

Yes. So some of our customers have given us what’s called TLog, transaction log data, which is very kind of them and also serves their self-interest, allowing us to be better work for them. And it’s -- these are massive data sets, even we get a small sample. But what we’re learning from it, and we’ve tried to get this information from other places in the industry and found it hard to get elsewhere, is where can we have the greatest impact. And it comes down to a theoretical notion of a scan velocity per object. Which you could imagine exists in the world out there, but it’s hard to isolate. So we’re using very statistical techniques to try to determine which products have what influence, and then to determine the prioritization of those products. And to determine where the long tail resides. And there is a long tail we found. So there are many, many products that don’t have much influence on IPM. And so in our early days, in our efforts to build our tools and expand our sophistication and to train our staff and partner staffs we sort of took on the whole range. What we’re finding now at this stage of maturation of our execution strategy, that we can actually be much more efficient, and we can deliver an impact sooner at lower costs for that particular application of improving IPM. So it’s an a-ha moment. It’s a really terrific opportunity that’s been given to us by the access to these data. And so that will inform our sales and execution or implementation strategies going forward, and thus allow us to move faster to have more impact sooner.

And you next question comes from Ilya Grozovsky with National Securities.

I was actually wanted to know about the trial that you had at Wegmans. If you could give us an update of what’s going on there, how many products are on the shelves? And what specifically has been learned there?

I want to make sure that I understand your question, Ilya. So we don’t have a trial or test at Wegmans. We have full implementation. So are you talking about packaging, consumer products packaging?

Yes, yes.

Okay. We’ve done well over 90% of the packages there and we have a substantial now on-shelf presence with them, and we are in the pilot phase on thermal labels with them. So that’s why I want to make sure I understood your question. So with respect to the packaging piece of it, we’re working with them now on creating some statistical models. And with respect to the thermal labels, we’re expanding the pilot.

So I feel like last time you guys reported back in the beginning of August, you had said that you guys were starting to figure out -- to analyze the data. So is there an update on what the analysis 3 months later has wrought?

That may be part of what I was just talking about. So as I’ve said repeatedly in prior calls and everywhere, when I talk to the capital markets is, Wegmans information is Wegmans information. So we use it to make our operations better to serve them better, and to make their operations better, but I don’t have permission to share more broadly. So we’ll either let them say what they want to say, or eventually, perhaps, get permission from them to talk about what’s going on there. But it’s their information so I really can’t give you any details, other than to say what I just said, and that is that it’s proving very helpful to us in understanding how to be most efficient in delivering return on their investment at Wegmans.

And you next question comes from Glenn Mattson from Ladenburg.

Most of the topics have been covered, but I was curious, just building on Josh’s question on the Sam’s Club. Do you know how they’re going about that? Is it simply a barcode reader? And do you know whose technology they are using to do that?

Yes and yes. Next question. It’s a barcode reader right now. They’re just reading barcodes.

And on Wegmans, also, I mean, it’s nice to see that you’re starting to learn, get insights from that, I guess, what’s the most expansive field application to date. But do you still view them -- they were viewed as kind of a thought leader in the industry and ahead of the curve, and a lot of people liked to emulate what they do. Are they still working hard as an advocate for kind of helping to propel this solution more industry-wide? Because obviously that would benefit them as well. Do you still have them as a proponent for your activity in the sales base?

Yes, they’ve been an outstanding collaborator with us and industry leader in innovation. I think that much of the interest in the industry actually flows from the little work that we’ve done together with them. And we don’t generally try to ask them too often to provide advocacy, but when we have they’ve been very kind in helping us out. You know, of course, about the store visits that we did for a couple of years at NRF, that they hosted. So they’ve done a lot of work in helping us to be successful that we appreciate.

And you next question comes from Jeff Bernstein of Cowen.

Just quick question for you, a number of months ago, you had a webinar with McCormick and Sun-Maid talking about the journey they were going through with their packaging, and McCormick was translating their packaging very quickly. Sun-Maid was very obsessed about the appearance of their kind of classic packaging art. Where is that all sorting out? And is that an issue even in the CPG space where people are looking at quality -- manufacturing quality as opposed to the customer interaction piece? How much of a stumbling block is appearance of packaging? And what kind of progress is being made there?

Yes, those are great questions, Jeff. So with respect to McCormick, again, I don’t want to speak out of school too much. They have a very challenging format for their highest volume products, their small cylinders. And so as we have just been talking about the effect of products with Digimarc Barcode on IPM, on those kinds of products you wouldn’t expect a lot of impact. Now, that wouldn’t be a primary interest of the company like McCormick. But their interest would be more in consumer engagement. But -- and I don’t know how much you study the retail environment or personal shopping habits, but consumer engagement at the package does not really happen. It’s been surprising to me how little that has developed industry-wide, regardless of Digimarc. Leaving us out of the equation, just if you think about barcodes, QR codes, image recognition, NFC tags, all of that stuff, you add it all up, it still isn’t happening as much as any CPG would like it to happen. They’d like to have more of it happening. But I also thought they would find the path through to that answer. Well, what we hear from all of the big players is, okay, fine, Digimarc Barcode would make it easier to do. But the question they say is, what’s the app. what is the app? And so in my remarks today, I noted that they’re totally confounded by that. They didn’t want to pay Shazam okay, and then Shazam now belongs to Apple. They don’t want Google and Facebook in the middle of their brand relationship at the pack. The retailers don’t want whatever app it is to be taking the customer from their store to another store at the shelf. The brands don’t want to be captive to the retailers. So they are all kind of tangled up in their shorts over this month. And I think I know what the answer is, I think, they will help us to get to the right answer, which is that all of this auto ID functionality needs to be in the operating system and camera stack of the smartphone, so that everybody can deliver people wherever they want to deliver them. And so there are vehicles, for instance, for retailers to identify where a consumer is or to direct them to their app, and so that when they’re reading Digimarc Barcode with their app, they’re going to get the retailer experience when they’re reading it, elsewhere they’re going to get a different experience. Much of that flexibility and versatility depends on the level of implementation that hasn’t happened yet. And that’s why I mentioned that I’m personally spending a fair amount of my cycles trying to figure out how to increase the priority of auto identification generally with the iOS and Android developers, and also to make sure we’re on the list. So I think McCormick is one of those companies that is stymied with respect to consumer engagement by the question of, what’s the app. With the folks at Sun-Maid, frankly, they haven’t moved forward very much, and I don’t quite know why. I don’t think it’s a function of our platform at all, but, I think, it may be the same issue, which is they were looking at -- for a means to improve consumer engagement and then they also get stuck with the question of, what’s the app.

And the issue of the package -- eventually Sun-Maid did come up with packaging that they thought appropriately represented their brand, et cetera, but it seemed like something that they were very obsessed about, the appearance being perfected. Is that an issue kind of up and down the line for everybody in terms of moving to the new packaging?

Well, aesthetics is, I would say, an issue with everyone in the following way: we take approved artwork and we change it, okay. And the general objective of our prepress tools are to change it in ways that consumers can’t see, and we do very good job at that. But from an institutional perspective, the approved artwork needs to get approved again, because it’s different. So that creates overhead associated with the artwork. That’s the importance of the Signal Rich Art announcement -- not to overburden the script too much and spend time on script here, but we presented Signal Rich Art at the Adobe MAX conference during the quarter -- or actually during this month, earlier this month. And Signal Rich Art, in a short explanation, does away with that. It creates tools within the Adobe Creative Cloud, wherein Digimarc Barcode is inherent in the art, so there is no processing of art, there is only Digimarc enabled art. And that wasn’t yet productized. That was our first public showing of the research that we’re doing. But in the long run, I expect that a fair amount of new material could be done in that fashion. So I’m sure we can do a great job for Sun-Maid, but I think they were intrigued by the technology. They did a demonstration of it on the shelf, which, I think, was quite good. But then this, okay, now where do we go, kind of, business question, because of the fact that all CPGs are stymied on the consumer engagement proposition.

Got you. Got you. I was really more concerned with the bottleneck aspect and it sounds like Adobe thing is a great solution there. And I guess, you talked also in the script about training 90 artists, et cetera. So that’s along the same lines.

Yes, yes. I do not know, Jeff, of any aesthetic objection raised by Sun-Maid. I don’t think that was an issue at all.

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

Thanks, everyone, for participating in the call this quarter. Thank you for your continuing support. We look forward to talking to you again. Presumably, the first major public statements will be in January unless something comes up in the meantime. I look forward to getting you all up to speed shortly after the NRF in mid-January. Thank you very much. Goodbye.

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