Sigma Labs, Inc. (NASDAQ:SGLB) Q2 2020 Earnings Conference Call July 23, 2020 4:30 PM ET
Chris Tyson – Senior Managing Director-MZ North America
Mark Ruport – President and Chief Executive Officer
Frank Orzechowski – Chief Financial Officer
Conference Call Participants
Harold Weber – Aiges
Good day, and welcome to the Sigma Labs Second Quarter 2020 Financial Results Conference Call and Webcast. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Chris Tyson, Senior Managing Director of MZ North America. Please go ahead, sir.
Thank you, and good afternoon. I’d like to thank you all for taking time to join us for Sigma Labs second quarter 2020 business update and results conference call. Your host today are Mark Ruport, President and Chief Executive Officer; and Frank Orzechowski, the company’s Chief Financial Officer. A press release detailing these results crossed the wires this afternoon at 4:01 PM Eastern today and is available on the company’s website, sigmalabsinc.com.
Before we begin the formal presentation, I’d like to remind everyone that statements made on the call and webcast, including those regarding future financial results and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company’s SEC filings for a list of associated risks, and we would also refer you to the company’s website for more supporting industry information.
At this time, I’d like to turn the call over to Sigma Labs’ President and Chief Executive Officer, Mark Ruport. Mark, the floor is yours.
Thank you, Chris, and good afternoon, and thank you for joining our second quarter earnings call today. I am very pleased to announce that we have achieved several significant milestones in the second quarter that move us towards our goal, setting the quality assurance standard for additive manufacturing. Although short-term revenue has been delayed due to the effects of COVID on the worldwide economy as was somewhat expected, we continue to execute on all aspects of our strategic and growth plan. As part of this, we have strengthened our balance sheet, preserved our cash, added additional sales and marketing resources, all this to position the company for strong growth as the economy improves.
Before I go into details, I’ll ask Frank Orzechowski, our Chief Financial Officer to review our financial results, and then I’ll provide some context around the quarter. Frank?
Thank you, Mark. Our detailed financial results are contained in our Form 10-Q filed with the SEC today and the press release we issued contains key highlights of our financial results. So today I will confine myself to a concise review of our financial results for the second quarter of 2020.
Our revenue for the second quarter of 2020 totaled $168,000. This compares to revenues of $34,000 for the second quarter of 2019. The increase in revenue was due to a PrintRite3D unit sale to an end-user customer, as well as revenue recognized under our legacy Rapid Test and Evaluation or RTE program during the quarter.
Our gross profit for the second quarter of 2020 was $110,000 as compared to negative $27,000 in the second quarter of 2019. Total operating expenses for the second quarter of 2020 were $1.53 million as compared to total operating expenses of $1.57 million for the same period in 2019.
Salaries and benefits were $605,000 for the quarter, an increase of $24,000 or 4% over the second quarter of 2019, largely as a result of salary increases that were effective in the second half of 2019. Our stock-based compensation totaled $271,000 for the quarter as compared to $220,000 for the second quarter of 2019. The increase is due to the vesting of 25% of the 2020 stock option grants awarded to employees during the month of June.
Investor and public relations expenses were $171,000 for the quarter, an increase of $14,000 or 9% over the second quarter of 2019. The increase is a result of the use of a consultant in 2020, as well as advertising costs associated with our enhanced internet marketing initiative. Office expenses totaled $79,000 for the second quarter, a decrease of $105,000 or 57% from the second quarter of 2019, primarily due to reduced travel as a result of the COVID-19 pandemic.
Other operating expenses totaled $52,000 for the second quarter of 2020, an increase of 33% over the second quarter of 2019, primarily due to an increase in our director and officer’s insurance policy premiums. Other operating income and expense totaled $507,000 for the quarter, primarily consisting of New Mexico state tax incentives of $152,000 and our Paycheck Protection Program loan of $362,000, which we expect will be fully forgiven.
Cash used in operating activities for the six months ended June 30, 2020 totaled $2.4 million, compared to $2.7 million in the first six months ended June 30, 2019. Note that approximately $400,000 of this amount was due to trade accounts payables carried over from 2019 due to a delay in our financings.
Net loss applicable to common shareholders for the second quarter of 2020 was $1.6 million or $0.49 per share as compared to a net loss of $1.5 million or $1.50 per share in the second quarter of 2019.
Now turning to our balance sheet, we have strengthened it in several areas since 2019 year-end. Our cash balance totaled $2.45 million at June 30, 2020 is compared to $87,000 at December 31, 2019. Our working capital was $2.8 million at June 30, 2020 as compared to a deficit of $98,000 at December 31, 2019.
Trade accounts payable totaled $295,000 at the end of the quarter as compared to $727,000 at year-end 2019, a decrease of 59%. And stockholders’ equity totaled $3.6 million at June 30, 2020 as compared to $652,000 at December 31, 2019. Our January and April offerings together with exercises of preferred warrants have contributed net proceeds of $4.9 million to the company during the first six months of 2020.
And with that, I will now turn the call back over to Mark.
Thank you, Frank. Okay, let’s start with some of the more significant milestones that we achieved in the quarter. First, we signed a global agreement with a major printer manufacturer, who will designate their printers as PrintRite3D ready, allowing us to leverage their worldwide sales force of over 800 people, who will actively promote our technology as their preferred monitoring solution. Currently, we’re under an NDA with the company. However, we expect to announce details about the agreement in the coming weeks. And we do expect to see the first purchase order from the relationship this quarter, and of course, increased activity as the economy picks up, and as we train the worldwide sales force. This is a major win for Sigma.
Second, our Japanese distributor signed their first customer, a Fortune Global 50 manufacturer, who will be using PrintRite3D to ensure consistent quality on their SLM dual laser printer. This sale serves as a critical beachhead for us to begin to open up the Japanese market for our technology. The sale was made with an agent under a new sales profit, which I’ll discuss in detail in a few moments.
Next, we recently collaborated with NIST to outline how to calibrate PrintRite3D sensors to a traceable temperature standard. As a result, Sigma has performed the first-ever standards calibration with the renowned National Institute of Standards and Technology. This is a strategic development because it opens the door to machine-to-machine calibration and enables machine matching for the additive industry, a major step to ensure quality in production environments.
Additionally, Sigma has become the lead author in developing the melt pool monitoring standards within the ASTM international framework, which is expected to go to ballot in Q4 2020. This standard enables a pathway to adoption by additional international standard bodies, such as ISO and JSA in 2021; something that many believe is needed to accelerate the use and adoption of 3D printing.
Finally, and to me, the most exciting achievement is that we’ve validated our ability to sell our technology using a new process called @Sigma RTE. Previously RTE’s rapid test and evaluations required us to build a full production PrintRite3D system at the cost to us of approximately $40,000. Shifted in most cases overseas and send an engineer and sometimes two to install the system at a customer’s site. And then work with the customer for several months, educating them on fine tuning the system to their internal processes.
As I mentioned a few minutes ago, in Q2, we closed our first sale through an agent in Japan to a very large company. One of the most important aspects here is that the system is sold through an @Sigma RTE, a remote process where prospects sends us their CAD file of their part and they specify the type of metal powder used to manufacture it. We built the part on our 3D printer in Santa Fe and gave the customer remote access to PrintRite3D for two weeks, no cost to build or ship or install our system, two weeks instead of two months on a purchase order of an excess of a $100,000 net to Sigma sold through a new agent in Japan. That’s a major reduction in the sales cycle, it leverages the partnering and more importantly, it’s a repeatable model that we can leverage with all the distribution partners as we build out a multifaceted distribution model.
Now, when I step back and I look at the dynamics of the market, I believe that we are seeing the beginning of the migration of 3D metal printing and therefore PrintRite3D moving from R&D organizations, universities and end-users prototyping initiatives to end-user serial production environments. And finally all the way up to the printer manufacturers or OEMs, I believe that we are on the cusp of the industrialization of 3D metal printing and PrintRite3D is positioned as a critical component or the missing link in the additive manufacturing’s digital chain.
As a result, we’re going to invest in strengthening our sales and marketing teams with the addition of what we haven’t invested and we are strengthening with an addition of Director of Business Development for North America, Steve Immel. He has over 20 years of sales experience in additive manufacturing. His most recent position was at Jabil, a contract manufacturer where he headed up a business unit within their Additive Manufacturing group. Prior to that, Steve was Director of Partnerships and Alliances for Materialise and prior to that Regional Director for 3D Systems and he’s worked for various software companies. We are very fortunate to have him joined the company at such a critical time.
We have also brought in marketing talent to sharpen our messaging, establish our brand and position Sigma as the trusted source of information, critical to additive manufacturing industry’s accelerated growth. In response to the markets need for education and collaboration we will be launching a series of online on-demand programs, including YouTube videos, podcasts and webinars designed to provide education for end-users on the value of IPQA or In-Process Quality Assurance, sharing our insights, highlighting the benefits of our technology and most importantly, spotlighting our talented engineers and the breakthrough accomplishments that they have accomplished in the last couple of years.
As a point of reference, I thought I would explain why PrintRite3D and IPQA are important to end-users and to the advancement of additive manufacturing. A 3D printer builds parts through a process of lasers, melting metal powder, adding layer-upon-layer to form a part that might have been impossible to manufacture with traditional subtractive manufacturing methods or creating a part which is lighter and stronger, and more durable than could have been previously manufactured.
The major issues holding back the adoption of 3D metal printing are first, as you might imagine, lack of consistency or quality and that’s even from printers coming from the same manufacturers. Second is a lengthy product development time, where the time it takes to go from design to production, basically that’s because it’s been more of a trial and error than leveraging knowledge like Sigma is collecting and our knowledge basis. Third is the lack of standards in collaboration. PrintRite3D and our IPQA methodology addresses these barriers head-on in addition due to the reduction of trial and error builds, we’re able to save the end-user money through minimizing waste, reducing cost and machine time, reducing post-processing costs and most importantly, compressing the time to market for delivery of critical parts.
As an independent software company, we’re able to provide a consistent standard monitoring process across printers from different manufacturers. Therefore end-users with their own factories or throughout their supply chain can be assured of a standard way to monitor and enforce quality and consistency.
On a different note, I’ve been asked several times about COVID’s effect on our business. Clearly short-term it’s been detrimental to our ability to grow our revenue as fast as I had thought. In Q2 alone, we had approximately $500,000 in revenue from six companies, where the customer selected PrintRite3D and we’re in the procurement process, when capital expenditures were either frozen, slowed down or faced additional scrutiny.
In one particular case, a large oil and gas company who had completed two successful RTEs and the expense on first one is not @Sigma RTEs faced difficult to getting a purchase order to us within the second quarter. We expect that order momentarily for at least one and hopefully two initial production system. And in another case, an order was pulled at the last moment by a university in Europe, the order was actually coming through a prospective new OEM that we were introduced to by Materialise via our joint sales agreement during my trip to Europe last January.
We also had forecasted an order for a quad-laser system from an existing customer, a renowned research organization in Germany that was delayed until later this year due to lack of funding. I believe all these orders will happen in the future. I just can’t forecast or predict the exact timing. Even though it’s painful in the short-term, many believe that one of the lasting effects of COVID will be the restructuring of our supply chains. Over time, supply chains have become too complex and too rigid and therefore vulnerable to times of crisis, the COVID, political unrest, natural disaster or another unpredictable event.
Additive manufacturing moves the production of critical parts closer to the end user and gives manufacturers the ability to quickly respond to shortages or increased demand. The end result is faster adoption of 3D printing in a larger addressable market for Sigma and PrintRite3D. And by the way, this isn’t true just for the United States. We have initiatives in India, Japan throughout Europe, in countries like Turkey looking to lessen their dependency on other countries and increasing their ability to be self sufficient in times of crisis.
In closing, we are adding sales and marketing resources and executing on all aspects of our strategy to set the standard for quality assurance for additive manufacturing. First, our focus on universities and the R&D organizations worldwide continues to introduce our technology and the value of In-Process Quality Assurance to tomorrow’s manufacturing leaders. Recently, we installed a system at Mississippi state on a Renishaw machine and we will be installing it at Northwestern University on a DMG machine in the near future.
Second strategic alliances and joint selling arrangements such as we have with Materialise are opening up opportunities around the world the new OEM such as the one I mentioned, as well as a largely untapped retrofit market. Third, end-users who are moving towards zero production are adopting Sigma’s IPQA technology to ensure consistency of parts, regardless of printer manufacturer. We continue to have ongoing collaborative initiatives with the international standards organizations who are establishing needed standards for the industry.
And finally, and most importantly for our financial model, we’re beginning to see printer manufacturers designate their printers as PrintRite3D Ready, a first step towards OEMing our technology and greatly increasing our profitability and our unit economics. The end result will be multiple, predictable, repeatable revenue streams that will grow and accelerate with the pace of migration of 3D metal printing from prototyping to worldwide industrialization.
I am more convinced than ever despite the effects of COVID that our goal of setting the standard for quality assurance and additive manufacturing is well within our reach. The timing of course is still difficult to predict due to COVID impact on every aspect of our lives. However as I hope you see, our strategy is sound, our technology is being validated in all market segments and we continue to prove that we can execute in a manner that will drive revenue growth and shareholder value.
Thank you for your time today. And with that, I’ll be glad to take a few questions. Operator?
[Operator Instructions] Our first question comes from Harold Weber with Aegis. Please proceed with your question.
Hi, guys. How you doing?
Doing well. Thank you.
Good. I’m glad to hear how you’re progressing. Some questions in regard to the customers. Could you give me an idea – this is a manufacturer that you’re going to be supplying the software, and they are going to be offering this with – is like as an OEM product from as a new – from the vendor as a new purchased add-on or is this going to now become or they’re working towards making this automatic for all customers or what?
Harold, as I mentioned earlier, that right now, we’re still under NDA, waiting for final approval to do a more detailed announcement. But generally, it provides the ability for their sales organization to quote and promote our technology as their preferred monitoring solution. We have an arrangement where then they come to us, and we install the software and take the order. And we expect that to move towards the second step towards the full OEM type of relationship sometime in the future.
When might you think that this is going to be more formalized or we could talk about it openly?
Sometime in this quarter. We expect our first order this quarter. And I think as the first order comes in, we’ll get into much more detail about the partner, the strategy, how to leverage their sales organization and what the ongoing outlook for the relationship will be.
Okay, great. Could you expand a little bit on what you were talking about some of the other channels that you were developing for revenue generation?
Sure. Are you still there?
I’m sorry, I had something buzz on my telephone there. I thought we had dropped the line.
Yes, we have signed an agent in Japan who did that first deal I talked about to a very large company through the @Sigma RTE. We’re working closely with a new distributor in India. Happens to be, we’re working on an arrangement there with a joint customer with Materialise. And then we continue to look for opportunities to integrate with software vendors who have simulation technology that we can then use our predictive analytics within their simulation and then compare the actual results in order for companies to fine-tune their ability to deliver a consistent part. So those are the current channels we’re looking at. We also have direct salespeople in North America and Europe, and we’ve just expanded that in the United States.
Okay. And this is encompassing on getting actual manufacturers of the machines as well as end-users of the machines. I know there are some large aerospace, avionics, engineering companies that have many of these machines that you work with.
Yes. It’s specifically the new Director of North America Business development is going after end-users, such as the ones you just mentioned. And also, we’ll be doing some strategic relationships with software companies, where the integration of our technology and theirs will speed the adoption of additive manufacturing.
Okay. And the situation about the certification about the calibration, is that going to be a global thing that we can – that will be accepted throughout?
This – well, that’s what we’re hoping. That’s what the standards organizations are working towards, and that’s why the leverage that we expect to get. But the calibration of multiple machines through PrintRite3D is a major step towards consistency and output of the parts of those machines manufacturer. So we hope that will be accepted by the International Standards Organizations. And if you look at the barriers to acceptance, when it comes to consistency, quality, collaboration, those are the things that we focus on and the standard is that last remaining piece.
And when might that come to fruition?
These are ongoing standards efforts. The one that I talked about that was to be voted on in Q4 of this year. And hopefully, it will take effect next year.
I appreciate your questions. And if I could move on, and I’d be glad to follow-up with you privately in a longer conversation, but I want to give some other people the opportunity to ask some questions.
Thank you. Our next question comes from George Carco [ph], a private investor. Please proceed with your question.
Yes. Hi, guys. Thank you for taking my call. Congratulations on the progress. Two questions. How would you describe the working relationship would Materialise? And what are the total number of shares outstanding, please?
The first one, I’ll answer the working relationship is very good. As I mentioned, during January, we did joint sales with them, resulting in opportunities for us. Unfortunately, it was delayed this quarter. And we continue to work with them, and we expect to make some significant progress with the integration of our monitoring system and their MCP in the next two months, and I think we’ll have some exciting things to talk about.
As far as shares outstanding, I’ll turn that over to Franc O.
Sure. As of the 30th of June and as of today, the total shares outstanding are 3,926,362 shares.
Okay, thank you so much guys.
Thank you. Our next question comes from Sean Lyles [ph], another private investor. Please proceed with your question.
Hello, Mark and Frank, thank you for everything you do at Sigma Labs. I’ve been investing for a long time. And I just wanted to ask, I know, are you familiar with WL3D? And how does that compare to SGLB? And as well, a follow-up question to that is, can SGLB help print support free? Or is that something in your business model? Or are you guys looking into at all?
So let me take the second one first, can it support free. So we’re working with several companies, software companies and hardware companies to do closed loop, where based on our predictive analytics, we can see a defect or anomaly coming in process and then send messages and signals to the printer to be able to address what is going to cause that anomaly or defect in the part that they’re building. Is that what you meant by being able to do it automatically, the answer is we’re working towards that, and we’re getting very close to being able to do closed loop in process quality assurance.
The first question, I’m not quite sure I understand. And would you repeat it for me?
Sure. I was just asking if you’re familiar with WL3D. Thank you for that on closed loop. But I was actually talking about WL3D can print support free structure on the print in the middle…
I see. I see what you’re asking. Yes, yes. So we’re not a printer manufacturer. So we don’t – the customer – our end-user uses our technology to be able to during the process of the build, be able to look for, predict, detect, so forth and so on. We can look at support structures and inform the customer whether the support structures are – meet the requirements of the part. But we don’t have anything to do with building a part structure-free or support-free.
Sure. Okay. Okay. I thought so. All right, thank you. And one last question. I know we are talking about giving an example of if Sigma took over 5% of market share for metal 3D printing. That we would bring in a certain amount. Do you know or project how much Sigma Lab once fully matured as a product would be able to capture to the metal 3D printing market?
I really don’t have a firm handle on that. And what you’re quoting is an analysis that we did that predicted the number of 3D metal printers that would be sold between 2021 and 2027. And for every 5% of that market, we would – it would mean approximately $100 million of revenue to the company over that seven-year period. So I can’t predict at this stage in the company’s life, what we might be able to garner. I can tell you that there is no other company in the world that is moving in the direction we’re moving to establish that standard.
And if we establish that standard and the maturity of the end-users comes to the point where they have multiple tenders from multiple manufacturers, we are the way to help them reduce costs and ensure quality.
Okay. Well, I appreciate your answers to my questions. Thank you.
Thank you. There are no further questions at this time. I’d like to turn the floor back over to management for any closing remarks you may have.
Great. Well, thank you very much for your time and your attention and your interest. As always, if you would like to have a further conversation we’d be glad to accommodate you. And the best way to do that is to coordinate with MZ and Chris Tyson. And again, we thank you for your time and your interest. And I look forward to updating you on the progress that we will be making with the partners that we’re working with, and I look forward to being able to announce and provide more detail around the agreement that we recently signed. Thanks again for your time and attention. Stay safe, and we’ll talk to you in about three months. Operator?
Ladies and gentlemen, this concludes today’s web call. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.