Sigma Labs, Inc.
Q1 2020 Earnings Call Transcript

Published: 15 May 2020

[Operator:]

Good day. And welcome to the Sigma Labs’ First Quarter Financial Results Conference Call. 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.

[Chris Tyson:]

Thank you, and good afternoon. I’d like to thank you all for taking time to join us for Sigma Lab’s first quarter 2020 business update and results conference call. Your hosts 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

[Mark Ruport:]

Thank you, Chris, and good afternoon, everybody, and thanks for joining us today. The question that is on everybody’s mind is what is the new normal? And no, I’m not talking about COVID and going to the movies or getting on an airplane. I’m talking about Sigma labs when it comes to revenue and results.In uncertain times, I believe that companies should provide more rather than less information. I can’t predict the future with any more certainty than anyone else, but during these times of uncertainty, we’ll endeavor to provide you with more information, allowing you to measure the size of our market opportunity, our progress and our ability to execute.So let’s start painting the pictures of Sigma’s new normal by answering the questions that you’re most interested in. What does Q1 tell us? What does revenue look like going forward? What have we done with expenses and cash management to reduce our burn rate and extend our runway? What is the current status of our RTE? What progress are we making on our strategic milestones? And how will COVID affect the company short-term and long-term? While I hope that covers most of your questions because we have a limited time. If I’ve missed them, I’ll be glad to answer them during the Q&A to the extent possible as a public company.I’ve been very consistent in my belief that we will have increasing revenue quarter-over-quarter for the foreseeable future. I first made that statement early Q1 and nothing has changed in that regard. We did increase Q1 revenue over Q4 just not as much as we had planned.But we also didn’t factor in a pandemic shutting down most of the world. Throughout most of Q1, we’re working towards a forecast of over $400,000 even with COVID gaining momentum in late February and early March. I felt comfortable with that forecast.We had one order for two machines or roughly $200,000 that was committed to us by one of our very successful RTE customers, who was under NDA and they ended up pulling the order in the last days of the quarter based on a corporate mandate to freeze all capital expenditures.The company happens to be a supplier to the aerospace industry, so you can understand the reluctance to spend money. That order would have split it as over 400,000 and we do expect they would have sometime in the future but we just don’t know when. So we did experience some negative short-term effects directly attributable to COVID. I expect that this is the case with most companies to move a little that we can do to mitigate that risk.Analyzing our current pipeline, I feel very comfortable in saying that I believe we will increase our Q2 revenue over Q1 by 50% to 100%. We actually have enough activity currently to generate more revenue than Q2.However, given the uncertainties of times and what happened with that purchase order at the end of Q1, it’s only prudent to be on the conservative side. Of course, we can’t predict whether this may change given the uncertain impact of COVID and what it might have on our customers, suppliers invest our business.I would like to explain one other factor regarding recognized revenue. As many of you know, PrintRite3D is an integrated software and hardware solution that’s connected to a printer. We recognize revenue for assistant upon shipment. However, in order to ship a system last week of a quarter, we have to order components by mid of that quarter.The lead time for some of our components is up to six weeks and because we’re retrofitting printers from different manufacturers, there are several permutations and combinations of hardware. So it’s not like we can order five or 10 of the same units to fulfill any order. We have to forecast our inventory requirements based on which opportunities are most likely to close and when, and as you know, it’s both a science and an art.On the other hand to preserve our cash, we need to closely manage our inventory. So there will be situations where we have received a firm order, but have not shipped the system and therefore recognize the revenue in that quarter. If and when we experienced a situation like that, our revenue number could swing dramatically. However, we’ll just move into the next quarter and will not be material to our revenue for the year unless of course it happens in Q4.On the other side of the equation, our expenses and cash burn, we raised $4.1 million in gross proceeds year-to-date. As Frank will explain our cash usage in Q1 was unusually high due to trade accounts payable that has built up from 2019 when our financing was delayed until the end of January.Additionally, we incurred several other one-time expenses in the quarter. When normalized for Q1 cash usage ordinary payments, we have actually reduced our cash burn by $100,000 a month by taking the following actions.First reduced executive management overhead with the most recent changes, we deferred all Board of Directors cash compensation for the end of the year. All employees differ 15% of their salaries and commissions for five months, May through September.We’ve reduced our IR and PR costs. We’ve reduced our travel both through the COVID and also before COVID. We reduced our cost of goods by approximately 33% or $20,000 per standard system by reconfiguring the platform without any degradation of processing.And finally, we’ve had transitioned, as I’ve mentioned in the past, from expensive RTE to straightforward agreement with 90-day acceptance criteria, which dramatically lowers our cost of revenue. While all of these actions were designed to lengthen our runway and preserve our cash, as we continue to build our pipeline and increase our revenue.On the strategic front, we continue to make progress with multiple hardware OEMs, so for vendors and with end users moving towards serial production. We expect to be able to update you on progress for those opportunities on our next call.I’ve had several questions about RTE that we’ve discussed in the past and the first thing that I’ll note is that, our -- every RTE we’ve done has progressed positively, from the first one that materialize to the last one under NDA in Japan.All are expected to result in building revenue streams for the future. So here’s a quick update on our status. We just are about to ship Airbus the system next week where we’ll begin the RTE2 where they will go through the qualification process for a production part. We continue to collaborate with their team on a weekly basis.The global energy and technology company that we’ve talked about often is inner successful completion of RTE2 and we expect to move forward with them at the conclusion of this phase. For those of you not familiar, an RTE2, it is a testing and evaluation on a second different type of printer, sometimes with more lasers than the first printer.Materialise, we expect to close our first joint sale this quarter to new OEM, who will be deploying the integrated offering with their printer. And then we have three RTEs that are under NDA. The first is a major contract manufacturer and that’s the one that postponed its purchase order. The second is a major international machine manufacturing company and we have concluded RTE2 completed our certification on the printers and we’re currently negotiating contract terms for the strategic alliance. We expect to conclude those discussions this quarter. And the last was an RTE for a major Japanese tool manufacturer and that’s going very well and we expect to conclude that this quarter or early next.So the picture looks as follows. We have increasing quarter-over-quarter revenue. We have reduced our expense run rate. We’ve lowered our monthly cash burn by a $100,000 a month. Every RTE that we have invested in has been successful and we believe will lead to future business. And we’ve transitioned from expensive RTE to straight contracts with the option for a 90-day evaluation period.So, given that, you might wonder, why would we stop doing RTEs that they’ve been so successful and what are we going to replace them with? Well, a year ago, we had to do RTEs in order to get access to different printers from different manufacturers and prove that our technology works. That was the only way that we could do a real test that customer’s site.We were essentially at that time begging companies that we didn’t have a relationship with the trust us and work with us. Today, we’re in a much different situation. However, prospects still want to try before they buy. So we’ll be producing the app Sigma RTE where prospects will be able to self-qualify via an internet web process, engage with our engineering team to review the requirements and then send us a CAD file plus metal powder and we will initiate a build on our printer and give them remote access to PrintRite3D for a period of time and there’ll be able to exercise the system remotely.So they will have full access to the latest PrintRite3D production series, building their product, their part with their metal. That’s a substantially more efficient and cost effective for both the prospect and Sigma and we hope will produce the same results.So we have everything going in the right direction. Now it’s a matter of timing and trajectory. We believe, at the macro level, the thing that will help the trajectory is the COVID crisis and the how it exposed major weaknesses in the current manufacturing supply chain.Over time, they’ve become too complex and too rigid and can’t respond quickly to any type of disruption be it COVID or war or political unrest or a natural disaster. While lack of agility results in shortages of critical parts and components, in order to mitigate this risk, many experts, seeing an acceleration in the adoption of 3D printing as manufacturers move production closer to where the part is needed.Tom Friedman author in New York Times journalists said when asked, what will be different when we get through this. The second answer on his list was 3D printing will explode. We see this change positively impacting our business in 2021 and beyond as company to build new 3D printing factories closer to where the part is needed. Many envision factories that can be changed in a matter of days to address specific shortages. This will increase the demand for 3D metal printing. And I say in 2021, because it takes a while for these factories to be built and to equip them with 3D printers and the effect of various industries is uncertain.In conclusion, the picture of the company that I have tried to paint for you is one that’s cautiously optimistic for the short time, with what we believed to be increasing quarter-over-quarter revenue of 50% to 100% and increasingly optimistic long-term as we believe that 3D metal printing will become a more significant percentage of the worldwide manufacturing capacity.With that, I’d like to turn it over to Frank Orzechowski, who will give a brief overview of our financial results. Frank?

[Frank Orzechowski:]

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 provide a concise review of our financial results for the first of 2020.Revenue for the first quarter of 2020 totaled $221,730. This compares to revenues of $64,450 for the first quarter of 2019. The increase in revenue was due to PrintRite3D unit sales to two research universities, as well as revenue recognized under the legacy rapid test and evaluation or RTE programs during the quarter.Our gross profit for the first quarter of 2020 was negative $22,973. Our first quarter 2020 gross margin is primarily a function of ongoing support of the legacy rapid test and evaluation programs, including equipment upgrades and additional travel and labor costs in early on in the first quarter. And as Mark noted, we have ended this old traditional program and the remaining legacy RTEs that we have will be winding down over the next couple of months.Our total operating expenses for the first quarter of 2020 were $1.6 million. Total operating expenses for the first quarter of 2019 totaled $1.5 million.Cash used in operating activities for the first quarter ended March 31, 2020 totaled $1.5 million, compared to $1.1 million in the first quarter ended March 31, 2019.As Mark noted, this was unusually high due to trade accounts payable carried over from 2019 due to a delay in securing our financing and is not representative of what management expects going forward. In addition, we made several one off non-recurring payments in the first quarter, including paying off the remaining balance of our note payable and our annual NASDAQ membership fee.Our net loss for the first quarter of 2020 was $1.6 million or $1.30 per share, as compared to a net loss of $1.5 million or $1.60 cents per share in the first quarter of 2019.Cash totaled $0.6 million at March 31, 2020, as compared to $0.1 million at December 31, 2019, and $1.9 million at March 31, 2019. And subsequent to the close of the first quarter, we further fortified our balance sheet in the form of $1.5 million offering that we closed on April 6th.I’m also happy to report that we are in active negotiations with OEM partners for strategic alternatives who currently see the immense value in our enterprise and look forward to providing an update on that front as they develop.With that, I will now turn the call back over to Mark for closing remarks.

[Mark Ruport:]

Thanks, Frank. Before we open line for Q&A, I’d like to thank our Chairman, John Rice for his dedication to Sigma during his time as CEO and I look forward to working closely with him as we execute on our plan to increase revenue and increase shareholder value. So thank you John.With that, I’d be glad to answer any questions that you might have.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from David Levine with Triple Research [ph]. Please proceed with your question.

[Unidentified Analyst:]

Hi, Mark. How you doing?

[Mark Ruport:]

Good, David. How are you?

[Unidentified Analyst:]

Good. So I just want to make sure I understand the sort of RTE alternative I guess. So going forward, somebody will send you a design and send you the -- whatever powder they prefer or use for that particular design, and then you’re going to create the platform and then send it to them for evaluation. Is that how that’s going to work?

[Mark Ruport:]

Well, I actually it did better than that. And if you recall, I spoke one time, I forget exactly what call it was on about the user who told us that they were using the system more than ever before from home because it became their eyes on the manufacturing process when they come be onsite.So we thought about that and we said, well, what if a prospect could send us a CAD file and also the powder they use and we will build the part on our printer and while it is being built, we will give them remote access, the PrintRite3D that aligned with that printer. Then they can monitor the build of their part with their metal on our printer and have the same experience they would have if we install the system on their machine and they built that part.The only difference it will be they built on our machine as opposed to theirs, but the same powder in the same part. So we’ll be able to provide the part that has defects or anomalies in it. We’ll be able to tell if we can detect those in real time as the part of the thing built. And then when they get done they can do a correlation and do their own CT scan on that part to ensure that our analysis and the actual build the correlation was close or if not exact or better.

[Unidentified Analyst:]

And that’s a sort of a process that you start to begun to rollout or have you already -- you’ve already done that with some people. I’m just wondering if people are accepted to that or how they are…

[Mark Ruport:]

Well, we don’t know yet. We have done the at home RTE with one customer and it became our beta customer or alpha customer through that program. We’ll be rolling out the website of the program in about two weeks and that will allow somebody to self-qualify, go through the process, they guess I’d like go through the program, work with our team, set expectation and then we’ll send us the CAD file and the powder.And we’ll see how it works. It’s the closest thing that we can do to putting to the alternative of traveling for the system on site. And in the end I think it’s going to be more productive for the customer or prospect than giving us time on their printer to do an installation.

[Unidentified Analyst:]

That’s great. Thank you.

[Operator:]

Thank you. Our next question comes from George Fiskatu [ph], a Private Investor. Please proceed with your question.

[Unidentified Analyst:]

Hi guys. Thank you for taking my call. My question is around Materialise, if I heard properly, we’re expecting to close the first deal with Materialise in the current quarter. Q2. Generally how are we going around, how we team with Materialise to sell? Is this to Materialise as existing base? Is it to a new base and how would you describe the status of that joint selling campaign?

[Mark Ruport:]

This is to a new customer to both Materialise and to Sigma. They brought us in January. We did a joint sales call to a new 3D metal printer manufacturer, who is looking for voltage control and for a monitoring system. And they selected us. They actually sold -- pre sold the first system and there we’ll be implementing our combined system on their machine hopefully sometime at the end of this quarter.

[Unidentified Analyst:]

Okay. Thank you very much. And one final call, I was intrigued by to discuss the ongoing discussions referred to by the CFO over strategic investment in Sigma. Is that by a traditional OEM manufacturer that we’re in discussions with or what’s the profile of the company or companies pure, we’re in discussions with first strategic investment in Sigma?

[Mark Ruport:]

And George we’re looking at all of our opportunities when it comes to funding, meeting our capital requirements with the company. And the profile varies from financial investors to industry strategic investors. So we’re not quite sure, which way we’re going, but we’re looking at all alternatives that are in the best interest of the shareholders and the company.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Tony Chris with Capital Securities Management Incorporated [ph]. Please proceed with your question.

[Unidentified Analyst:]

Thank you for taking my question. I -- Can you give us the share count right now and I tried to look a little bit at the history of it. But it’s gone up and down so much. It’s hard to keep track. And also with respect to options, I noticed there is a new executive, usually there is options involved, what their conversion price is, and how many, and I have a part two also, if that’s all right, sir.

[Mark Ruport:]

Sure. Before you get to part two, I’m going to ask Frank to answer part one.

[Frank Orzechowski:]

Sure. Yeah. So currently right now, we have $3,086,151 shares outs outstanding. With respect to total warrants and options outstanding were common underlying those securities, it’s another $5.4 million outstanding, which would be a fully diluted number of $8.5 million and that takes into account the financing that we closed on April 6th.

[Unidentified Analyst:]

What revenues will we receive where that all exercise and converted?

[Frank Orzechowski:]

Right now if that were all exercise, we’d expect to receive about $7.5 million.

[Unidentified Analyst:]

That’s good.

[Frank Orzechowski:]

Yeah.

[Unidentified Analyst:]

Okay. Thank you. And then part two. If you -- I got on the call to late, and I apologize if I missed this, but did you give guidance for revenue going forward? I read both of your very well written letters to shareholders, but I’m wondering if you did give guidance or any kind of guidance you might offer at this time?

[Mark Ruport:]

Sure. And what I said earlier was that, I expect quarter-over-quarter revenue growth at 50% to 100%. So if you take the 222 that we did this quarter, 50% growth will put around 350 and 100% growth, will put around 415. So that’s the bandwidth.And of course I have some caveats around that regarding what might happen, that we’re not sure if regarding COVID and also when it comes to shipping and recognizing is different than sometimes booking the revenue because of the lead time. But I feel very confident that we have enough opportunities for foreseeable growth quarter-over-quarter of 50% to 100%.

[Unidentified Analyst:]

That would be really exciting. And I’m not personally too worried about COVID because the Chinese communist party flu is no more severe than the Hong Kong flu was in ‘68, ‘69 or the Asian flu was in ‘57, ‘58, or for that matter, the 2018 flu, which killed 80,000 hospitalized, 485,000 killed 188 children. I can only find three children under 18 that have died from it. Not that I’m -- not that -- but to put it in context, I’ve never in my life seen a government act so coercively to stop an economy.

[Mark Ruport:]

Well, Tony, I appreciate your comments, but I think, I’ve answered your question with a 50% to 100%.

[Unidentified Analyst:]

Yes. You have. Thank you and it sounds exciting. I’m going to stick around for sure.

[Mark Ruport:]

Great.

[Operator:]

Thank you. Our final question comes from Joe Chadman [ph], a Private Investor. Please proceed with your question.

[Unidentified Analyst:]

Good afternoon, guys. Mark, you mentioned, a new client with your arrangement with the Materialise, now does that imply to me in all of us that the closed loop is something that is a marketable?

[Mark Ruport:]

We were getting awfully close bill.

[Unidentified Analyst:]

Okay.

[Mark Ruport:]

We can do it. And so the intent of our relationship is to move towards closed loop and then offer the closed loop solution to new OEMs that are coming into the market and to the retrofit market. So that’s the intent of our relationship and we wouldn’t be signing up new customers if we didn’t expect to be able to offer that.

[Unidentified Analyst:]

Okay. That’s great. Thank you.

[Operator:]

Thank you. At this time, this concludes our question-and-answer session. I’d now like to turn the call back over to Mr. Mark Ruport for his closing remarks.

[Mark Ruport:]

Thank you. I hope that we’ve answered your questions, but I know some of you are long-term investors and some of you are new to Sigma. I like to tell people that when they look at the company consider us as an 18-month or two-year-old startup that did its work last year in the laboratory and with expensive RTE and now we’re rolling out and commercializing our product.We would have hit the 400,000 in Q1 if it wasn’t for the last minute issues that were encountered by our customer. And you can imagine if you’re a main supplier to the aerospace and what’s happened to that industry, how reluctant you are to spend your capital right now.But even regardless of that, we expect to see the revenue growth, I’ve talked about, we’ve taken the actions to reduce our expenses and our cash burn and we’re looking for opportunities to fund and get new capital into the company that are friendly to the company and the best interests of the shareholders.With that, I do think it’s an exciting time to be looking forward for Sigma and I look forward to sharing with you the update next quarter. Thanks again for your time and your interest and we’ll speak to you in about two months.

[Operator:]

Ladies and gentlemen, this concludes today’s teleconference. Thank you for your participation and have a great day.