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

Thank you. Good afternoon. 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 Website. Please note that during the course of this call, we will be making certain forward-looking statements, including those regarding revenue recognition matters, results of operations, investments, initiatives, perspectives on business partners, customers and prospects, industry trends and growth strategies. We will also from time to time discuss information provided to us by channel partners and actual and potential customers about their business activities. Please appreciate that we are providing this information as we understand it was represented to us by these customers and partners and we don’t verify nor vouch for such information. Such forward-looking statements and statements of our partners and customers are subject to many assumptions, risks, uncertainties and changes in circumstances. Any assumptions we share about future performance represent a point-in-time estimate. Actual results may vary materially from those expressed or implied by such statements. We expressly disclaim any obligation to revise or update any assumptions, projections, or other forward-looking statements to reflect events or circumstances that may arise after the date of this call. For more information about risk factors that may cause actual results to differ from expectations, please see the company's filings with the SEC, including the Form 10-Q that we expect to file shortly. Charles will begin by commenting on our financial results. I'll then discuss significant business developments, market conditions and execution of strategy. Charles?

Thanks, Bruce. Good afternoon, everyone. Revenue for the quarter was $5.5 million compared to $5.8 million in the second quarter of last year. Most of the difference was due to lower service and subscription revenue. Service revenue was lower due to less program work with a government contractor; subscription revenue was lower due to completion of revenue recognition on a confidential software license. We anticipate that the more well-established areas of business will grow at modest rates. Our revenues from Central Bank work are expected to uptick in the second half of this year and grow at a higher rate than in the past couple of years due to increased program requirements, at least through 2017. Revenues in these areas may vary quarter to quarter due to timing of program work and swings in reported royalties from our licensees. Gross margin was 62% for the quarter, four points higher than the second quarter of 2015, due to lower costs from improvements to the operating model for our Guardian product line made over the course of the last year. Operating expenses were $1.3 million or 17% higher than Q2 of last year, reflecting previously noted increases in staffing for sales, marketing, engineering, research and development and operations to support our market development activities. As a consequence, the net loss for the second quarter was $5.3 million or $0.62 per diluted share versus a net loss of $4 million or $0.50 per diluted share in the same quarter last year. Our working capital position remains in good shape with nearly $32 million of cash and marketable securities and no debt. We invested $4 million of our working capital during the second quarter, including $3.1 million to fund operations and $500,000 for capital expenditures. Cash usage so far this year of $7.3 million is lower than we projected at the start of the year largely due to timing of customer receipts and vendor payments. There have been no substantive changes in our rate of investment. We expect that cash usage in Q3 will be in the range of $4 million to $6 million. For further discussion of our financial results and risks and prospects for our business, please see our Form 10-Q that we expect to file shortly. Bruce will now provide his comments on significant business developments, market conditions and execution of strategy.

Thanks, Charles. Digimarc Barcode is a powerful improvement on the traditional barcode with higher performance and broader application. We’re building a multi-faceted ecosystem through our partner program to support effective and efficient globalization of our platform guarded by 18 years of experience in developing a globally deployed bank note counterfeit return system with leading central banks. The partner program is a key element of our market development strategy. It allows us to focus on our core competence in identification and discovery technologies, while serving as a force multiplier in sales, marketing, customer acquisition, quality assurance and service delivery. The program provides ready access for customers to multiple sources of supply, fostering growth and globalization and facilitating early adoption. Customers can obtain the benefits of the platform via well established trusted supplier relationships, bypassing many of inefficiencies associated with establishing new supplier relationships. Importantly, for our shareholders, the program is intended to provide Digimarc with operational and financial leverage that will expedite progress toward timely realization of our vision and mission. Since our last call, we've been improving training, coordination and support for previously announced participants. We’ve also added several new partners some of which I will highlight in more detail later. As the number of partners grows, our company’s access to prospective customers and ability to serve them is expanding significantly. We are beginning to observe the benefits of this leverage. We began the year with an announcement of numerous key strategic supplier relationships. We've been operationalizing and optimizing the partnerships in the months since then. One particularly important partnership announcement of interest was our collaboration with GS1 US. The official launch of our collaboration took place at GS1 Connect Conference in Washington D.C. June 1 to June 3. We were prominently featured at the conference, including a DW Code…

[Operator Instructions] Our first question comes from the line of Josh Nichols with B. Riley & Co.

I was wondering if there's anything you can elaborate on as far as the pipeline or some licensing data points now that GS1 launched Digimarc-enabled DW codes? I know it's still early, but is anything being sold in the early but yet potentially meaningful way?

If I understood the question correctly, it was about pipeline and I think I'm saying all I believe I can say about that. I'm trying my best to be sufficiently vague so as not to endanger business relations, but as informative as I can be within that constraint. So we and our business partners are meeting with lots of retailers and brands. And as I said in the prepared remarks, the leverage that we presume would come from the program appears to be developing as anticipated. And so we're having lots of engagement, but when we get a contract that we can announce, we will, and absent that give as much indications we can of how things are going. But I don't know that there's anything more that I could say.

And I know a lot of the focus has been on barcode, but anything you could say regarding some interest or what you're seeing in the market regarding the larger Discover platform as it pertains to other forms of media?

As I think most people on the phone know, Digimarc Discover software has a seamless multi-modal discovery of things using conventional barcodes QR, Digimarc image and audio barcodes and we are licensing that generally to consumer engagement applications and to retailers. We have picked up more retail business that we can’t specify. And we are engaged increasingly in public policy discussions and potential regulatory developments associated with federal legislation concerning the nutrition facts panel. All food products, consumer packaging for food products will need to be revised by July 2018 to include a new design of the nutrition facts panel. That's a wonderful opportunity for us as we've talk to brands to say as long as you're revising all your packaging why don’t you go ahead and modernize it with Digimarc Barcode. So it’s a very healthy policy-driven market development. Then, there was a law passed regarding genetically modified organisms in food products in Vermont and it caused a panic in the food industry which led the Congress to rapidly pass federal preemptive legislation that is now pending the President's signature. And so in that legislation it's contemplated that the manufacturers would have the right to deliver the GMO information via the Internet and so we're trying to make sure that Digimarc Barcode is one of the means available to do it, if not the preferred means to do it. But that law is on the President's desk and hasn't been signed yet. And so you see the coalescence of two federal policy initiatives putting additional pressure on packets designs which are already overburdened with messaging. So [they run not a real estate] and it seems that they only answer will be dynamic information provided as a point of purchase and point to use and reorder to consumers. We believe we're the ideal trigger for that. We also published research earlier this year about the growing desire of consumers for information independent policy initiatives. So there's a very powerful movement afoot here from the consumers and from the government to make more information available at point of purchase. And I think that's a very healthy market development for us.

Our next question comes from Jeff Kessler with Imperial Capital.

I'm wondering if you could talk about some of the infrastructure challenges and plans you have for moving into foreign markets? Again, I realize it's early. Are there differences in the way you're going to have to approach these markets? Is it going to be country by country by country, particularly in places like Europe? And is this the type of thing that will entail some type of different type of marketing, different type of packaging, different type of scanning and infrastructure than you've had in the United States?

Those are lot of questions piled into one, I'll see if I can try to answer them all. Let me know if I missed something. So we had wanted to focus on the US and particularly in the collaboration with GS1 US on building on an exportable collaboration model. The foreign markets are too anxious to get going. It won't wait. And so in Japan DNP and SATO Corporation, who are very large powerful companies, wanted to move forward with the study group. They wanted our consent them participation to do that, to prepare the market for development. The Japanese industry operates very differently than the US. And so in their model and one of our conditions of allowing them to move forward was that it would be an open collaboration where any company could participate. So although there were 17 we mentioned in our releases already and 18th has to join, I expect there will be many more. And their purpose is to do the work in an efficient manner. And so I expect actually the Japanese model is going to work a lot better than the US model because of that open collaboration, whereas in the US you’ve heard me complain from time to time about needing to do the same study, repeatedly getting the same results, while in Japan that is likely to not be necessary because they will make available to the study group participants the findings from such research. So I think it's going to be a very productive group in the study group and a very good model for introducing a transformational technology to their market. So that's a big difference between Japan and the US. In Europe, really our initial presentation there will be at this ECR TAG Conference. We have a representative…

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

I wanted to follow up on your comments about nutrition fact panel. So effectively 100% of consumer packaged food items for the US all have to have a new label in two years time from now? Did I understand you correctly?

Yeah, the legislation has been passed, so it's a law. And I believe there are some small exceptions, but let's say essentially all food products.

So I mean it seems like as you've been working on this and we've been observing it, the challenge has been all around getting the first couple of sheep through the shoot. Do you get a sense that the nutrition panel plus soon to be added GMO issue perhaps add some sense of urgency, so that there won’t be so much time spent doing as you noted repeat of the same test to get the same result?

The packaging of consumer products in general is under a great deal of stress. We had sort of theorized that these things would happen and now they're happening. So the facts are supporting our assumptions of our strategy we laid a few years ago. And of course we didn’t know all these things will be happening. But if you think about the real estate of a package, if you observe next time you're in the grocery, how much room is left to put more stuff on there, it can't go on like this. They have to move the source of information into the Internet and then they have to have a convenient and reliable user interface for consumers and we think we have both sides of that, the Digimarc Barcode being the best trigger and Digimarc Discover being the best discovery software for smartphones. So we think we're right in the sweet spot of this change going on in the marketplace. And the sort of frustration and not quite a panic yet, but there is great concern that industry has, much of this concern has coalesced around Grocery Manufacturers Association initiative called Smart Label. So it's the GMA Smart Label initiative. There are many, many brands involved in that and that initiative started several years ago. And they had presumed that they would use QR as a trigger and so we are presently increasingly engaged in the discussion about how Digimarc Barcode can serve the interests better. And so we will see where that goes. But that’s the embodiment of an industry reaction to the policy initiatives and then the desire to provide reliable information at point of purchase and point of use reorder for consumers as a broader interest of industry that we obviously serve very well. So all of these factors are positive factors affecting the likelihood of adoption and the pace of adoption.

So it this like so many other examples of federal legislation going to be left up to some regulator or other to work out the implementation? You mentioned being engaged with this process, is it FDA or somebody that’s – Department of Agriculture, who is going to eventually be putting this down to details? Is it possible that barcode becomes one of the acceptable solution, i.e., is recommended for implementation by the regulators?

Yes. So it’s the FDA and as you know because you know our long history, we used to spend quite a lot of time in Washington and we're familiar with the town and how things get done there. And so after many years since the ID system sale of not having much interest in what's going on there, we have to now go back to Washington and hang out a bit and make sure that everyone does the right thing. So we know how to do it. So that's another area in which our strategy is being modified a bit here. We’ve got to go and spend a little time in Washington to make sure the policymakers make good judgments. But we have here the great virtue of having three industry associations on our side, the GS1 obviously, GMA and FMI, or the Food Marketing Institute. So all three associations believe as we do that the solution to this problem has to reside in Internet based delivery of critical information to consumers and that we are the best means of delivering that.

So a couple of housekeeping questions maybe for Charles or you, Bruce. One on OpEx which were down – up a lot year over year, but down a bit sequentially with new hires and so forth, how should we think about the back half of the year versus the first half in terms of further run rate of expenses?

Expect a marginal increase in OpEx kind of in the second half of the year. We kind of delayed our hiring plan a little bit, been very selective in our hires and so obviously we announced two pretty notable hires that are coming on board and those will obviously add to OpEx a little bit in the second half the year, but there's some other positions there too as well.

My other question was you mentioned that the gross margin improvement had to do with cost reductions related to Guardian. So is this new level of gross margin for the subscription segment sustainable or are there other things that might cause that to come back down towards the level that we've seen over the last few quarters?

Yeah, I think for the Guardian business it's certainly sustainable. I think there's additional opportunities to reduce costs even more although probably not as significant as the reductions we've currently made. But we’re continually focused on those costs and finding ways to automate processes and just be more efficient overall. When you talk about the subscription line in general, as Barcode and Discover revenue grow, obviously that's a lot higher margin business than Guardian itself. So the composition of revenue within that line item will impact margins going forward, but the Guardian business itself is certainly sustainable.

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

A couple questions from me. First, Bruce, you spent a lot of time and effort building out the ecosystem, pretty methodical approach here, can you talk a bit about the ecosystem in particular I think about the ability to onboard SKUs with respect to package designed bringing the label in, you've trained some partners that you've been very visible about, I think you referenced some others that maybe haven't seen the light of day. Can you just talk about how that build has evolved? I think it might give us a better picture of the ramp in the infrastructure you’re building, maybe you could talk about number of people that have been trained and are capable of bringing SKUs on board and how that might have changed over the last three, six months.

So I’ll call it brand deployment aspect of the partner program includes [indiscernible] publicly announced. There were others involved who were not yet publicly announced. So we will try to get that information to you as soon as we can. But in all of those cases, we are expanding our client engagement reach as I mentioned in the prepared remarks by allowing a trusted supplier to sort of put a check box on existing agreements as opposed to us going in and spending all the time and resources necessary to negotiate direct agreements. In those relationships then, we're encouraging our business partners and some of them have design firms that work with them to work with us as we continue to develop the toolset to allow for the implementation of Digimarc Barcode in an original design rather than post-processing. And we're ramping up our work in that area because I believe that the design community is a source of friction that we can mitigate and even convert into a motivator rather than an inhibitor of adoption by making it possible for designers to remain in control of their art. So in the first phase of market development, we necessarily said let’s send all your stuff to us. In the next phase of market development, we'll be transitioning the tools to the designers so that they don't have to surrender their art. And we think that that's going to be a very productive change in our approach here and it's a natural evolution of a platform that I hope everyone appreciates we’ve been anticipating for a long time. So we're trying to move quickly on that. As we make those tools available then those business partners, companies like SGS and [Schawk and Parago] are in fact quality assurance providers. And so…

Just shifting gears then with respect to GS1, obviously a tremendous partner. They've gone live. Can you just talk – the original, I guess, coming-out party had talked a lot about joint engagements, speaking, training, et cetera, education. Can you talk about what's been done, what's to come in the next six to 12 months, any direct fulfillment through their side of DW Codes? Have you worked out the kinks, has that gone smoothly? Just an update of how that relationship is actually playing out on in the field.

So we announced in January and then we sprinted to their conference, I'll say, we had a few very important things to do. We have to get integrated into their website and develop the coordination there for processing orders from clients. And we need to get ready for their conference in June for the launch and there was a lot of work done on that. So we've quite wrapped a little bit since the conference and we're convening our marketing and sales folks to get together shortly to plan the second half activities. So I don't have the plan for it yet, but we're going on it and we're going to do a detailed planning session to build out a plan for the rest of the year very soon.

And if you're able to say, has there been any direct fulfillment through GS1 at this point?

I can't say yet. I don't think there's been a lot of activity and that's because we haven't yet marketed it. We just made it available on the website, that's part of what will be in the agenda for our upcoming summit to plan the second half marketing activities. So we need to do some marketing to let people know it's available and to let them know how to use it. So what we got done by the conference I thought was quite impressive and that is just the implementation, but there was no marketing program associated with it.

One last if I could. Certainly, I think Wegmans laid out the case at the GS1 Conference and there seem to be a lot of other examples of the value proposition from the retail, particularly the store brand side. Would you talk to the CPG brand owner's side with respect to the ROI? Obviously, some have been willing to come out and say that you're working with them. You're working with a lot of others. What is bubbling to the surface in terms of the rank order of how they're justifying the ROI? What do they see as the key drivers from a CPG, not a store brand, but a CPG brand owner's desire to adopt?

So we have a slide deck on the website about the consumer products lifecycle. It has about 30 applications referred to on the slide. And so that slide is intended to answer the question you just asked. And so the answer goes something like this that when selling to a large CPG, if we do the executive level presentation, they go, wow, wonderful, amazing, transformational and then we go, okay, who is buying, right? And then everybody sort of looks at everybody else. So what we have done is a matter of sales tactics. After having such an introductory meeting, I tell our sales execs find someone with a budget, right. And so if you’re looking those applications, they span the entire life cycle, so obviously various functional departments of any CPG. Any one of those applications, we believe, would provide sufficient value to justify the entire cost of implementation for the enterprise and that’s the model. So the $50 per package is meant to provide access to the platform and then the value is derived from applications built up on that access. So it actually varies considerably from company to company depending on who is willing to champion the cause and apply their budget. So there is no single answer. I think the greatest level of interest, if I was going to try to characterize among all of the CPGs that we talk to what’s the most common theme, I think it has to do with the packaging real estate being exhausted in light of increasing demands for information, so either regulatory concerns or marketing concerns, how to make it easy for consumers to use their smartphones to shop because they really want to use them. They're still not scanning routinely across a broad spectrum of consumers. So how do you get that platform available for everyone and then how do you make it really easy and effective and provide good quality results for every scan, all right. So there is a lot of work going on in those areas. That's a squishier ROI and then I can reduce my defects in manufacturing, I can improve my efficiency in distribution or I can make my retailer happy and maybe get more shelf space. So even though it’s the broadest I would say common interest, it’s not necessarily the most compelling value proposition.

[Operator Instructions] Our next question comes from Glenn Mattson with Ladenburg Thalmann.

Bruce, a question, just parsing some of the phrases you used regarding some of these customers, you talked about the one large regional grosser who was mainly, I think you said, using Guardian for the digital assets, but also trials on packaging, could you explain what they're using Guardian for exactly?

Let's just call sort of nose under the tent. I mean, we’re trying to build the relationship with them and so they're doing some baby steps here. So the Guardian implementations would protect their digital assets just like any brand would use Guardian for images. So it's a Guardian for images solution provision. But they also have the licensed our SDK for the mobile app. So we're chipping away. On the packaging front, we’ve done some trials with them, but we haven't gotten them to yes yet. So we're continuing to work on that and so that would be a very nice development if we can get that piece of business, but I still have to work on it.

And then you said, I think, proposals with other large retailers, is that a step beyond what you've said in the past which was either trials or some other language like that?

You know it’s hard to comment on this sort of abstractly, every day there's new news. It’s not real linear and predictable, but right now there are some very large players in brand packaging who seem really psyched to get going. I never really count them until I've got the contract in hand and the production has begun. But there's a lot of interest among very important players who appear to want to get going, but we don't have them in house yet. So that's what I was getting out when I called proposal stage, they're going – give us proposals, what kind of deal can you give us, we’d like to get going, how do we get going, all of those kinds of conversations are going on. But if we get actual production I will characterize them differently.

And then other retailers are implementing the SDK, I believe you said. Maybe just explain why they would do that ahead of – could you use your app say without adopting Digimarc Barcode or Digimarc Discover? Would there be a value to someone to do that, or is this something you think people are doing to lay the groundwork ahead of a bigger campaign or anything like that?

Well, the motivation can vary, but the structure of Digimarc Discover has a broader footprint than Digimarc Barcode. We have built what we think is industry leading conventional barcode and QR code reading capability. So you could buy QR code or conventional barcodes and we believe we would be riding superior price performance. So it depends on licensee, what their motivation is. But in every case, they get future proofed. That was my point with the licensee, the grosser licensee, SDK, is that – now we can show them a few more things, right. So it's kind of this nose under the tent notion that Discover can be a means of getting engaged with the accounts and then showing them that even though we do a great job with commercial barcodes, if you adopt Digimarc Barcode, it’s going to work even better.

Charles, just a clarification, you talked about an increased growth rate or an uptick in the Central Bank in the second half of 2017. What kind of magnitude are you talking about as far as the uptick there?

It’s still kind of single digits, but meaningful compared to where historically the business has been, 3% to 5%, so add on another single digit growth factor to that.

Ladies and gentlemen, at this time, we have reached our allotted time for questions. I will hand the program back over to Bruce Davis for any closing remarks.

Thanks very much everyone for your support and interest. It’s a pretty exciting time here in mid-year, obviously there's a lot of activity going on and opportunities to expand our reach which we hope will bring some tangible results you can get excited about in the near future. We're continuing to manage the business carefully as we pursue these new opportunities, but we have a plethora of opportunities to nurture. So we will look forward to talking to you again next quarter and giving you an update. Thanks very much and good bye.

Ladies and gentlemen, this does conclude today's conference call. Thank you for joining us.