Sigma Labs, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Mar 2021

[Operator:]

Good day and welcome to Sigma Labs Fourth Quarter and Full Year 2020 Financial Results Conference Call and Webcast. Today's conference call is being recorded. At this time, I would like to turn the conference over to Mr. Chris Tyson, Executive Vice President 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 fourth quarter and full year 2020 business update and results conference call. Your hosts today are Mark Ruport, President and Chief Executive Officer; Frank Orzechowski, the company's Chief Financial Officer. A press release detailing these results across the wires this afternoon 04

[Mark Ruport:]

Thank you, Chris, and good afternoon, and thanks for joining our call today, everybody. I hope everyone is safe and healthy as we enter what we all hope to be the final turnover at the pandemic. I know I'm excited for both the end of 2020 as well as the start of 2021 and the activity that we're seeing in the market, which I'll discuss shortly. First, I'll ask Frank Orzechowski, our CFO, to review our 2020 results and financial situations, and then I'll put the year end perspective and discuss a road map for 2021. Frank?

[Frank Orzechowski:]

Thank you, Mark. 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 summarized review of our financial results for the full year of 2020. Our revenue for the full year of 2020 totaled $807,000 as compared to $402,000 for the full year of 2019, primarily as a result of increased sales of our PrintRite3D system. Our gross profit for the full year of 2020 was $216,000 as compared to 2019's gross profit of negative $172,000. Our 2020 gross margin of 27% includes costs associated with our legacy RTE programs as well as parts and materials upgrades for certain existing customers reflect given engineering enhancements throughout the year. Our total operating expenses for 2020 were $5.9 million compared to total operating expenses for 2019 of $6.2 million. The decrease of $300,000 in total operating expenses was primarily driven by decreases in R&D costs of $297,000, resulting from substantially completed product development in 2019. Lower organization costs of $105,000 due to reduced directors compensation 2020, savings of over $300,000 in travel costs as a result of COVID-19 travel restrictions, and lower depreciation expense of $88,000 due to an increase in our fully depreciated assets. Partially offsetting these decreases were increases in salary benefits of $268,000, and stock-based compensation of $100,000 and other operating expenses of $127,000, primarily as a result of an increase in our D&O insurance premium for 2020.

[Mark Ruport:]

Okay. Thanks, Frank. So let's start by putting 2020 in perspective. And I'll do that by contrasting the company and our market opportunity as it was a year ago, to the company and the market opportunity that we see today. As we enter 2021, I believe that 3D metal printing is beginning to fulfill its promise as a disruptive technology and take its place alongside traditional manufacturing processes. And as I hope you'll agree, Sigma is a much different company than we were a year ago. With everything in place for what we believe to be a very bright future. However, I do realize that at some point, potential needs to be validated with results. In that regard, I'm pleased to tell you that we're off to a very good start in 2021. Our announcement last week of a direct contract was for an initial system with Lockheed Martin Space Design and Manufacturing Center, was obviously a great way to kick off the year as it further validates our technology.

[Operator:]

Your first question comes from the line of , private investor. Please proceed with your question.

[Unidentified Analyst:]

Hello, Mark. Thank you for this call and the update. I appreciate it. I just wanted to ask, in what quarter do you expect a multiple unit production -- cereal production contract to be awarded to us?

[Mark Ruport:]

It's a tough one to break the timing of it, Sean. But as I mentioned in my comments, we've had more discussions about larger systems and network configurations of PrintRite3D than we've ever had before. I'm going to predict, and that will be sometime in the early second half of the year.

[Operator:]

Your next question comes from the line of Harold Weber with Aegis Capital. Please proceed with your question.

[Harold Weber:]

The new product line, the PrintRite and this is to address, you were commenting some of that a much larger market. Could you believe -- maybe expand on what that kind of a customer and is and how much larger this market is? Before we were talking about, I don't know what it was. The metro market we're talking about over the next couple of years, you have $10 billion, $20 billion? This market is much larger. Could we address that somehow?

[Mark Ruport:]

If you look at 3D metal printing has several components, several processes, the largest is powder Bed Fusion, which we participate in today. And PrintRite3D was originally designed to work and optimize the quality assurance and monitoring of the metal pool for powder diffusion machines. We announced last year in a relationship with Northwestern, that we are going to introduce PrintRite3d DED or direct energy deposition. That's another 3D metal process that's used by companies alongside Powder Bed fusion. It's not as large a market, but it's another component. PrintRite3D Lite is targeted at the entry-level user who is not -- doesn't require at that time the full features and functions of PrintRite3D. So PrintRite3D Lite gives us access to a lower end mid-market PrintRite3D DED gives us access to a whole separate market. If you look at the metal 3D printing market, between Powder Bed fusion and DED, that makes up about 80% of the 3D metal printers that are being shipped today. So it's hard to quantify how much bigger that opens up the market opportunity for us, but it allows us to provide an entry-level machine, and it allows us to move into the adjacent market for the DED processing.

[Harold Weber:]

So these entry-level machines, is this -- do they -- are they purchased by a different industry set?

[Mark Ruport:]

No. No, it's exactly the same. It just provides an easier ramp for people to begin to use our technology.

[Harold Weber:]

Is it reasonable to say then that most clients, customers, users have both types of systems?

[Mark Ruport:]

More and more, they're having both types of systems. And there are also OEMs that develop those types of systems. If you look at DMG MORI, they have both a powder bed fusion and DED machine. If you look at Mitsubishi, they develop both machines. If you look at end users like a Baker Hughes, they have multiple machines and multiple processes. A DED process is often used for repairing metal components as opposed to a Powder Bed fusion for building metal components. So you're seeing a combination coming both from both the OEMs and also being used by the end users.

[Harold Weber:]

Okay. So the bottom line is this helps expand our market applications?

[Mark Ruport:]

Yes. And it provides a lower entry ramp for new users that want to begin to test our technology.

[Harold Weber:]

Okay. Well, that's really good. Okay. That's really good.

[Operator:]

Your next question comes from the line of Lee Alper with Hammock Investors. Please proceed with your question.

[Lee Alper:]

Hi Mark, it sounds like we're on the right track. Can you give us some color on how many bids you have outstanding at this point? And some maybe estimate on time to close?

[Mark Ruport:]

How many bids we have outstanding. I can tell you that our pipeline has probably increased 2 to 3 fold over this time last year, if not greater than that. The a number of bids is tough to keep track of. But the overall pipeline is 2 times to 3 times what we saw this time last year. The time to close varies from 3 months to 18 months. If you remember, we closed the Mitsubishi contract in about 90 days, the Lockheed Martin contract was not much longer than that from a close perspective, even though they've been looking at our technology from a far for a long time. But we have other opportunities like Armox in that was closed, which was over a year in the making. So the one thing I can tell you, the number of bids is increasing, the pipeline is increasing and the time to close is decreasing.

[Operator:]

Your next question comes from the line of private investor.

[Unidentified Analyst:]

We've been following the company for a long, long, long time now, and a bunch of us feel like things are definitely moving in the right direction. So I got 3 questions. Do you -- do you feel that 2021 is the year that Sigma Labs moves to breakeven and then move them beyond that to profitability? Second question is how in the world do you get the story of Sigma Labs and the product into a much wider audience, much more sophisticated audience than it has now. And the third question has to do with the patents. Does Sigma Lab's current patents protect the technology in the company against the competition that's out there that is actively looking at different spectrum frequencies for observation for in process quality. Are the patents going to protect Sigma labs for those that are playing around with the same manner of observation, but perhaps in a different region of the frequency spectrum?

[Mark Ruport:]

Mark, you pack a lot into a little bit of time, so let me see if I can parse that for you. As far as breakeven and profitability, we haven't given a lot of guidance on that. It's going to come down to how hard we want to push our growth and how the market responds. So it will not be this year. And we can't predict exactly when it will be. It's going to be dependent on the level of activity we get, the investment we want to make and the time it takes to reap the benefits from that investment. As far as the getting to a wider audience, are you talking about from a shareholder perspective or from a customer perspective?

[Unidentified Analyst:]

Actually both, but I was originally intending it to be a shareholder perspective. We get great movement and market capital in the company. And then, of course, it just all fades away because nobody wants to actually stay invested in Sigma Labs.

[Mark Ruport:]

So I think the answer is also both. So we are getting to a wider audience today. We've increased our marketing and our visibility and the awareness of the benefits of in-process quality assurance. We now have the leverage going into the market. I believe as we expand our presence and deliver results, we will get to a wider audience when it comes to the investors. And one will lead to the other. As far as the patents and how they protect us, we've been very active and putting together a packet portfolio and what they call a thicket around our technology. I do believe that it will protect us from competition in some regards to what extent is yet to be seen, but we believe the patents are a valuable asset for the company.

[Operator:]

Your next question comes from the line of Ralph Weil with R. Weil Investment Management. Please proceed with your question.

[Ralph Weil:]

One simple question. The -- you had orders or contracts or what from whether it be Airbus or Mitsubishi or Baker Hughes or EraGen and Lockheed. And you've been getting one contract, an order for one unit. How long do you feel that most companies will take once they get won before they go to 2, 3, 4, 5 whatever. Are they testing these for a period of time in different ways. And I'd just like to hear your thought on that.

[Mark Ruport:]

Yes. It really depends, Ralph, on the sophistication and the level of competency of the company that's acquiring the system and doing the testing. So for instance, I'm going to say that Lockheed Martin is one of the more sophisticated users and of 3D metal printing and probably has more knowledge in that area than 90% of the company's worldwide. I believe that they will move very quickly from one system to multiple systems if we prove that we can do what we say we can do and address their needs. I believe the same is true with some of the other companies that we're dealing with when it comes to space exploration and aerospace and defense. So this initial system, it takes a while for people to understand the value and to be able to -- as they get multiple printers for multiple vendors, they understand the need for an agnostic third-party quality assurance system. If they have 1 printer or 2 printers from the same vendor, they have less need. So as their use of 3D metal tourney expands, the value of our technology increases and the speed in which they will move from an initial purchase to multiple purchases will compress. So it really is, as the industry matures and the customer matures, the opportunity to increase the speed from initial purchase to multiple purchases will shorten.

[Ralph Weil:]

Do you feel that the additions to your team in sales and marketing and will help expedite that? Or is it just up to the companies to take their time?

[Mark Ruport:]

No, it's a combination of both. They clearly will help expedite it with their knowledge. But they can't fill multiple systems into companies that have single machines. We need to get the maturity of the overall 3D printing market to the point where you have multiple companies with multiple factories with multiple machines. Then you have the industry imperative coming down from the regulatory agencies and other components of the industry that are telling people that they have to have a consistent view of quality across those machines. So you will see time being compressed as the competency of the user increases and the use of 3D metal printing continues to move to full production. And we see that happening more and more quickly than we ever saw before. And as far as the field organization, both the technical people and the salespeople are more than capable of working with the customers and explaining the benefits of a third-party in Process quality assurance system and having that consistent look and feel. And I think that's becoming more and more obvious to the industry as you see organizations like Fraunhofer do studies on monitoring systems and quality assurance systems and reinforce the fact that companies have to step up the overall quality if they're going to take 3D metal printing to the heights that everybody believes they can get to.

[Operator:]

Your next question comes from the line of private investor.

[Unidentified Analyst:]

I just have a question on -- for the low end machines for PrintRite3D Lite. How are you thinking about the need that the end user, if they're using a lower on machine would need for better quality assurance in general?

[Mark Ruport:]

Say that again, Devin?

[Unidentified Analyst:]

So if we have a lower end machine, what's the necessity to pick up PrintRite3D Lite versus how much they care about the product?

[Mark Ruport:]

Sure. And so let's describe a lower end machine. A lower end machine is in the area of $400,000 to $500,000 compared to a high-end machine, $800,000 or $1 million. So we're not talking about a lower end machine that's under $100,000. And the need for the quality assurance on that lower end machine is really dictated by the type of part that they're building in the application. So we're dealing with one OEM who has a mid-range machine that's used for dental type of applications and lower end medical applications. Their need for quality is as high as the need for quality of the higher end machine, they're just not producing the production level that the higher end machine is producing. So it's still a mission-critical part it's just a lower cost mission-critical part, and they don't need the full extent of the features and functions of PrintRite3D to assure the quality that they're looking for.

[Unidentified Analyst:]

And then second question. As you go out to the OEMs and end users, I assume we're trying to pick them on cost savings at the end of the day, can you quantify or qualify what you're picking and then how much time it typically takes to prove that to a customer?

[Mark Ruport:]

Sure. So when you look at the return on investment, one of the first things you have to look at is risk management. So that's a large component that's difficult to quantify. Once you get past that, we focus on machine time, machine downtime, material waste and cycle time. And as an example, if you're using PrintRite3D and you are going through the qualification process for a part, the amount of cycle times it takes you to go from design to simulation to build to get to the point where you have a quality part cost you money every time you go through another cycle. With PrintRite3D, we're able to reduce that cycle time and get you from prototype to qualification to production much more quickly than you can without a technology like ours. So between material waste, machine downtime, cycle time, we're able to quantify the benefits to an end user. As far as the return on investment, actual time it takes to get to that return. That's all dependent upon the specifics of the manufacturing and what they producing, but from what we’ve seen so far the return on investment for one of systems is less than 2 years.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Mark Ruport for closing remarks.

[Mark Ruport:]

I'd like to thank everybody for their time today. I would like to reinforce the fact that the amount of activity that we're seeing within the industry is increasing tremendously. And if you step back and say, why now? I believe it's the convergence of 3 things. The first an industry imperative that manufacturing has to be more agile. It has to be able to build parts and critical parts on demand, and they have to be built closer to where the end user is going to be requiring them. And that's particularly in cases of crisis and to avoid the shortages of those critical parts. The second thing that's causing the acceleration of 3D printing is the technology itself. The printers are getting better, the materials are getting better with the science offer is getting better, the level of competency, the user is getting better. And that's all coming together at the same time, Sigma, our technology, our field organization and our partners are ready to take advantage of that opportunity. So we do expect 2021 to be a very different year than 2020. We do expect to see more OEMs, additional sales to all the segments that we talked about earlier. And as people have asked, multi-unit sales to end users in the aerospace, defense, automotive and oil and gas industries. So with that, I appreciate your time today. We look forward to answering other questions that you might have. And we look forward to updating you on what we believe will be a very successful Q1 and the start of 2021. Thanks again for your time.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.