Sigma Labs, Inc.
Q4 2022 Earnings Call Transcript

Published: 31 Mar 2023

[Operator:]

Good day, and welcome to the Sigma Additive Solutions Fourth Quarter and Final Year 2022 Financial Results Conference Call and Webcast. Today's conference is being recorded. At this time, I'd like to turn the call over to Chris Tyson, Executive Vice President of MZ North America. Please go ahead, sir.

[Christopher Tyson:]

Thank you, and good afternoon. I'd like to thank you all for taking time to join us for Sigma Additive Solutions Fourth Quarter and Full Year 2022 Business Update and Results Conference Call. Your host today are Jacob Brunsberg, 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

[Jacob Brunsberg:]

Thank you, Chris. Good afternoon, and thank you for joining us today. As we close out Q4 2022, this marks the third quarter of our transformation as a business. I'm excited to share the progress our team has made, transitioning the business to a scalable software solution and connected quality standard for the additive industry. Today, I'm looking to provide a concise and clear update on the business. I'm going to focus on three areas. First, we are executing the transition of our business to a software-only suite that is focused on being the center of digital quality and 3D printing. Second, the market is showing signs of finally opening up, and we believe is ready and demanding a connected digital quality solution. And third, we have partners and customers that are validating our road map and the need for this quality solution. I do appreciate there is an underlying discussion on our cash runway and its impact on our ability to achieve our objectives and possible strategic next steps. I will ensure we cover this as well. First, I will turn the call over to Frank to go through the financials. Frank?

[Frank Orzechowski:]

Thank you, Jacob. Our detailed financial results are contained in our Form 10-K filed with the SEC today, and the press release we issued contains key highlights of our financial results. So today, I will provide a brief overview of our financial results for the fourth quarter and full year 2022. As we have discussed on previous earnings calls and disclosed in our various SEC filings, in 2022, we moved away from selling expensive one-off perpetual licenses for PrintRite3D to a subscription-based pricing model, whereby revenue is recognized over time. As a result of the deemphasis in perpetual sales of the current version of PrintRite3D as well as the change in the manner in which revenue is recognized, we experienced a decline in our revenue for both the year and fourth quarter of 2022. Specifically, revenue for fiscal 2022 totaled $630,000 as compared to $1.7 million for fiscal 2021. Revenue for the fourth quarter of 2022 totaled $154,000, as compared to $350,000 for the fourth quarter of 2021. Our order backlog, as of today, defined as firm orders received but not yet shipped, totaled $125,000 of both perpetual and subscription sales. Additional revenue to be recognized from transactions closed in previous quarters totals $370,000, yielding a combined total of $495,000 of revenues to be recognized in future periods. Gross profit for the full year of 2022 was $280,000 as compared to 2021's gross profit of $1.1 million. Gross profit in the fourth quarter of 2022 was $117,000 as compared to $200,000 for the fourth quarter of 2021. Our gross margin for fiscal 2022 was 44% as compared to 66% for fiscal 2021. This decrease of 22% was a result of an increase in the price of certain PrintRite3D hardware components as a result of configuration changes, an increase in travel costs related to system installations and discounted sales to universities and research institutions as members of our act of industrial network. Before I go into detail on our operating expenses, I'd like to provide some context. 2022 marked a significant change in the way we conduct our business. And while this shift has manifested itself in lower revenue for the year, it has also had a significant impact on our operating expenses and our cash burn rate going forward. Moving away from direct sales of perpetual licenses to a focus on sales through embedded software-only products has enabled us to reduce our sales footprint and realign some of our resources towards ensuring customer success. This has also enabled us to reduce our operations and administrative overhead while maintaining our ability to support our current and anticipated level of activity. In addition, we have been able to reduce our engineering headcount without sacrificing the delivery of our new software-only products, currently targeted for the end of the second quarter of this year. Our total employee headcount at December 31, 2022, was 25 and as compared to 33 at December 31, 2021, and our peak of 35 employees in April of 2022. And as of today, total head count stands at 19, a further reduction of 6 employees in the first quarter of 2023. Total operating expenses for 2022 were $9 million, of which $2.1 million were incurred in the fourth quarter. This compares to total operating expenses for 2021 of $9.6 million, of which $2.6 million was incurred in the fourth quarter. Salaries and benefits increased by $454,000 over 2021 as the aforementioned headcount reductions did not take place until the second half of 2022. And in addition, we incurred severance and other costs related to those reductions. Salary and benefits for the fourth quarter of 2022 were $1.03 million as compared to $1.23 million in the third quarter of 2022. The increase in compensation and benefits in 2022 was more than offset by decreases in almost all of our other operating expense categories. Stock-based compensation decreased by $273,000 from 2021 as a result of fewer stock options granted during the year. Operations and R&D expenses decreased by $237,000, largely as a result of lower spend for parts and materials due to fewer perpetual sales for our PrintRite3D solution as well as lower obsolescence charges in 2022. Investor relations, advertising and marketing expenses decreased by $81,000 as a result of a reduction in Investor Relations resources, partially offset by an increase in trade shows due to the relaxing of COVID-related restrictions. Office expenses increased by $180,000, mostly due to increased travel costs, again, because of the easing of COVID travel restrictions. Our organization costs decreased by $414,000, largely driven by fewer stock option grants to nonemployee directors and one less shareholder meeting in 2022. Net loss applicable to common shareholders for the full year 2022 totaled $8.7 million or $0.83 per share as compared to $7.5 million or $0.76 per share in 2021. Net loss in the fourth quarter of 2022 totaled $1.9 million as compared to a net loss of $2.4 million in the fourth quarter of 2021. Turning to our cash usage and burn rate in more detail. Cash totaled $2.8 million at December 31, 2022, as compared to $11.4 million at December 31, 2021. Our working capital at December 31, 2022, was $3.6 million as compared to $11.7 million at December 31, 2021. In 2022, we used $8.2 million in cash for operating activities and an additional $389,000 for purchases of fixed assets and investment in our patent portfolio. In total, this equates to an average monthly cash usage or burn rate of approximately $717,000 per month. In the fourth quarter, however, we reduced our burn rate to $650,000 per month as a result of our headcount reductions and other expense cuts. And in the first 2 months of 2023, with the additional headcount decreases I mentioned, our burn rate has been reduced to under $600,000 per month. I would add that this is a conservative number as it does not take into account any additional sales or cash collections. And finally, as we look to extend our cash runway to a strategic investment or sale of the company, we are seeking additional ways to raise capital and conserve our cash. And with that, I will now turn the call back over to Jacob.

[Jacob Brunsberg:]

Thank you, Frank. As I mentioned earlier, I'm going to focus on 3 areas

[Operator:]

We take our first question from the line of Scott Buck with H.C. Wainwright.

[Scott Buck:]

Jacob, can you talk a little bit about whether or not the current, I don't know, elevated level of macro uncertainty is having any impact on the conversations you're having with either OEMs or potential customers?

[Jacob Brunsberg:]

Yes. I think certainly, the macroeconomic environments have presented a change in the valuations and what's going on in the market. I think, honestly, COVID even before that, I think had a probably bigger impact on starting the trajectory in the sense that people really are focusing on profitability and core business. I think that, honestly, in reflection is one of the bigger reasons you're starting to see an openness in the marketplace. There's an urgency around profitability and focus. What I see that doing is actually increasing collaboration in the market. It may be a little counterintuitive, but what we've seen is an acceleration of some of the work, with OEMs opening some of their platforms, as well as other software companies looking to generate more revenue by connecting solutions in the marketplace. I think that's plays really well with our strategy to connect and really merge some of our technology with OEMs and make us more simple user experience from start to finish in digital quality. So I think it's continuing to augment the fact and focus on profitability. But I think honestly, some of these trends were started probably a couple of years ago as well.

[Scott Buck:]

That's helpful. And then the growth in the backlog, is that coming from new customers or, I guess, expansion of current customer relationships?

[Jacob Brunsberg:]

Yes. I think the interesting thing here for us is that we were perpetual based before, right? So every single thing was a new sale because it was sold perpetually. So as we look at that transition in 2022, outside of maybe some maintenance contracts that were lower dollar value, the majority of our sales are all our new sales. But the start of these sales are kind of our start towards that subscription model. So we're seeing more and more of our revenue transition into that subscription landscape, which is why you see us actually carrying a backlog in the future quarters, which is something that was outside of things that were bought, but not yet installed prior was about the only thing meeting that criteria. So that tracks with our subscription plan and our software launch, which we hope will help level out that revenue over time and kind of continue the growth keeping that consistency month-to-month from a revenue perspective.

[Scott Buck:]

That's helpful. And then last one for me. I'm just curious whether or not you guys think you have maybe a little more room to cut on the OpEx side if you have to and then get even tighter than they are currently.

[Jacob Brunsberg:]

I think you definitely always have those options. We've really been thoughtful about our approach to this now to really allow our ability to still grow and target the growth that we have. Certainly, depending on situations, there are options there. But we're really focused on running lean and giving ourselves the ability to really grow here as we launch our software platform in Q2.

[Operator:]

We'll take the next question from the line of Troy Jensen with Lake Street Capital Markets.

[Troy Jensen:]

Congrats on the results. Maybe, Jacob, to start with you. I just want to dig a little bit more into the market activity that you're seeing. Is it mainly just the partners within the market active with you guys now developing the partnerships? Or is it the customer adoption you're really starting to see? And I'd love to know who of the partnership do you think it really drives the biggest opportunity for you guys?

[Jacob Brunsberg:]

Certainly. I think it's actually both, a little bit. So certainly, from a partner connectivity perspective with OEM and software, I think the macroeconomic environment is creating a more open environment in the additive community. I think from the end user perspective, for the people who are doing production now, you're starting to see a lot of people who are collecting a lot of data and now figuring out how to make their operations more profitable. And quality is one of the largest hidden costs in 3D printing. So I think that's a big driver of why you've started to see in some of the trade shows and the talk sessions and things like that, the topics and themes having a lot more quality and cost undertone to them here. And so as we are presenting a path to a lower-cost quality solution and one that's more scalable, I think we're feeling a lot of resonance from the end user base. So I'd say both for there, but -- for us, the attachment to OEM APIs is really the big one for us. Before Sigma is retrofitting on the machines, the ability now to connect and have partners there is a whole additional total addressable market that really just wasn't there in Sigma staff.

[Troy Jensen:]

Yes. Perfect. Okay. How about -- can you expand a little bit on Dimension post processing, what you're doing exactly with polymers?

[Jacob Brunsberg:]

Yes. Yes. No, great question. I think we entered the SLS space from a monitoring perspective, earlier in 2022. That kind of brought us into spheres of new additional steps post processing being one of those in that space. And as we build out our software tools, a lot of are items that we built out here are modules to look at quality data over time. And what we found is this is kind of relevant from the whole digital quality chain. And so what we have done is kind of started to build out that quality module with Dimension so that we can connect the further quality chain all the way through post processing to end part to kind of know how that part is progressing through its life cycle. And I think we'll have plenty of opportunity as well to take some of the things that we built and apply them to either earlier items in the process or later, really to focus again is connecting more of the digital quality stream and keeping it in one user experience versus having to have multiple different things you're jumping around from.

[Operator:]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would now like to turn the call back over to Jacob Brunsberg, CEO, for closing comments. Over to you, sir.

[Jacob Brunsberg:]

Thanks. I'd just like to thank everyone for joining us today. We look forward to continuing to update you as we progress, especially as we get towards the launch of our software-only products targeted for Q2. I appreciate the time and talk soon.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.