Digimarc's (DMRC) CEO Bruce Davis on Q2 2014 Results - Earnings Call Transcript

| About: Digimarc Corporation (DMRC)

Digimarc Corporation (NASDAQ:DMRC)

Q2 2014 Earnings Conference Call

July 23, 2014 17:00 ET

Executives

Bruce Davis - Chairman, CEO

Charles Beck - CFO, Treasurer

Analysts

Josh Nichols - B. Riley

Jeff Kessler - Imperial Capital

Kim Opiatowski - Vertical Group

Rob Knipp - Janney Montgomery Scott

Kevin Hanrahan - KMH Capital Advisors

Riley McCormick - CCM Capital

Operator

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

Bruce Davis

Thank you and good afternoon. Welcome to our conference call. Charles Beck, our CFO, is with me. On the call today we'll review Q2 financial results, discuss significant business developments and market conditions, and provide an update on execution of strategy. This webcast will be archived in the Investor Relations section of our Web site.

Please note that during the course of this call, we'll be making certain forward-looking statements, including those regarding revenue recognition matters, results of operations, investments, initiatives, and growth strategies. These statements are subject to many risks, assumptions, 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 our latest Form 10-K. Charles will begin by commenting on our Q2 financial results and cash flow projections for the second half of the year. I'll then discuss significant business developments, market conditions execution of strategy and our plans for managing working capital during the development of the market for Digimarc Barcode. Charles?

Charles Beck

Thanks Bruce and good afternoon everyone.

Revenue for the quarter was $5.7 million down $4.8 million or 46% from the second quarter of last year. Revenue was lower primarily due to the scheduled completion of quarterly minimum license fee payments from Intellectual Ventures in May of last year and the Nielsen Company in January of this year.

Excluding the impact of the expirations of these license fee payments, revenue is down $400,000 or 6% reflecting primarily the timing of program work with the central banks.

Gross margin was 66% for the quarter 14 points lower than the second quarter of 2013. The decrease in gross margin reflects the impact of lower license revenue from Intellectual Ventures and the Nielsen Company.

Operating expenses increased by 17% over the second quarter of last year reflecting the increased level of investment in our product development and sales growth initiatives, which center around Digimarc Discover, the Digimarc Barcode and other aspects of our intuitive computing platform as well as development and marketing of our second wave patent portfolio.

We incurred an operating loss of $4.5 million during the quarter versus operating income of $1.4 million in the second quarter of 2013. Our effective tax rate for the quarter was 40% resulting in an income tax benefit of $1.8 million on a pre-tax loss of $4.4 million.

At the bottom line, we incurred a net loss for the quarter of $2.7 million or $0.38 per diluted share versus net income of $600,000 or $0.08 per diluted share in the same quarter last year.

The balance sheet remains in good shape, the $28 million of cash and marketable securities and no debt.

The $4.4 million investment of our cash reserves in Q2 was higher than in Q1 due to factors affecting revenue and expenses. The primary contributors to the change included the scheduled completion of quarterly minimum license fee payments from the Nielsen company and timing of program work with the central banks coupled with expenses associated with formation of a professional services team to expedite the delivery of the Digimarc Barcode; enhancements to web services and supporting infrastructure to enable efficient customer enrollment and engagement and outside legal expenses associated with preparation for potential filing of patent litigation associated with the marketing of our second wave patent portfolio.

Absent of significant uptick in revenues, we expect to continue to be using our cash reserves to support our product development and sales growth initiatives through the remainder of the year. The rate of investment is expected to be between $4 million and $5 million in Q3 and between $2 million and $3 million in Q4. The difference in our projections for Q3 and Q4 are largely due to the timing of customer receipts and vendor payments.

Later in this call, Bruce will comment on our rate of investment offer some preliminary views on the path to return the profitability and discuss how we purpose the manage working capital in the meantime. The further discussion of our financial results and risks and prospects for our business, please see our Form 10-Q that we expect to file shortly.

Bruce will now provide his comments on significant business developments, market conditions and execution of strategy.

Bruce Davis

Thanks Charles. I will begin with a brief comment on areas of our business other than Digimarc Discover and Digimarc Barcode. I intend to focus this call on those two activities and associated working capital management as I have a fair amount to cover and I believe that these are the areas of greatest relevance and interest for our investors.

Revenues from established products and services were down in the quarter compared to last year mostly due to the timing of program with central banks. We expect these areas will generate low double-digit growth in the second half of the year over the first half of the year.

As Charles noted there was an incremental spending in Q2 for preparation -- for potential filing of patent litigation involving second wave patents. The filing decision has been postponed for the time being while we discuss proposals for licenses and/or strategic business relationships with the companies involved.

We and our consultants are exploring a number of potential relationships which could give rise to income, investment and/or litigation expenses that could alter our projections on the investment of cash from the second half of the year.

As you know this developments were notoriously difficult to forecast. I will be happy to take questions about any areas of legacy business during Q&A at the end of the call. Now, let's get on to an update on Digimarc Discover and Digimarc Barcode.

We continued to executing as a publicly disclosed strategic planned as promised following on from the very successful launch of Digimarc Barcode at the NRF in Q1, we issued a white paper in May for public comment providing a quantitative model that estimates labor cost savings resulting from adoption of the Digimarc Barcode by high volume retailers who are our primary target market. The paper includes an ROI calculator for potential customers to access the value of the Digimarc Barcode can deliver to the businesses. The model estimates the Digimarc Barcode to be able to foster billions of dollars of savings annually for retailers in our target markets resulting from faster scanning speed to checkout.

The model is intended to inform retailer purchase decisions, guide resource allocations for us and our customers and facilitate our financial planning. As previously announced, the next step in execution strategy is to being to deliver at least one retailer, Digimarc Barcode private label products that will lead to in-store of statistical test of the model. On a sufficient number of Digimarc Barcode products become available in our customer stores structured testing can begin.

The purpose of the testing will be to validate key assumptions of labor cost savings set forth in the quantitative model. Once the financial impact of faster check out is validated, we will have a compelling value proportion to sell as retailers gain confidence, we expect and to incur the national brand suppliers to adopt the Digimarc Barcode as well.

We are making good progress in delivering this next important milestone in our execution strategy. A joint project team has been formed with our first customer. We are selling on a good process with them and have completed encoding of initial batch of packages. These packages will be printed soon.

Once the Digimarc enabled packages are printed, we will expect them to be produce and just distributed in the ordinary course of business. These products should begin to reach shelves by year end consistent with our published strategic objectives.

Validation of the quantitative model will provide important support for our products from mid-perspective customers that calculate ROI estimates for adoption of the Digimarc Barcode and refine and enhance credibility of Digimarc's estimates of the size of the addressable market and the value delivery for the Barcode.

These signs will form our projections about the course and timing of rollout, capital requirements and the return path from investment mode back to profitable operations, sustained growth and margin expansion.

The enablement of Digimarc Barcode reading useful in the testing described above and laying the foundation for rollout following the successful proof of concept is also progressing according to plan. As we projected on our last call, our go-to-market partner Datalogic has began shipping scanners with software embedded previously shipped scanners are field upgradable.

We are beginning the conversion process for additional customers, a number of perspective customers including at least one top five retailer are preparing to provide packaging files for encoding to perform proof of concept testing. These and other Tier-1 retailers are also proposing to test the Digimarc Discover for consumer engagement.

In one case, the top 10, global retailer selected a joint research proposal from Digimarc and Datalogic from our 250 proposals from over 50 suppliers. The project is expected to commence later this year.

In important market development Amazon announced that its new smartphone will contain a dedicated button feature called Firefly. We believe that this maybe a very significant market development. Followers of Digimarc strategy know that we anticipate that leading multinational online retailers like the Amazon and eBay and some times lead by Google will inevitably move toward an approach to search pioneered by Digimarc that we refer to as Discovery.

Discovery via Digimarc's patented intuitive computing platforms simplifies the UI for search by using the cameras in microphone to smartphones to automatically identify objects of interest particularly the brand impression that motivate in direct shopping.

As we discussed often over the years the nature of the smartphone and the increasingly mobile centrism of shopping and network access generally should compel this direction. We had for many years anticipated these market developments and invested heavily to build a huge patent estate and licesenable technology platform that can improve the businesses of such companies or competitors of these companies to better serve their customers.

Given that the Amazon phone hasn't shipped yet and we understand that they are becoming available today and embargo on the press the release of their number of new articles out. We don't have one yet we will get one very soon within the next day or so. And we will begin an in-depth study.

It appears with the Firefly feature of the Amazon phone, Amazon is the first of the majors to make a concerted move toward the seeing, hearing device concept we pioneered and patented. We intend to study the competitive and intellectual property and its implications of their products in detail as soon as possible. At a minimum, we see Firefly as a clear presence threat to retailers.

It's easy to imagine shoppers and retail stores ready to buy and then pressing the Firefly button to divert the purchase to Amazon right there in the store. We will carefully access Amazon solution and develop marketing programs to present Digimarc Discover and the Digimarc Barcode; it's an effective competitive response to this threat for all those put that risk by Amazon Firefly. We hope this will enhance demand for Digimarc Discover among Amazon's competitors in retail most of whom are already beginning to engage with us for Digimarc Discover and Digimarc Barcode.

As many of you know from prior calls and other corporate communications we are exercising our best judgment in metering the rate of investment in market development for the Digimarc Discover and Barcode offerings by balancing our investors’ desires for rapid market development with the tolerable rate of investment in relations to our working capital. There are no easy answers in such matters and certainly there is room for legitimate differences of opinion. I'm guided by long career in market development in making judgments regarding the necessary comprise it can pace the market development and capital risk.

We file the self-registration for $100 million on May 16. The registration statement became effective shortly after it was cleared by SEC. Since the filing, we have done considerable diligence concerning how and when this vehicle might be employed in managing working capital including technical and market research and discussions with numerous investment banks. We have concluded that the optimum management of working capital levels can best be realized through a financing activity known as At-the-Market offering or ATM.

ATM offering process is quite simple. The company sells new shares into the market as needed using essentially the same process as investors use to sell existing shares. Process is effectively the mirror image of a stock buyback, if I can buyback the company address flexibility regarding the timing, size and execution. ATMs are relatively new form of secondary equity offering that emerged in 2008 did regulatory changes. Of those such offerings account for only about 10% of recent follow-up equity offerings the approach is gaining share.

ATMs have many virtues in contrast to more traditional approaches. In the first academic study of ATMs published in 2013, the authors found “ATM issuers appear to experience lower explicit issuance cost, less negative event returns and less negative long-term returns compared to standard equity offering issuers.”

We also found that issuers using ATM offers like our company tended to be smaller in our growth oriented on average with more R&D and cash the lower sales of profits that issuers using traditional follow-on offering methods. They went on to say the long term share price performance was better for ATM issuers those who employed traditional methods. The reasons that steady support our view that the ATM approach to financing is best suited for our circumstances. ATM allows our company to raise capital on an as needed, when needed basis. It is the most cost effective first to raising capital primarily due to the fact that the cost of establishing and maintaining the ATM offering program are considerably less than an underwritten offering.

Notably ATMs and other financing techniques including fully marketed and confidentially marketed offerings are not mutually exclusive. In ATM offering program will not restrict our ability to use other approaches during the life of the program. That's for example, one of the ATM program is in place we can take advantage of company events or favorable market conditions to raise capital in our traditional underwritten public offering or private equity or debt transaction. The ATM process is also an efficient means to accommodate strategic investment.

Thirdly, we expect to announce the selection of a high quality investment bank to administer the program appreciating that it would be on the cost flow and inflection point in the value of our business; we intend to be parsimonious in managing working capital. We will balance having adequate capital to provide reasonable comfort to customers, business partners and investors. Now, we are adequately capitalized with the avoidance of unnecessary dilution.

Mindful of the importance of minimizing dilution recognized that our plan anticipates several more quarters of investment. We have decided to suspend the dividend. We initiated payments of dividends in early 2012 to provide income to long-term shareholders as we developed Digimarc Discover to Digimarc Barcode and a second wave of patent portfolio. It's been a good program serving that objective as we provide $7 million in income to shareholders during the past two years.

At this stage the execution of strategy we now believe that investing the capital and delivering an operational support of Digimarc Discover and Digimarc Barcode monetization of second wave patent portfolio and other growth investments will yield the better return for shareholders and reduce our financing needs.

There has been some stellar pressure on our shares recently as most of you know it's very difficult for companies to gain insights into trading activities. We tried to learn what we can. We observed the short interest has increased in each two week reporting periods since the beginning of the year as we invest in product and development for the Digimarc Barcode and as short interest has increased by 60,000 shares in the last couple of weeks to approximately 240,000 shares. Additionally, we see conservative pressure on small cap text docs since comments by the Federal Reserve last week about valuation.

Ownership updates available with the company are only currently March 31 so they are not useful for members seeing that recent activity. I do not know of any human shareholders selling. The selling hedging began during the blackout period so there is no insider selling involved. We have not been able to identify any block trades. We have no other information regarding this unusual selling.

My best guess is that algorithmic trading maybe a primary source of the selling and hedging (indiscernible) zone more than 10% of our shares as the latest information to us disposals. Raw financial information not informed by discussion of strategy or assessment of leadership would trigger such a response, it would make sense that the computer models will act in this manner.

If this is the source of pressure then the share price should recover is evidence of continuing progress and executional strategy becomes publicly available properly motivating among those who understand those strategy and appreciate the evidence progress. We will do our best to promptly deliver this news to investors has it becomes available.

In all material respects we are on plan and executing well against our publicly detailed strategic plan for the Digimarc Barcode and continue to believe that will represent an inflection point in our business and a transformative technological development of great economic significance with retail industry.

That's it from our prepared remarks and I will open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line Josh Nichols [B. Riley].

Josh Nichols - B. Riley

Thanks for taking the call. Real quick want to go over a couple of things, I know that there has been a couple of drop offs in some of the legacy revenue. Is there any other contracts that are coming to up relatively soon with the central bank…

Operator

One moment for the first question. Mr. Nichols proceed with your question.

Josh Nichols - B. Riley

Yes. Thanks for taking the call. Real quick, I know there has been some changes obviously in the legacy revenue couple of the 10% customers that company used to have, one, are there any other contracts or agreements that you might expect to roll-off on the near future that were – that are part of Q2 revenue, that would cause another significant decline or these long term contracts like with the central bank that you are not too worried, do you think most of the roll off is done?

And then quickly, would any other revenue be coming back and then I would like to get into a little bit more about the future plans for the company?

Bruce Davis

Hi, Josh. If we can answer your first group of several questions, we will let some other people who are in line to ask their questions and come back later I think that would be helpful.

Josh Nichols - B. Riley

Sure. Nor problem.

Bruce Davis

The group if you don't mind. So with respect to fixed fees paid over time that is where the two contracts that had those characteristics. And so they have been completed. There would be additional revenue from those sources, if they needed additional licenses. But the licenses that they obtained for the products and services within the fields of use were fully paid for by those fees.

With respect to other patent licenses, they are all subject to risk of course in terms of the value of the IP to the customers of the businesses that we licensed and many of them are private companies. And we don't have great visibility on where those licensing constraints will go. But some of them have been longstanding sources of income to us. And we have some newer ones as well. And we continued to explore additional license opportunities as I alluded to in the discussion of expenses we are actively engaged in licensing negotiations for the second wave and got pretty close to filing litigation during the quarter.

So we will see how it goes, it's very – this is the classic problem of our company during its R&D phase, it is difficult to predict exactly how when and how much will result from those activities.

Josh Nichols - B. Riley

Right. Okay, yes. I could jump back in the back and let some other people go.

Bruce Davis

That would be great. Thank you, Josh. Appreciate that.

Operator

Your next question comes from the line of Jeff Kessler with Imperial Capital.

Jeff Kessler - Imperial Capital

Hi, Bruce. I'm wondering if you could give us an update on the progress you are working with embedding with your partner, embedding the Digimarc technology at the chip level.

Bruce Davis

Yes. So as everyone knows we have an ongoing R&D relationship with Qualcomm. And I think we are doing well there. We don't have a product yet. And I can't scoop them on anything they might say about what we are doing at some point in the future. But, we are making progress and we continue to work on the Amazon low power audio recognition solution. And we think it's quite impressive and we would like to do a similar kind of research and development project with them in imaging so that our goal in terms of execution of long-term vision is to have the seeing hearing capability for encoded media to be chip level function that will be callable through APIs from the operating systems above the chips and not to be even above as it is on the Amazon phone or an application as it is in most other environments today.

Jeff Kessler - Imperial Capital

This is a follow-up quickly, how well do you think you mentioned that you are on – you believe you are on track with all of the – with the operational progress that you are making. But how close are you to being able to let's call it control the development of your – the development of your capacity with your chosen prime client, are you able to – do you feel you are in control of that process given that there are more than one company trying to – try to pull at your shirt sleeves right now to get your attention.

Bruce Davis

Well, one of the reasons that we are running a little hard on expenses here, there are couple of reasons, one of them as to do with desire to accommodate some additional customer involvement as everyone knows on the call I believe I have been suggesting to everybody I would like to limit customer involvement during 2014, so we focus on customer number one.

We are off to a nice start with customer number one, we are entering into the production process and we do anticipate that will meet our goal with having products in the stores before year end. We continued to be obsessed about that that is the right thing to be focused on as a business. However, some additional perspective customers have come to us and asked us if they can begin getting involved. And so we are not saying no to them. So I will expect by year end that will actually be activities going on with more customers than I had anticipated and in more ways than I had perhaps anticipated as well.

We are working on some Digimarc Discover proof of concept activities as well as Digimarc Barcode activities in that regard. We also continue to work which is difficult to discuss publicly with business partners in R&D other than Qualcomm. And they are kind enough to let us talk about it. But there are other stuff that we are doing as well which is also burning up some cycles here.

Jeff Kessler - Imperial Capital

Okay. Thank you very much.

Bruce Davis

Okay. And the other point Jeff to finish off the thought is that in the IP monetization area that's one of our wild cards if you like that as we have thoughts about our strategy here, we felt we were getting to a point where we have sufficiently mature IP in the second wave portfolio to begin marketing. So we begun marketing and now we are getting more aggressive in trying to bring that to fruition early on in order to feed the engineer and to create and an understanding of the value of the portfolio for investors. So we are working hard on that and we are engaged in at least a couple of cases now but that also leads to additional investment in the short term.

Jeff Kessler - Imperial Capital

All right. Thank you. I will get back into the queue.

Bruce Davis

Okay.

Operator

Your next question comes from line of Kim Opiatowski with Vertical Group.

Kim Opiatowski - Vertical Group

Hello, Bruce.

Bruce Davis

Hi, Kim.

Kim Opiatowski - Vertical Group

Could you just give us a little more color with regard to partner number one you are working with right now, you have obviously given us indication there should be product in-store by year end. But, obviously, you are constrained with certain things like inventory replenishment cycles. Can you give us any color around timing of when you think partner one or number one will be up and running? And how long do you want that to stay at a current rate before you feel that proof of concept has been proven and you kind of let the backlog of customers that you are already working within kind of open the stay and go forward.

Bruce Davis

Sure. I will offer one more detail on what I expect the process to be which I guess the essence of the question.

Kim Opiatowski - Vertical Group

Right.

Bruce Davis

Better informed now than we were in the last call about that. So I can't disclose the identity of the customer, it's up to them to did I want to really feel it's appropriate. But, they have a lot of private label products and we began receiving files and we have encoded the first batch of those files and returned them for QC. They will be printed shortly and then they will move into the production process.

And the production process varies by products and it can be anywhere from a few weeks to a few months in the replenishment cycle. And so we need to get a certain number of products on the shelves to have the good grounding in statistical relevance extrapolating results to the universe of the industry.

And so that's our goal here not only get in the stores but get enough products in there so we can run all test we want to run. And then to hopefully publish the results with the corporation of the customer because they understand as we do that it's beneficial for them to tell everybody about the savings that can be generated because industry adoption gets more pressure on national brands which causes them to make more money.

So we think we have good alignment on publicity regarding the results once we have run the test. So stage wise here, get the files and close the files, print the packaging and run the inventory into the stores build sufficient inventory in the stores to run a statistical test of the assumptions and the financial model, validates the model then publish. So that's the process that we are involved in right now in a bit more detail than rather I provided previously to most people on the call.

How much proof is, that's sort of part of your question, I wish I knew the answer that's a subjective matter, I can't tell you the answer on that. But I have speculated in the past that no reason to change those speculations, it's a relatively small number of customers maybe one and my guess is, it's not more than five. So somewhere between one and five that we need to get going. And that's where some of the opportunities that are coming to us now may allow us to get two or three going before year end and have that running in parallel to get it more persuasive proof of concept done soon.

So we will keep our fingers crossed on that, I can't promise it yet. But, we seem to be heading in the right direction with regard to that opportunity as well.

Kim Opiatowski - Vertical Group

That was great color. Thank you very much.

Bruce Davis

You are welcome.

Operator

Your next question comes from the line of Rob Knipp with Janney Montgomery Scott.

Rob Knipp - Janney Montgomery Scott

Thanks for taking the call Bruce. Just a quick question relative to the – on your last call you mentioned you expected deliveries of the Datalogic scanners to start shortly and on this call you said that they had begun. Can you give any additional color to that?

Bruce Davis

No. I don't have authorization from them to discuss our business in any detail. I just want to make sure everyone that our belief that they would ship was well-founded and they did ship. So they shipped during the quarter as I have proposed would happen. So they are in the field now. And we are quite comfortable that the units that shipped prior to that are easily field upgradable.

Rob Knipp - Janney Montgomery Scott

Okay. And then just a quick follow-up, in your most recent investor slide deck – on slide 12, you show 20 some odd different retailers names like Wal-Mart, Costco and Target and I guess I'm just trying on a bit of a fishing expedition here I recognize in respect the fact that you cannot disclose the name of different retailers without their prior approval. But what point in time, do you think will start to get a sense of which these are actually good clients?

Bruce Davis

Well, I guess the enduring well understood relationship here with the little guys and all these guys and the big guys, it's a way, way, way bigger than us. So it will always be whenever they feel like it not when we do. And I don't know what to tell you, they will say whatever they want to say whenever they want to say it. And they usually don't let us know in advance. So that's – we have encountered that. So we are not trying to pressure anyone to tell anyone anything because we don't wanted to interfere with the development of the business relationship. We are really respectful of the fact all of our perspective customers are multi-billion dollar revenue companies and we are not.

So we are just trying to be a good supplier and get them excited and have them talk because it's good for them to talk as opposed to its good for us that they talk.

Rob Knipp - Janney Montgomery Scott

Fair enough. Thanks for the clarity.

Bruce Davis

Yes.

Operator

Your next question comes from the line of Kevin Hanrahan with KMH Capital Advisors.

Kevin Hanrahan - KMH Capital Advisors

Hello Bruce, hello Charles. I have three questions. The first one, it looks to me just from looking at the two cash flow statements from Q1 and Q2, you did repurchase about $600,000 in total during Q2. So I heard we said about the dividend, my question is a buyback, do you still have the buyback authorization and can you provide some color about that?

Charles Beck

Yes. So those particular shares it was around 17,000 shares that we had bought back and that's part of our normal employee stock program buying back shares to cover their tax like holding liability.

Kevin Hanrahan - KMH Capital Advisors

Yes.

Charles Beck

Until there has been no change in that program at this point, it is obviously something that we could evaluate longer term but there has been no change.

Kevin Hanrahan - KMH Capital Advisors

Okay. So….

Charles Beck

And we have not purchased any shares on the open market under the authorization which actually expires at the end of this year.

Kevin Hanrahan - KMH Capital Advisors

The authorization?

Charles Beck

Yes. For a buyback in the open market.

Kevin Hanrahan - KMH Capital Advisors

Okay. That's interesting. Bruce I wanted to congratulate you on getting some coverage Jeff Kessler from Imperial Capital had fabulous and much needed, my question is because you mentioned some larger investment banks you might be talking to in relation to the ATM, will you be pursuing some more coverage?

Bruce Davis

Well, first with respect to financing on investment banks as I mentioned in my remarks to varying clients, we are going to begin with an authorization for ATM but that does not preclude any other form of financing. So I don't mean to imply mutual exclusive approach to this at all. But it's – given our circumstances and given the interest that we have in management and as the shareholders as well in minimizing dilution out of potential inflection point, the ATM sounds perfectly suited for that. So we will start there and see how it goes.

And then with respect to seeking coverage, Jeff is a very well-respected and seasoned analyst and I greatly appreciate his interest that he has shown in our company. I'm not interested in getting coverage for coverage sake because I don't want to spend my time trying to explain why analysts who aren't competent to cover the business are saying things about us. So it depends is the answer, really depends on the quality of the analyst whether we are interested or not in having them provide the coverage. So we got a great start with Imperial and Jeff. We will see – there are other firms that have expressed interest in potentially initiating coverage and that sort of approach that we will take to those opportunities.

Kevin Hanrahan - KMH Capital Advisors

Okay. And my last question, I hadn't heard the term marketing opportunity in maybe a couple of years since your relationship with IV. So that would be my next question, if you are going to pursue marketing opportunities for the second wave of patents, could IV be involved or do you think IV will not be involved in helping you with those marketing opportunities?

Bruce Davis

Yes. I probably can't get into detail on and of course, the honest and simple answer would be it depends, which isn't very useful. But, again, we've executed down – on strategy as we forecast that we would so in 2008 after the sale we embarked on a heavy R&D effort when we did the Intellectual Venture deal couple of years later we included in their use of license to sub-license the more mature parts to the portfolio. And we kept on the four issued patents, now we have about 100. And we have 350 pending that are not subject to license to sub-license to Intellectual Venture. So that's our focus right now.

And as I have said to many investors with respect to Intellectual Ventures proper participation obviously we call the bid about expenses but to the extent they produce income for us that's great. And I think that would be highly correlated with our success and our success value to investors that motivates their provisional income to us will far outstrip on the value of the income in determining the market value of our company. So I don't really focus too much on those guys as I'm a shareholder myself.

But, in terms of our relationship with them, I hope we can have a nice healthy relationship and get some profit sharing and make together and focused here on the second wave and our license in the second wave because I think that we have some valuable IP that we developed over the course of last five or six years that now as reached a sufficient scale in terms of issued patents that we have a credible offer to potential licensees and business partners.

So that's what we are pushing right now. We are promoting our wholly-owned patents of the Intellectual Ventures portfolio.

Kevin Hanrahan - KMH Capital Advisors

Oh, great. Bruce, thank you.

Bruce Davis

Yes.

Operator

(Operator Instructions) Your next question is a follow up from Josh Nichols with B. Riley.

Josh Nichols - B. Riley

Hi. Thanks again. Real quick just want to go over a couple of things just like I said a little bit more focused on the future instead of the current situation or the past. Looking at it and I'm wondering, so it looks like there is really two things these happened. One is, you need the scanners that could read the barcodes and you would be in the barcodes. Have one of you go and talked to retailers or manufacturers, distributors, what kind of feedback are you getting and what type of investment would they have to make.

Bruce Davis

Okay. Well, we talked to virtually all the top 10 retailers in the world. And many others below the top 10 and the top couple of hundred. And there are two value proportion associated with the Digimarc Barcode and then there is a broader value proportion associated with Digimarc Discover, Barcode being in our view a feature of that platform. So focusing first on the Barcode, we do our best to focus them on the front of store operations productivity gains. And we published the model because the large volume retailers obsessed about a key performance indicator that is called item per minute or IPM. And everyone of those guys now focused on that as a matter of productivity and profitability.

So because we can objectively measure our impact on IPM, we focused first on that so that once the value is established, we have a very strong selling proportion. The second value of the Barcode is more difficult to quantify and haven't made an effort yet to characterize whether it's smaller or larger in potential economic significance to the industry. Because the productivity gain estimations are so high. But that's the other benefit of the Barcode to retailers.

All of the retailers we talked to get both of those arguments. So the issue that we have right now is proof of concept. And it's the gate to every new technology must go through with these guys because they all have formal processes for simulation of new technology. And because there is so large and they are operating in such small margins they generally will be very reluctant to differ from that process. So we are trying to go extraordinarily fast because of our situation as a microcap public company with a pretty high investment rate. So I say we don't rate in that process but it is a process that is somewhat unavoidable we think.

The Digimarc Discover value proposition encompasses both of those and is broader to encompass all media. And so we also explain that opportunity to the retailers as brands. And they sort of get back to, so that's where I said in the case of one of the top 10 retailers there were 50 vendors who submitted 250 proposals for funded R&D projects funded in terms of the retailer side of things competing for budget. They accepted five and ours is one of the five. And so there we without getting into too much detail on what the project will be it actually is the broader proposition its Digimarc Discover.

So we got all the way from a focus with customer number one on front store operations productivity gains from the Barcode to top 10 retailer who is going to detest in the broader proposition – broadest proposition, I never where between them.

Josh Nichols - B. Riley

Okay. And last question real quick is, I mean for the Barcode for the first part since the second part bigger proposition for Digimarc Discover hasn't really been quantified, any thoughts about what type of decimal you might employ was that something that might be like royalty licensing model and any idea of what type of cost it would be for the company and potential margins. I know that's a bit of ways off but just curious.

Bruce Davis

No. It's actually we have a published business model and it looks like it should serve us well and that is a price per code paid by the customer. And so we – part of the investment that is on going is continuing development of our webbed interface for customer enrollment and service provision. And we recently launched an updated version, changed the name, we just call the OSP, Owens Services Portal is now called the Digimarc ID Manager. And so any brand or any client even an individual client can go to this web service available through our corporate website sign-up get codes, get the service to encode them and be on their way after making payment.

And so in describing the Firefly feature of the Amazon fire phone mentioned casually, we are talking about 40 million Barcoded products that could be identified. And that's the same number I got from some other big company and I don't know (indiscernible) numbers, but I would assume digitals would know it. So there is 40 million Barcoded objects and we are charging $300 set-up fee and a $50 per year annual fee the map is pretty compelling in terms of business model. That's just for the Barcode just for package goods. And so package goods generally are presumed to have a multiyear lifecycle and thus the renewal fees are important.

For most other applications of the Digimarc Discover system the uses tend to be more limited in duration, so we don't focus much on renewals fees. And there we charge from $25 down to $3.50 per code depending on the clients’ lifetime usage of codes. So the first code cost $25. That's the business model for Digimarc Discover generally.

We don't charge licenses fees to the enablers, the smartphone application providers and we don't charge license fees to the professional scanning companies. So how do we make our money from the provision of codes now, the Digimarc Discover system is built on our patented intuitive computing platform. The intuitive computing platforms involve multiple symbology so it's not just Digimarc's its Barcode QR codes and we will soon be adding some more identification means.

The write that stuff is sort of three, so you could view our code sales as the metering mechanism for margin generation not necessarily exactly correlated with all the uses of the system. But we think it's going to work and it will be adequate to create a massive increase in value and a much more understandable business model and easier forecasting of how we will do. So we think there is a lot of virtues to it. But, again, we will see how the markets develop and whether any changes are indicated but that's the current plan and that's laid on the Web site.

Josh Nichols - B. Riley

Well, thanks very much of those pretty thorough answer. I appreciate.

Bruce Davis

You are welcome Josh.

Operator

Your next question is a follow up from Jeff Kessler with Imperial Capital.

Jeff Kessler - Imperial Capital

Just –

Operator

His line disconnected from the conference. Your next question comes from Paul Sonz with Paul Sonz Partners.

Paul Sonz - Paul Sonz Partners

I have a question regarding cash, I wondered what is the sort of the minimum amount of cash you want to keep on the balance sheet and how much do you expect to – do you think that you are going to need to raise?

Bruce Davis

We want to keep enough to keep everybody comfortable. So I don't want to peg a number for public consumption because it kind of depends on circumstances. So it's an ongoing assessment by management that we will clearly run by the board at least every quarter but the notion here is – it's an awful balance. So there isn't any right answer I don't think and I will solicit everyone use among our existing shareholders including Paul. On an ongoing basis, how we are doing, but Charles and I will do our best to keep the level working capital at a comfortable level in relation to our projected investment rates and not more than that because we don't want to have any unnecessary dilution. So that's the management task that we have set for ourselves here and we are going to do the best we can do at all circumstances.

Again, a great virtue of this approach to working capital management that we settled on is that we can be pretty refined in those deterrents. It's not as if we have to go out and do road show and sell a block or something like that. It's also is very helpful for potential strategic investors if they want to get involved in the business, it's a pretty easy process.

Paul Sonz - Paul Sonz Partners

I think what I was going – getting at is how much cash do you think you need as a precautionary measure against people who might want to litigate against you on the intellectual property. How much if war chest you need to maintain so that they know that that you have enough money to litigate within if they want to do that. And then the second part is, how much because you already have fair amount of cash on your balance sheet right now and the second part is trying to get an understanding of how much this increased expenditure on marketing development can be expect to see?

Bruce Davis

On the part of your question is that by intellectual property or product…

Paul Sonz - Paul Sonz Partners

No, I do actually – I guess it encompass both and marketing for the intellectual property and for the development of the Digimarc Discover and Digimarc Barcode?

Bruce Davis

Okay, but let me separate them because they are quite different. So with respect to intellectual property marketing we do most of that work with our staff so there is not a lot of third party cost unless we kind of play litigation. When we kind of play litigation we need to employ an outside firm with litigators and prepare for that form of intellectual property marketing. And so unless we get to litigation the expenses are not ready. But, when you look at those run rate that we have – if it's a couple of hundred thousand dollars in a quarter you guys’ notice that's not most cases consider a huge amount of money. But that was what was going on in the second quarter.

And we wanted to do that we are pretty close to filing and as happened there often happens, you get into a little discussions decide to turn it off because once you get it going it can be pretty expensive. Now, how expensive it is, it depends on the nature of litigation so there isn't any simple answer to your question, how much does one of the costs. And it depends on the number of patents and how long it goes and how complicated it is and what the never side does and on and on and on. But, it can be let's say hundreds of thousands a quarter would be sort of big until you got your trial which you would see coming a year or two in advance. But the early stages are more of tens of thousands or hundreds of thousands not more than that.

For each such activity and so if that's one target and so hope that helpful to you, it isn't simple to generally characterize. And with respect to that plus really products and services market development Charles gave you the estimate earlier for the next couple of quarters.

Paul Sonz - Paul Sonz Partners

I'm sorry, I missed that. Well, it was said number or I can just look at the transcript if you will?

Charles Beck

No, Paul, I can share with you. So we are projecting usage of cash without any sort of financing activities of $4 million to $5 million in Q3.

Bruce Davis

I see.

Charles Beck

$2 million to $3 million in Q4. And there is a little bit of a difference between cores that overall expense rate probably will be somewhat inline but it really comes down to timing of payment and receipt from customers kind of the key variations between those quarters.

Paul Sonz - Paul Sonz Partners

Okay. Thank you very much. I somehow missed. Will we assume that that's the kind of run rate going forward into next year as well or is it something that you determined later?

Bruce Davis

Yes. We are not intending to provide any financial guidance with next year as you know we will not provide any but we are varying from our general protocol in order to keep people comfortable that way we have a plan that with reasonable confidence. And the run rate of the legacy businesses is more predictable on the intellectual property licensing based revenue streams that dominated the revenues in prior periods.

So again, one of the potential onus of volatility is our key marketing. And its measured there is a much bigger upside than there was a down side. But there is a possibility of spending more money than we plan or making more income than we figure.

Paul Sonz - Paul Sonz Partners

Yes. That's all right. I think that's very good. Thank you very much.

Bruce Davis

All right.

Operator

Your next question comes from Jeff Kessler with Imperial Capital.

Jeff Kessler - Imperial Capital

Please my phone doesn't cut out this time. See, just two quick follow-up questions and the first is the ebbs and flows in your legacy business particularly with the banks, it appears that you have, this is a period of ebb and then I take that you are expecting a fairly stronger second half from your banking partners. Is this due to a change in the number of payers who are just the size of the individuals that are within – that are within the VIS that are going to be paying you?

Bruce Davis

I suggest that you attach no significance at all to this quarterly variation, it's circumstantial and it will – the flow will match the ebb here pretty quickly. It just have to do without allocation of resources on our side for the most part. We are very busy and so we – have to move people around a little bit and we are not trying to manage the quarterly revenues. We are trying to expedite the delivery of certain things and so that's how it happens.

Jeff Kessler - Imperial Capital

I apologize for the background noise. By the way…

Bruce Davis

And we typically by the way at the end of the year the fourth quarter is typically a little lower than the prior quarters but so this quarter is a bit unusual.

Jeff Kessler - Imperial Capital

Okay. And finally with regard to the timing on the decision for the dividend how was this – how did this discussion come about – was this in the last month or in the last week or in the last couple of days.

Bruce Davis

No, no, this is not none of those. We initiated dividend a couple of years ago when we were a couple of years away from introducing the products of our R&D. And we wanted to provide income to our long-term holders as we develop the products and services that we are now beginning to deliver in and we thought that we could afford to do it. So we did it. And as I said in the script, I'm happy to have been able to get $7 million of income to our shareholders but it doesn't seem wise to continue the dividend in a time which might be raising equity capital. I think anyone who was raising money to pay a dividend under – given our circumstances. And given our circumstances and the potential for great increase in value of the business from investment – the investors were better off if we spend the money on that than providing it has income.

So it's something that we talked from day one that we decided to do it every quarter we would have a thorough discussion with the board about what we are doing, why we are doing it and whether it would continue to make sense.

And we are hoping that once we get this proof of concept done and get backlog dealt that will be anticipating days when we institute a dividend and increase it. But, right now it doesn't seem like it, did make sense.

Jeff Kessler - Imperial Capital

Right. Again, I apologize for the background noise. Thank you.

Bruce Davis

You are welcome, Jeff. Thanks.

Operator

Your next question comes from the line of Riley McCormick with CCM Capital.

Riley McCormick - CCM Capital

Hey, guys, how are you doing?

Bruce Davis

Good thanks.

Riley McCormick - CCM Capital

So a couple of questions, first Bruce just clarifying the guidance, so the guidance were cash burn for Q3 and Q4 includes no potential settlement with anybody who might be infringing wave two but also know commencement of any litigation, is that correct?

Bruce Davis

Yes. I think that's fair.

Riley McCormick - CCM Capital

Okay. And does that cash burn off so include getting customers two and three started on Barcode?

Bruce Davis

It does. As I said long go starting last year before the show but certainly since the show, I stated my preference sort of focus on customer number one but I missed then and it's now becoming a reality that we don't want to stiff arm other valuable customers who want to get started early on. We just did not aggressively pursuing them. So you can figure that this sort of let us know they are willing to go and we are not going to say no to them.

Riley McCormick - CCM Capital

Great. Okay. And I understand, I just want to make sure that's all incorporated in the cash flow guidance, okay. You mentioned that you are gearing up for litigation and put on hold the negotiations, is this mean that you are actually close to starting litigation with couple of infringers and it came with a table or is the last step before beginning litigation you are reaching out one last time?

Bruce Davis

I don't want to get down to ravel the detail about the calls on litigation. But, without any – implying any obligation to provide regular updates and details we have a couple of companies that we think need to have the license. And we have been engaged in discussions with each of them for quite some time now. And with one we were getting kind of to the point where we thought that made sense to file and then we had some conversations and decided to defer that.

And so that's what happened we got pretty close and then we backed down. I can't tell you whether we are going to go back to litigation or not. We obviously prefer not to. But, we also are intent on receiving a reasonable return on the investment in vengeance that people have to really use. So we feel we have a good basis for requesting the relationship and we will see what comes out of the discussions.

Riley McCormick - CCM Capital

Few last questions, the first couple of customers on Barcode, I assume they will be generating some revenue, right? So products on shelves should lead to some revenue for Barcode this year even if potentially it's not tested out. We are not going to have to wait until this is proven in customer six and beyond are on Barcode to get paid, is that correct?

Bruce Davis

Sort of. Let me give you a honest and strategic answer. It's really unproductive for me to talk about individual customer pricing in public it's just really a bad idea to the extent anybody gets any deal that varies from the published pricing on the Web site. So I won't do that as a matter of course. What I have said and everyone would presume so I feel comfortable saying is that customer number one is going to get a discount for being customer number one. And the customers two and beyond kind of depends.

So I don't want to any more specific than that because it's really not helpful given the transcript is readily available for any customer number two, three.

Riley McCormick - CCM Capital

And I guess so all those kind of leading up to my final question which is and I realize that the cash flow numbers are moving target and you need to do what's best for the long term of the business as opposed to short term. But, if you are looking at cash burn you have $28 million burning maybe $4 million to $5 million this quarter with the potential of whoever this party that you are trying one last negotiation before litigation and potentially some revenue for customers on Barcode this year, were there any reason to start the ATM sooner rather than later or why not play out for a few months before you begin.

Bruce Davis

Well, this is the delicate question that I'm happy that you – if you want to give me a call, I'm happy to share my thoughts with everyone here publicly. There is some magic number there is an assessment that we make Charles and I based on our understanding of our clients and perspective clients or business partners and our shareholders. And so we constantly assess that and we try to make a good judgment about how to maintain that confidence. And basically we don't want to have more money than that whatever that is and it's not a fixed number because it kind of depends on all the circumstances.

So the ATM allows us flexibility as to timing and volume to assess those circumstances and adjust accordingly and that's why again with our preferred technique. So it's nothing that we have to make decision to do it now or later or a particular amount, we just need to maintain that level of working capital, we think is comfortable.

So that's our goal. And we are new to the process, learn a little bit about it as we do it, we expected to work well and we will report it on each quarter in our SEC filings and then in these calls. So we won't report on it anymore regularly than that because it's an essence kind of normal trading activity like stock and I back would be.

Riley McCormick - CCM Capital

Okay. I guess one last on that because the way you couched that answer which is all very fair. If it's a matter of maintaining working capital, I assume would be something where again outside of a strategic or something that was beneficial there is no reason to stockpile money through an ATM or would be something where your stock traded at $1.5 million of volume alone today, if you are burning a couple of million dollars a quarter there would be no reason to go out and do 15 million in an ATM in a quarter, is that fair?

Bruce Davis

Yes, it is.

Riley McCormick - CCM Capital

Okay, great.

Bruce Davis

Yes. You should or everyone on the call should be comfortable with that will be very conscientious about this.

Riley McCormick - CCM Capital

Fantastic.

Bruce Davis

Yes. And with respect to the intellectual property stuff, it's kind of the same old story on that. But I don't want anyone to misunderstand that we got five or six months less in the year here and so the way that stuff work is that we are engaged and if we are not going to litigate there is a fair chance we might be able to get paid this year, which would obviously contribute to working capital and profitability.

If we have to litigate we definitely won't be paid this year very much. But, we will have expense that is contemplated and it will be in those sort of five figure, six figure ranges per quarter that I offered when Paul asked the question. So somewhere in between it's hard to tell. But, our goal here with respect to the initial licensing of the portfolio is to keep that in mind as we are thinking about all of those same issues. I'm sure that all of you would appreciate us if we had some more margins this year and that we have better resource of working capital instead of equity markets and so very mindful about working on the licensing.

And I also don't want anyone on the impression, we think there are only a couple of companies that could benefit from a license, we actually think there are and will be a growing number of them. And so we are just getting started with the marketing process. And again, like in the development of the market for the Discover and Barcode solutions is not a good idea for us to get too many of those going in all at once.

So a couple is good number, we are comfortable that we have to manage the opportunities that we are currently working on. But, we also interested maybe additional opportunity particularly the market realization of the – the value of vision growth and that's where we don't yet know what to make of Amazon because the phone hasn't at least arrived in my hand, digital moves on it's way here today, but we are in fact -- real close look at it. And what we see there is very encouraging because for those long term holders who have listened to Bruce's dreams for many years, it's happening. The big guys are seeing what we saw after we saw it, after we built considerable patent assets and technical assets and so here they come.

So I'm excited about the potential of a second wave portfolio and these early initiatives we will test some of our assumptions but I think in general I would be inclined to get a little more favorable deal given our current circumstances and I might a little further down the road. So I will do what I can to have that be a source of working capital on a reasonable time horizon here but I won't give the store to do it. And I can't promise that we don't have to litigate to get it. So there is a wide range of potential outcomes here again skewed positively.

Riley McCormick - CCM Capital

Fantastic, thanks a lot guys.

Bruce Davis

Yes. Thanks.

Operator

Your final question comes from the line of Kevin Hanrahan with KMH Capital Advisors.

Kevin Hanrahan - KMH Capital Advisors

Thanks for taking my question Bruce. I wondered about if you're going to give an update on the mobile payments, I know you are working with monetize in U.S. bank, so can you just give us an update there as we didn't hear much about that in this call?

Bruce Davis

Yes. I can. And I just had all the so stuff I wanted to cover and I didn't want joining hand for hours. But, we continue to work on the mobile payments opportunity and we are going to do a showcase at Money 20:20 which is a tradeshow in Las Vegas in November with some other business partners. So that's kind of our public presentation again to NRF for the Barcode. And I'm not going to go into lot more details at this point but that's the plan. And mobile payments continues to be a very interesting space and I was amused today to find that I was reading through all the Amazon stuff because they released their trading embargo I think today. They actually have mobile payments offer some card, I don't know anything about it, but it's right across 15 minutes before the call here but I think we are right in the thick of it, which is where we wanted to be. So it's a very exciting time and as you know theory as to why in mobile payments is appropriate for us to innovate in supporting our general shoppers turning enablement.

So we are not investing fortune in it, it is R&D, but we continue to believe that it may have an important role play.

Kevin Hanrahan - KMH Capital Advisors

Okay. Thanks very much Bruce.

Bruce Davis

Thank you, Kevin. And I think we need to wrap the call up here, since it's okay with everyone. And so operator…

Operator

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

Bruce Davis

All right. Thank you, everyone. I appreciate your support and your conscientious views of the business here where we are doing the best we can. We are executing the strategies we told you we would. And I think everything is going fine. So thanks again, we will talk to you in another quarter. Bye.

Operator

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

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