Digimarc Corp Q1 FY2021 Earnings Call

Good afternoon and thank you for participating in today’s conference call. Now I would like to turn the call over to Chief Legal Officer, Mr. Bob Chamness. Sir, you may proceed.

Thank you. Welcome to our Q1 conference call. Riley McCormack, our CEO, and Charles Beck, our CFO, are with me. On the call today, we will provide a review of Q1 financial results and an update on the business, followed by a question and answer forum. We have posted our prepared remarks in the investor relations section of our website and will archive this webcast there. Before we begin, let me remind everyone that today's discussion contains forward-looking statements that have risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Charles will now comment on our Q1 financial results.

Thank you Bob and good afternoon everyone. Before I dive into the financial results I want to make everyone aware of two important changes we have made to our financial reporting structure. First, we are merging what we previously referred to as Retail and Media into one market category called Commercial. This change was made to better align with the structure of our sales organization to create better alignment and greater accountability. Second, we will report both total bookings and first year bookings for the Commercial market to provide better insight into future revenue trends. The definition of total bookings remains unchanged and is defined as the non-cancelable value of a contract over its term versus first year bookings which only includes the non-cancelable value over the first 12-months of the contract. To provide full transparency, in our earnings scripts we will provide comparative information under both the prior and new reporting structure for the remainder of 2021. We have also included a table within the script showing these comparative results for all of 2020. Revenue for the first quarter was $6.7 million or 8% higher than Q1 last year. This revenue increased 1% from $3.7 million to $3.8 million reflecting growth in Services to Commercial customers partially offset by a decrease in services to the Central Banks due to timing of program work. Subscription revenue increased 19% from $2.5 million to $2.9 million reflecting the impact of signing a new Commercial customer, which resulted in $460,000 of revenue during the quarter. The majority of the minimum contract value for this deal was recognized as revenue upfront, versus ratably over the term of the contract which is customary for most of our Commercial contracts. Revenue was recognized upfront as there were no continuing performance obligations once the software was delivered. I anticipate we will see similar deals like this in the future but I still expect most deals to result in ratable revenue recognition over the term of the contract. Revenue from Government was lower by 2% from $4.0 million to $3.9 million reflecting the timing of program work with the Central Banks. For the full year, we still expect revenue from the Central Banks to grow modestly in 2021 over 2020. Revenue from Commercial was up 26% from $2.2 million to $2.8 million reflecting the impact of the contract I just referenced earlier and the impact of higher services to Commercial customers in support of the plastics recycling work in Europe. Total Commercial bookings were $3.0 million, up 15%, from $2.6 million in Q1 last year. Total bookings included a $550 thousand booking for the minimum fees owed under a 2-year software license for use in brand protection and traceability use cases. The contract is with the same customer I referred to earlier. First year Commercial bookings were $2.5 million, up 11% from $2.2 million in Q1 last year. First year bookings included $200,000 from the same contract I just referenced, representing the minimum fee for the first year of that contract. Gross margin for the quarter increased to 65% from 64% in Q1 last year, due to improved Service margins partially offset by lower Subscription margins. Service margins were 59% up from 55% last year due to a favorable mix in billable expenses with higher labor and lower non-labor expenses. Subscription margins were 73% down from 79% last year reflecting higher license payments to a technology solutions provider. We have initial customer interest in new solutions where we do not yet have the full tech stack and are partnering to round out those offerings. These license payments are recorded as Cost of Goods Sold. Operating expenses were $12.6 million, a decrease of 4% from $13.0 million in Q1 last year. Operating expenses were lower reflecting lower travel, compensation and marketing costs. During the second quarter, we will record a non-recurring charge related to the separation agreement we entered into with our prior CEO. The separation agreement includes continuation of salary and benefits through the term of his employment agreement and the acceleration of stock awards that he would have earned if vesting continued for another two years. We estimate the total charge will be approximately $6.2 million, which includes $2.2 million of cash-related expenses and $4 million of stock-based compensation expenses. Excluding this non-recurring charge, we expect operating expenses for the second quarter to range from $12.5 million to $13.0 million. Net loss for Q1 was $8.2 million or $0.50 per common share versus a net loss of $8.9 million or $0.74 per common share in Q1 last year. We ended the quarter with $70.7 million in cash and investments. We used $7.1 million of cash and investments during the quarter to fund the business including $6 million in operations and $500,000 for capital expenditures. Our application for forgiveness of the $5 million Paycheck Protection Program loan is still in the process of being reviewed by the Small Business Administration. We do not have any visibility on when they may complete their review. 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. Riley will now provide a business update.

Thanks Charles. I want to start off by talking a bit more about the change in how we are presenting our financial results. This change reflects both how we are now going to market and how we are now running the business. In reimagining our Go To Market strategy, we realized the prior split of our commercial business into “Media” and “Retail” was not only flawed in name but also flawed in focus and opportunity maximization. There are wonderful assets, including and especially human assets, in the area we used to describe as “Media” that we could be, should be, and now are applying to our broader commercial effort. Therefore, the historic split no longer captured who we are or where we are going, and it was a no-brainer silo to knock down. Kindly note, we will continue to provide detailed breakouts for the rest of this fiscal year, so you will be able to monitor our business using both old and new reporting structures, on both a bookings and a revenue basis. Today’s transcript provides all this information not just for Q1 2021, but also for each quarter of FY 2020. In addition, we are now also providing further transparency into the segmented duration of our bookings numbers because it is important for your understanding of our progress. As with everything, we are fully open for feedback, thoughts or suggestions on how we can shed further light. I also want to provide you an answer to Jim Ricchiuti’s question from the Q4 call, an answer that I would imagine many are curious to hear. We currently still expect to report triple-digit bookings growth in what we used to refer to as our Retail business, although we now believe revenue growth in this area is unlikely to clear that bar. Revenue will, however, grow at an extremely high rate. I believe bookings is the best indicator for what all of us are waiting impatiently to see: an enduring inflection of adoption. Bookings doesn’t suffer from the vagaries of revenue recognition accounting rules and moreover, it is the leading indicator for where the revenue line is going. However, while we are indeed reaffirming that we expect to grow bookings triple digits this year, I want to tell you why I think it’s not really that relevant and that the only reason I am discussing this is because we promised you all an answer. I believe the truly exciting takeaway from today’s call is how we are positioning ourselves for 2022 and beyond. Size and scale bring a whole bunch of wonderful benefits to the forecasting exercise. A high percentage of bookings coming from renewals, which are much more predictable than bookings expected to come from new business; a big enough pipeline so that even the less predictable new business self-forms into a smooth distribution curve; and importantly, enough history in win/loss analysis to accurately probability weight that distribution curve. With those attributes, a company can get to a statistically relevant prediction and thus give that guidance with confidence. But specific guidance for a company that did $5.4 million in bookings last year, that doesn’t enjoy the luxuries in forecasting I just listed, that has some large lumpy opportunities to which it is almost impossible to accurately assign a meaningful expected value and that has multiple ways a customer could start adoption that result in wildly different outcomes for day one bookings? Well, it’s frankly a bit garbage in/garbage out. And I just think promising without truly high conviction does a lot more damage than good as we try every day to earn your trust. For you to build trust in our honesty and transparency, we are best served in telling you things that fall into one of two categories. Outright facts or things that are based on knowable, high-conviction expectations. Internally we focus on 'under promise and over deliver,' and there’s no cadence I’d rather get in with all of you as well. And candidly, for all the reasons I listed, we just can’t have the level of conviction in our 2021 bookings forecast that we’d like to apply in our communications with you. On top of all that, there’s something else that makes our current internal numbers less relevant. We are long-term greedy, not short-term greedy. We are not going to do a deal that leaves money on the table just to make a number. We are not going to chase business that doesn’t align with our new go to market strategy just to make a number. And we are not going to steer a customer to a paid-upfront contract, which delivers a bigger day one bookings number but comes at a discount, versus a pay as you go contract, which understates contract size day one but allows for a larger total dollar-sized deal, just to make a number. Do I think we’ll grow bookings triple digits? Yes, I do. It’s just the logical outcome based on our pipeline and the level of engagement we have across the globe. There are many ways to get there, we have the skilled team in place to execute on the opportunity set, and there is significant upside potential even above our current internal point estimate. So if we can just ignore for a moment the arbitrary digit-count hurdles, here’s what I do feel comfortable committing to you. We will grow bookings significantly. With those two housekeeping items out of the way, I want to turn to what I believe should be the most exciting part of this call, which is sharing with you how we are switching our go to market strategy in order to build a scalable, sustainable, high-growth and high-margin solutions business, one that should allow for a shortening of the time to meaningful gross profit dollars while also increasing our trajectory for years beyond that point. Before I give you the output, I want to spend some time on the input. Very high level, and to use software terms, I believe there have been three Digimarc releases. Digimarc v1.0 was a bunch of really smart people with a game-changing technology who had the common innovator’s curse of trying to predict where the demand would come from and then taking the first steps to get there. While a natural place to start the GTM journey, the problem every v1.0 company has is that truly great (read: scalable) opportunities are not sold, they are bought. It is really hard to convince a large customer that they have a problem and then try to prove to them you can solve it. It requires pre-defined and static pricing, finding the right audience, and then defining the right ROI tests. It also requires ad-hoc, reactionary adds to the tech stack vs customer-driven and data-informed roadmapping of your product. This isn’t scalable and it’s not margin friendly. DMRC v2.0 was released when a few visionaries in their fields heard about what we were doing, came to us and said 'I have a problem. From what I understand of your technology, I think you might be the solution.' If in our business planning post that first conversation, we can ascertain that this problem is not prospect-specific, and thus the Total Addressable Market (TAM) is large and our solve could be applied then we have the spark of scalability. And importantly, the spark of high-margin scalability. In addition, because DMRC 2.0 customers are coming to us with a problem, the proof we can solve that problem is easier to provide, and wonderfully, they most likely already have a line item in their budget for a solution to their problem. It also allows us to be more thoughtful in how we price, because our solution can be priced based on the value it provides, not some arbitrary price per GTIN. The $50/GTIN pricing model almost always leaves some value on the table. In some cases, that value is measured in orders of magnitude. Orders with an “s.” For DMRC 2.0 customers, the $50/GTIN pricing construct will be almost irrelevant going forward. Our pricing will be higher when viewed from the standpoint of this arbitrary metric of “price per GTIN,” because we are selling a solution, not a GTIN. This is especially true in DMRC 2.0 solves where serialization is a key ingredient. And then, for true scalability, there’s DMRC v3.0, our newest release. DMRC 3.0 is when a happy 2.0 customer becomes a “Digimarc Champion,” reaching out either across divisions or geographies in his or her own company, or in some cases reaching across the aisle to competitors, and saying 'we’re seeing this type of ROI, but we believe if we adopt this as a wider solve, that ROI will be even higher.' Our work in sustainability is the most public example of our v3.0 release, but there are others earlier in the process. DMRC 3.0 is currently the version to which we want all our products and customers to migrate. I say currently because there is a DMRC 4.0, which involves data-analytics, but it’s still in the ideation stage. More on that if and when relevant. DMRC 3.0 allows for us to really roadmap our products. It allows us to fully lean on our wonderful partners, so we can deliver enduring triple-wins (customer, partner, and Digimarc). It creates powerful network effects that allow us to iterate with our customers because we’ve moved up a level in terms of our relationship with them, from supplier level to partner level. It allows us to really consider where else in the stack we can provide value, because we can fully grasp the solutions our customers are seeking, not just the product. And this is incredibly important, because if the history of tech has taught us anything, it is that while people will make do with tools, what they really want are solutions. To be fair, a lot of these features are available in 2.0, but it is in 3.0 they become truly impactful to our business. With the release of 2.0 and more recently 3.0, then, we have the opportunity to reinvent who we are and how we set our priorities. It is a massive unlock for us in terms of both time to and scope of future value creation and it is the way forward. We are customer-obsessed and customer-driven; customers have to provide the answers to almost every question we ask ourselves. We are upgrading our corporate Customer Experience (CX) in a bunch of simple ways, so we can provide an intuitive, consistent and customer-friendly way to do business with us, no matter what entrance you have chosen as the starting point for your Digimarc journey. We are becoming, and will continue to become, easier to do business with, in multiple different ways, because great CX is a byproduct of customer-obsession. We are guiding our business based on data, not guesses or gut. We are no longer chasing lower-margin development deals solely for the current bookings they would provide so we can free those otherwise-booked internal resources to focus on vision and roadmap. This discipline will allow us to capture bigger and higher-margin bookings in the not-too-distant future. To this point, and to be clear, if we can work with a potential customer or partner to build a business plan that proves out that signing a Proof of Concept (POC) or entering into a base-level partnership agreement helps us accelerate our roadmap, we’re in! And we still want to hear, meet, and plan with anyone interested in doing so, as we realize we don’t have a monopoly on great ideas or on amazing technology. 'Not Invented Here' is not welcome here. But if you’re a customer that wants to perform a POC for an offering that is already fully baked, we completely hear you and fully respect your process. After you’ve done whatever it is you need to do to complete your POC and are ready to go into production with us, we will be here ready and eager to everyday win your business, and we can’t wait to reconnect. If you’re a partner that wants to pay us a small fee to get on-boarded just to check a box or put out a press release with us, we are honored and thrilled you are as excited as we are by our future. But we are focusing our internal resources on delighting partners with whom we’ve roadmapped the path to wonderful triple-win (customer, partner, Digimarc) deals in the near-future; those partners, and our soon-to-be-delighted shared customers, deserve our laser-focus. In other words, before we chase rainbows that might help with 2021 bookings but aren’t obvious accelerants to road-mapped solutions, we are now taking the time to ascertain if there are indeed giant pots of gold on the other side of said rainbow and not just a few gold coins along the road. Moving up a layer, across the whole company we are questioning every assumption and being patient to come up with the right answer. 'Good enough' and 'This is the way it has always been done' are no longer answers we need to accept. I have promised my teammates one thing above all else, and that is we will allow for focus, not fire drills. 2022 and beyond will be much better if we take the time to do things right starting today, acting with the wonderful freedom to plan, not react. Mid-race, then, we are in essence shutting down our bowl-of-spaghetti GTM engine, one that was cobbled together as one might expect from a company on a v1.0 release, and we are in process of building a Space-X engine to replace it, one we will have ready for 2022 and beyond. But here’s what’s amazing about this company, this technology, this opportunity, and every single teammate on this team. We are going to make this hot swap in such a way that if we didn’t just tell you we were doing it, you wouldn’t have known it had happened. Instead, you would have just noticed the outcome we expect this upgrade to have, which is an enduring inflection to a truly-scalable, high-margin, customer-informed and customer-driven solutions company that is changing the world in many different ways. Because on the side, the team has built this auxiliary engine of 'on-the-truck' products and pipeline that will carry us across the checkpoint of 2021 without forcing us to pull into pit row. I am in awe. And frankly, all of you should be as well. Starting on our Q2 call, I want to begin introducing you to the internal leaders that are actually creating all this magic. As I said two Mondays ago, my confidence in this opportunity started with the technology, but grew infinitely once I got a first-row seat to the level of talent throughout this amazing team. I know when you get to spend time with them, on these earnings calls or at a much-reimagined Analyst Day that I can’t wait to get organized, you will see with your own eyes why I am so confident. So I will stop there and save a further description of the impressive details underlying all the above until then, because I want you all to be able to dialogue with the visionaries that are actually behind them. In the meantime, we are happy to answer any questions you might have on this subject during the Q&A session at the end of our prepared remarks. And as I said two Mondays ago, I don’t expect you to do anything but judge us on our results. Three last things before we turn it over to you all for Q&A. First, I promised you consistency of message, and there was just too much level setting necessary to really start that process today. I don’t believe a series of shiny anecdotes tells our truth or provides you any value, you need a framework so you can follow threads across quarters. That is the only true way for you to monitor our progress and begin to extrapolate where we are going. Plus, a series of shiny anecdotes often reflects a true lack of focus internally, and we are not lacking focus. But with that being said, there was also too much goodness that’s happened since our Q4 call to not give you a quick update on some of them. And hopefully it’s clear how each of these aren’t just snapshot anecdotes or vague promises of what could be, but tangible stepping stones to our future. Any and all open threads you have from prior calls, bring them up in Q&A, we will help you connect those dots there. A wonderful partner of ours, PACCOR, announced in a customer-event they held just last week that the City of Hamburg has green-lit a full-scale commercial test of all packaging types PACCOR offers with the objective being to prove the power of applying Digimarc technology as a means to dramatically improve plastics recycling sortation. This is the first Golden Thread we are able to discuss, and should work in parallel with the efforts of AIM and HG2.0, as well as other Golden Threads yet-to-be announced, to prove beyond a shadow of a doubt the planet-saving benefits of our technology. Further to that point, I encourage everyone to keep an eye out for PACCOR’s annual report, coming in May, which will include a scientific study of the benefits of Digimarc’s technology. Thank you Nicolas and team for everything you do. Our partnership is the role model of what all corporate partnerships should be, and together we will save the planet. #digipac. On the AIM/HG2.0 front, the membership continues to grow in both number and global thought leadership, and the base plan for Phase 3, including test markets and packaging formats, has been locked by the Leadership Team. It will be publicly announced soon. I fully understand the excitement and curiosity surrounding this potentially world-changing endeavor, but I remind everyone this is not our truth to tell, so we ask you kindly respect that fact, as hard as I know that is. We also closed a deal with Practical Methods which has five things worth highlighting. First, it is one of the first big migrations we have done of an HP Link customer, and sets the template for how we can migrate more of those customers. Secondly, the customer committed to eight figures of serialized codes, which should give you a sense of how scalable this business can be. Third, Howard and his wonderful team are based in South Korea, adding a new flag to the Digimarc map. Fourth, the end customers being targeted are heavily cosmetic and beauty, a vertical in which we are just scratching the surface. Fifth, and most importantly, Practical Methods is a fantastic company that is doing wonderful things, and we are thrilled to be associated with them and more powerfully, call them a partner. Another fantastic partner of ours, Multi-Color Corporation (MCC), recently completed a seven-figure production run of serialized labels using a hybrid print technology. This is the first at-scale commercialization of our serialized offering using this cost-efficient hybrid technology, and opens up a whole other tier of the market that can benefit from our solutions around item-level traceability. As impressive as this is insofar as what it means for TAM expansion, we are equally as thrilled by whose packaging these labels will adorn. The customer, a large fresh food CPG company allowed us to pass along this message to all of you: 'Over the last few years, we made significant strides adapting the Digimarc technology into brand image, and we now look forward to propagating it across our SKU portfolio. This production run validates that our technology scales in a cost-efficient way. Moreover, thought leaders are adopting. And last, like the Brooklyn Nets, we just keep adding all-stars to our already impressive roster. I mentioned on the last call all the wonderful talent, experience and perspective we’ve added at the Board level, but at the company level we’ve been busy as well. We have added wonderful talent across the board, including two new senior executives, Tim Price (Chief Revenue Officer) and Kelly Haggerty (Chief Product Officer). As a product company trying to get to big revenues these are two positions we had to find experienced all-stars to fill, and I’m thrilled to announce that mission was accomplished. Second, I want to share some feedback on what I have learned in these last two and a half weeks. I have been meeting with as many teammates, partners and customers as would make the time for me, and I want to thank them all for their time, trust and candor. In these two weeks, I grew taller. The consistent message I heard from customers and partners, when I asked what we could be doing better, is: 'Just do what you promised us you’d do ‘new guy. Make this transition seamless because we love the teams we’re working with at Digimarc. Don’t you dare mess that up!' The message I heard from teammates was a bit more varied and touched on quite a few different topics. And it was downright inspiring to have the kind of honest and transparent dialogue I was fortunate enough to have with so many passionate people. Importantly, the single constant I heard in each and every conversation was the love they each have for the company and the people who work here, a message often times said overtly, but in any case was woven into all the wonderful ideas people shared with me regarding ways to make us better. I want to brag a bit about my new teammates, because they deserve to be bragged about. This team is tough, it is smart, and it is passionate. It is a team of rock stars dedicated to changing the world. I heard quotes like 'I came for the tech but stayed for the people,' which just about sums up ALL my conversations. The level of honesty and transparency, aka the level of 'CTC-ness,' I repeatedly heard made me realize just how lucky I am to be a late-season-trade to this amazing team. Every company has its beauty marks and its warts. Normally, the people inside a company, seeing firsthand how the sausage is made, tend to see much more the warts, much less so the beauty marks. And that’s just not the case here. The best way I can describe the spirit and belief of my new teammates is that if I could somehow copy and paste the internal view about our future to partners, customers, and investors, we’d have millions of partners, billions in revenue, and trillions in market cap. My teammates, and their unshakeable belief in us, is the foundation on which all the aforementioned will be built. And, my biggest takeaway from these last two and a half weeks? That foundation is world class and miles high. And then finally, I want to share a question someone asked me last week, and my answer to him, because while some might call it a stretch goal, it is what loops through my mind every day on endless repeat. He asked how I would define success for Digimarc, and I told him the answer lies on four axes: 1) We are considered the single best company or organization anywhere in the world for which to work. 2) We are considered the single best supplier or partner of any company, in any industry, anywhere in the world. 3) We never run out of really high ROI ways to invest a portion of our prodigious amounts of free cash flow and thus aren’t returning all of it, just a large percentage of it, to our owners. 4) And every single stakeholder of Digimarc can proudly tell their kids and grandkids that yes, they actually were a Digimarc stakeholder and yes, it did change, and continues to change, the world. As with everything, judge us on the results. With that we’ll open it up to Q&A. We want to try the same format as the last call, but hopefully with a few more questions this time around. We have not set a hard stop and will be here for a while, and everyone will have the chance to ask their question. However, for us to be able to continue this slightly different Q&A format, we do ask you all to keep it professional. Again, not asking you to take it easy on us, you guys own this company, just asking you to keep it professional.

Thank you. And your first question is from an investor named Harvey Montaz.

Hi, Harvey.

Could you go into a little bit of detail on the number of shares? We had 12 million this time last year and we're up to 16 million now. And then also if you could address the number of short through like 15% of our outstanding stock has been sold short.

Yes. Let me address the share count myself. We bought 3.7 million shares. So, the share count has changed. Any other comments on that?

Yes, 16.9 million shares outstanding.

Yes. So, your numbers are a little bit off but 3.7 of that was me and my own royalties. On the shorts, do you want me to confirm the number that you said or what's your question, why are they there?

Yes. Why is it 15 percent? Why do so many people want to short our stock when we present such a great opportunity?

I don’t know. Again, it's a great question. I honestly don’t spend that much time on the shorts, and I can answer if Charles or Bob want to chime in. The best way to handle shorts is to recognize that there’s nothing inherently wrong with them; they’re just doing their job. Our role is to show them, at least in this case, that they're not very effective. The best way to outperform the shorts is to execute one contract at a time or two. We obviously care about the stock for many reasons. One reason is to attract attention for the team, and recruiting and maintaining a fantastic team is one of my top priorities. It's also important as currency for acquisitions whenever we consider future moves. Additionally, I understand that owners need to transact based on the monetization price, which is essentially the entry and exit price that Digimarc has established for its stock. Honestly, I hope we have a high short interest because it serves as a buffer. Shorts are ultimately individuals who will have to buy our stock at some point. Many people on this call or in the world may never decide to buy Digimarc stock, but shorts will eventually need to purchase if we prove them wrong. That’s my perspective on the shorts, and I have likely considered this more in the past three months.

Okay. Will we be moving to Portland or are you just going to still operate out of Florida?

That's a great question. I actually just signed my lease today, I'm not going to move full-time. I got a 10-year-old and an 11-year-old in school here but I will be logging a lot of miles in here. And also, I don’t just want to come to Oregon, I mean it's very important to spend time with the team. But there's a lot of our business that's happening elsewhere in the world. And there is nothing that would make me happier than to get on a plane and go visit customers and suppliers and partners. It's a little difficult to tell; people don’t really want to do face-to-face meetings. So, I was doing a lot of those meetings on teams and Zoom. But yes, I'm going to probably get platinum status pretty quickly here on the plane.

Okay. Will you be getting a national PR company?

I'm sorry?

Will you be getting a national public relations company?

So, from all sorts of communication, investor relations, corporate communication, government relations are a big focus of ours and that's what we're working on.

Okay. Thank you very much. Look forward to many more years.

Fantastic, me too. Thanks.

And your next question is from Andre Peppitue with Coatue Capital.

Hi, Andre.

The pricing per G-10 indicates that you’re confident it will exceed 50 when calculated. I understand there are potentially millions of G-10s available. Would it be accurate to say that you're considering a figure in the billions for HolyGrail 2.0?

We haven't discussed our pricing for the recycling application yet. My main point is that, in nearly every situation I'm aware of, which is quite a few, we can make a move if version 1.0 was logical because we aimed to replace G-10 for cornerstone. That served as a natural reference for pricing. As we developed versions 2.0 and 3.0, we focused on solving issues rather than relying on G-10, allowing us to adopt value-based pricing. Naturally, we won't reveal our pricing schedule in advance, as each pricing contract requires negotiation. I firmly believe there are very few applications where pricing can be assessed against a different framework beyond just an arbitrary G-10 figure. While I usually try to avoid discussing sustainability, consider the numerous products sold in plastic and the billions of units involved. If we can recycle some of those, we could exceed $50. At some stage, we might conduct a review to evaluate what this means on a per G-10 basis, but that's not our current focus. Right now, we are concentrating on identifying the problem, quantifying it as best as possible while collaborating with customers, outlining our solutions, and determining our share of that. The G-10 factor has become less relevant.

Okay, great.

What I would say Andre maybe another would answer you first without answering how we're going to price per recycling. Yes, the massive mass of opportunities.

Okay, thanks. I'll wait for the Analyst Day on more specifics, I guess. Thanks.

Thanks, Andre.

Your next question is from Jeff Van Rhee with Craig-Hallum.

Hey guys, this is Rudy on for Jeff. I want to start with the one customer that contributes the 450,000 in the quarter. And I think you just said it was a commercial customer unless in there something with it. Was that a media or retail customer, what was the use case, just any more color that you could give on that one?

Yes, Rudy. That was what we would have previously classified as a retail customer. And so, their focus is around brand protection and traceability.

Got it. So, there is no significant ongoing recurring stream from them; this was a one-time license deal.

So, that's the minimum value of the contract. So, they made a certain level of commitment. There is potential upside where we get recognized as an upside is realized.

Yes. And Rudy, this is an ongoing matter; we didn’t set up a one-time deal if that's your question. This isn't a license payment; it's a revenue recognition matter with them. As Charles mentioned, this would typically be recognized over time, and given the specifics of this contract, we view this as an ongoing relationship that we hope will continue for three years and grow, as Charles said.

Yes.

It's basically a minimum price for two years. So, beyond two years there is opportunity but even within the first two years there is opportunity for upside.

Got it. The Golden Thread you talked about Hamburg. What more specific gap in there you could share at this point. I know you said you're talking backwards or forward may but with Hamburg just what are the initiatives from here with them over the next 12 months in terms of testing. Have they laid out any specific timelines yet or?

Bob, you want to take and answer that?

Yes. It's still in the early planning stage. The environmental climate energy in agricultural authority of the city of Hamburg is working with both partners of which we are one and to put a plan together. And there will be participation by a Hamburg technical university in developing the project study. So, let's look at it as early-stage planning for deployment later in the year. And the primary focus is on proving up the ability to both identify and sort the various forms of plastic polymers and to increase the quantity of recycle waste we then pull out of the waste stream and to improve the quality of the sorts. So, that's kind of the nature of the project.

Yes. And really the significance here is multiple groups forming to prove our technology is the top of the trade. There is no single group; there are multiple groups that are being formed and running tests and trials that are running simultaneously to get to the same answer. So, this is they've alluded to; there are other Golden Threads that we have not yet talked about. But there is more than just one test of our technology as to the answer for plastic recycling.

Got it. And then just one more. I know you talked about revamping the whole product market engine and then have that ready next year and beyond. Just what are your early thoughts on what that looks like, I mean what does it look like now and what do you guys want to change and transform it into?

I'm glad you asked that because I may have misspoken; it’s already in progress. My main point is that we are currently evolving our go-to-market strategy, which is already happening. However, due to our auxiliary engine, you might not immediately see the impact in our bookings when we recover. I don't want to focus too much on this since it's not the main highlight of this call. We are confident in achieving triple-digit bookings this year. At the same time, we are thoroughly evaluating our approach to the market, which is what makes this opportunity so exciting. Regarding how we are changing our go-to-market strategy, we are driven by data and being customer-focused. We are concentrating our resources on opportunities that align with our planning roadmap, rather than experimenting as a newly established company does. We are at a stage where we can strategically plan how we develop our products into comprehensive solutions, and this includes the partnerships we are pursuing. When you ask what this evolution looks like, I can’t provide specific details just yet. I would love to bring Tim and Kelly on the next call so you can have discussions with them. It's important to note that this initiative goes beyond just sales and product; every team at Digimarc is experiencing this significant upgrade. All functional groups must work together, and they are empowered to transition into the organization we aspire to be. What’s pivotal in our go-to-market strategy will primarily revolve around product development and sales. Tim and Kelly will be able to answer specific questions on the next call, but as I've mentioned, our focus is on being customer-centric and making it easier to do business with us. We are not merely chasing deals for short-term bookings; instead, we are committed to careful planning and data-driven decision-making.

Got it. And lastly, do you have any updates on Wal-Mart regarding the count or number of packages they've tagged, or any expectations on when they will increase their labor?

I don’t know the labor issues; I don’t know if we talked about that. Charles?

Yes, we normally do and that's their bid on us.

Okay. Yes.

I think when we've highlighted before Rudy is that they're continuing to enhance packaging. There hasn’t been any disruption in the work that we're doing there but we're not going to give regular count updates.

Yes. I'll address the second part, which highlights that the beauty of our business model comes with its risks. There will always be go-to-market partners involved. Even as we expand our solution stack, there are adjacent technologies and products we will interact with. You've heard that our journey began outside of our technology scope. We could have chosen to surrender, but instead, we accepted the challenge and turned potential defeat into success, which you seem to recognize. The resilience and caliber of our team speaks for itself, allowing you to draw your own conclusions about the path they selected. Setbacks have turned into opportunities for us. In our collaboration with Wal-Mart, we have three key advantages. First, they are an exemplary corporate citizen, consistently prioritizing their stakeholders' interests. We have many ways to contribute to their efforts. We are also focusing on serving all our customers. To enhance this relationship, we engaged a consultant two months ago to help us fully leverage the opportunities with this valuable customer. Wal-Mart emphasizes doing the right thing, and we possess numerous tools that can assist them. This collaboration and the renewed potential we can offer Wal-Mart are the results of our strategic study, which ties back to our market approach. We are taking a step back to assess Wal-Mart's needs alongside our capabilities, delving deeply into this partnership. Ultimately, we anticipate this will result in a significant win for us, as we aim to transform from merely being a supplier to becoming a true partner. Additionally, we've learned valuable lessons through this process that can be applied to other retailers as well. Lastly, this process is designed to be repeated; once we thoroughly understand how to engage with our customers, we will have a template that we can utilize internally and extend to others beyond these retailers.

Got it, great. That's it from me. Thanks for that.

Thanks, Rudy.

Your next question is from Robin Knipp with Janney Montgomery.

Thanks very much, operator. So, Riley you partially answered the question that I was going to ask about understanding the sales culture at Digimarc and how effective it's been where we come from where we are and where we're going. And what I heard you say was if we can wait till the next quarterly call and get Tim Price on the call that would be helpful just to have a better understanding. So, let me just skip to my second question if I may. And that is, I recently attended the World Commercial Property Day 2021 sponsored by the U.S. Patent and Trademark Office during which I was able to hear Joel Meyer who is the EVP of Innovation Specifications and Standards.

I know Joel. I've heard of Joel here.

Yes, I thought you had. Speak about the value proposition that digital Wal-Mart’s can bring. So, during this time or state moves made by another one of the panelists I think it was Frank Captain who said 'Intellectual property is probably the most valuable asset in anyone's portfolio.' So, given our very robust and unique patent portfolio and the unique technology that we bring to solutions, can you help us understand how we should be thinking about how to value our intellectual property?

Yes, what I get to say now, Robin? That's your job not mine. Unless we're looking to monetize it, it's not my job. And Bob would probably cut me off by trying to do that anyway. There are so many levels of goodness here. And our IP is the massive one but it's only one. So, IP is I guess maybe the bedrock of which all value can be built. You can't build a lot of value in technology without strong IP, you can't. You can also build nothing and have a lot of value in IP. What we're doing here is both. What that turns into, what multiplier factor that is and on even if I could take a gadget the value of the IP I'm not going through but then with everything we're building around it. There is a slide deck on the our homepage. It's an introduction to whatever. And I forget what slide number it is but there is where we list the notes or I forget how we wrap into it. But to me it's sort of like why there is so much so many layers that of value and actually it's I think it's concentric circles is the way we represent it. IP is one part of it. There's massive value on each one. So, I would challenge you and say Robin don’t you stop at picking up the value of IP to get the value of every other mode in that stack.

That's fair enough. The reason behind the question is really about understanding its worth and the IP portfolio. We have patents that will expire at some point. With over 1150 patents issued and pending, I have no idea what the timeline looks like for the patent expirations.

Yes. But that's only one of the remotes, right?

Right.

And so, here's the thing, there are a couple of ways to answer that one. Number one is if we're not constantly patenting new things, we're not doing our job and Joel is not doing his job. And I know Joel does his job very well. So, one is request patents run off, and it's our only mode. If our only single mode was patent, yes, in 20 years maybe somebody could be where we are today with our tech stack.

Right.

Our responsibility is to stay ahead and continuously innovate. However, the IP protection we have is just one layer of overall protection. This is a key focus for us, especially for Joel. If you visit the website and check out the presentation, you will see that it's just one aspect of the broader strategy and multiple layers of protection we have in place.

That's fair, I'll go spend some time there. Thanks for taking the question, Riley.

Of course, thanks Robin.

I have a specific question and then some more general questions. Specifically, I'd like to focus on the practical method customer. And I'm wondering is my understanding correct that on the income statement, the revenues there which show up in the new Subscription category and not the Service category.

That is correct.

And then have revenues appeared on the March statement or do you expect it to show up in future statements?

So most of it was recognized in Q1. So that's the well I should say on that particular contract yes we won't get into it on those specific contracts on individual customers.

Okay fair enough. Right so and then it's exciting because you said there's a minimum commitment of eight figures. So is my understanding correct that eight figures refers to tens of millions?

Serialized codes. So we're not going to pricing with any. So serialized codes meaning serialized items.

Right. tens of millions of codes. Correct.

Yes, that's correct. Serialized codes, so you understand, are different from the $50 per GTM.

Right, understood. This is first.

Which was kind of my point let me just take a quick so not talking I'm talking completely generically so nothing about practical methods. In general if we have a contract for serialized and you do what I mean by serialized codes.

Right. I mean just like you said for the HP link where you can have an individual code for an individual package to enable tracking.

Right. So take product xyz and let's say so product xyz under the old rubric of thinking about it might be $50 for xyz’s GTM but if they sell a million items we get and it's they're serialized it's per item that's a serialized code. So back to my point in question about how to think about different pricing metrics. I have no idea to be honest on the practical method that the eight figures of codes how many GTM that might represent how many different products those are going on but I would assume I don't know this and it's not really my place to share but I did know it that if you did the math on that random metric of GTM it would be higher than $50. So serialized code just means an individual item gets its own code.

Right, understood. They want to track tens of millions of items.

At least remember Charles said that's the minimum and practical methods and Howard are absolutely fantastic as a company and fantastic team. So I would like over time that to go up because they're a great company and we're happy to have as a partner. So their success is our success.

Right and that also shows the power and the correctness of your switch to value-based pricing because obviously no one would pay more than they think it's worth and the real difficulty is convincing the customer that getting to agreement with the customer on the value of the solution and that's where it takes off and that gets to my second question which is do you believe in the hockey stick model of earnings and if that is what's in your mind where do you think we are on the hockey stick at the moment?

It’s a great question, it’s the great attempt. I don't know, I mean I literally I wasn't just throwing random words at the beginning of this call where I said there's a lot of reasons why it's really tough to forecast this business. There are size and scale issues that any company our size would face but then we have these other really big complicators or things that make it even more difficult. First of all we have very large lumpy opportunities. I don't know how to expect. Those are very tough opportunities for the expected value on but the other thing is there's other, there's multiple ways to come to market with it. So somebody can say hey listen, here's what we think we're going to use over X- period of time or whatever and so I want to sign an enterprise license today and liquidate some of that value. So I'm willing to pay you upfront and obviously as you would imagine somebody pays upfront they're probably going to get some discount and the other way is to say yep we're fully in but we're going to pay as you go. We're going to pay as you roll out and then that obviously has a wonderful impact at full scale that contracts bigger than if they paid an upfront license or not in front of upfront booking an enterprise deal but it takes longer to hit. So it's not just a matter of trying to nail the timing it would also be trying to understand where exactly and how these different contracts are going to come in plus again I think if I tried to answer that Nob would probably disconnect my line so I'm not going to try.

Okay. Well good enough, I mean obviously I feel very optimistic about what I'm hearing on this call.

So it makes two of us. Hopefully at least more than two of us but thank you for that. Yes, I agree.

Yes. That's it. Thank you.

Thank you.

At this time this concludes our question and answer session. I would now like to turn the call back over to Mr. McCormack. Sir please proceed.

Well, I'm glad there were more questions this time than last time. Thanks everybody for dialing in and ironically I'm just looking at the clock and it ended up being an hour anyway but I really do appreciate you guys dialing in and we look forward to updating you guys in the future. Take care. Have a good night.

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