Sigma Labs, Inc.
Q1 2015 Earnings Call Transcript

Published: 15 May 2015

[Operator:]

Good morning and welcome to the Sigma Labs First Quarter Conference Call. All participants will be in listen only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Witty. Please go ahead.

[Chris Witty:]

Thank you. Good day ladies and gentlemen and welcome to the Sigma Labs’ first quarter conference call. Following management's prepared remarks, we will hold a Q&A session. With me today is Mark Cola, the company's President and CEO; and Vivek Dave, Science Advisor. I would now like to provide a brief Safe Harbor statement which is also shown on Slide 2 of our first quarter presentation which is on the website and being webcast. This conference call may include forward-looking statements that represent the company's expectations and beliefs concerning future events that involve risks and uncertainties and may cause the company's actual performance to be materially different from the performance indicated or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company's expectations are disclosed in this conference call and in the company's annual report and Form 10-K for the fiscal year ended December 31, 2014. All subsequent written and oral forward-looking statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise after the date of this conference call. I'd like to turn the call over now to Mark Cola. Mark?

[Mark Cola:]

Yes, thank you. Good morning to all and thank you for joining us. We are excited to have you here today and pleased to be able to provide you with the information regarding our past quarter and looking forward where we see the growth paths for 2015 as well as give you a little bit of update on our financial status, and at that point in time we will open it to questions that you might have. So if you’ll all turn to Slide 3, titled recent highlights. There’s several bullets we’d like to review with you and sort of recap the quarter. So the first of which is looking at the revenues for the quarter -- first quarter 2015 and as a comparison to last year and we’ve seen an uptick in our revenue which is what we expected. And the other is, of course, we received an order recently for Honeywell for one of our PrintRite3D quality assurance systems which was very pleasing to us and it’s our first commercial contract of this customer ad follows on to a lot of programmatic work we've been doing with this customer through externally funded programs which we previously announced such as the DARPA Period One program. And so Honeywell will be testing and evaluating this system in their additive manufacturing metals laboratory in Phoenix, Arizona and we look forward to working with them as they receive our system. The other item we wanted to mention is we had a very good turnout to our open house on April 14 where we launched our EOS M290 AM printer. We had, as you see, a very good turnout both from public entities as well as private folks from industry attend -- including as you see that there is a photograph on this slide of the mayor of Santa Fe and he was in attendance and welcome of the opportunity to give us a proclamation declaring the April 14, 2015 advanced manufacturing day in Santa Fe. And so we’re quite pleased with that proclamation and the turnout we received from the participants. And I think the other thing to make mention of over the quarter is we recently joined the America makes Institute for additive manufacturing, also known as the National Additive Manufacturing Innovation Institute in Youngstown, Ohio. It’s a consortium-based organization comprising many different companies from many different segments of industries, including aerospace and oil and gas and biomedical, all with the interest of moving the technology forward and enabling it so that it’s well received in the manufacturing community. And so we’re pleased to be members which allows us to participate in calls for proposals as well as team awards for AM sponsored programs. And I think just closing this slide out, based on the interesting highlights we’ve seen over the past quarter, we seem to be on track for significant revenue growth in 2015 as we continue to follow up on some of the good activities we saw come from our open house as well as what we anticipate from being a member of America Makes. So with that if you would move to Slide 4 titled growth paths for 2015. I’ve taken the opportunity here to break the slide into two components as we see the breakout here within the company as our products and our services. And so first our products. Those are all based on the PrintRite3D series of software suites that we’ve developed and commercialized such as INSPECT as well as the ones we’re developing currently, such as DEFORM. And so I’ve mentioned INSPECT and the recent software license Honeywell has made as part of their purchase of one of our PrintRite3D systems and included in that was a pre-release version of DEFORM or at least the opportunity to attain that when it is available, which at the moment we anticipate that being available for commercialization starting first part of the third quarter this year. And as I mentioned in our call last time we had a bit of a delay earlier in this year due to unforeseen circumstances with our 3D printer coming online when we would've expected it, but we seem to have identified the problem, corrected it and now are back on track to release DEFORM as I said in the first part of the third quarter. The other opportunities that are in front of us right now with respect to PrintRite3D sales seem to be all related to leveraging the relationships we currently have, with customers as well as those that we’re in discussions with at the moment. So we anticipate the increased sales for the PrintRite INSPECT and of course we’re anticipating sales of the DEFORM module when it becomes available later in the second, early third quarter. The second part of our businesses as we view with is operationalizing now the 3D metal printer we have here within the facility and we've already won and are delivering on several small orders for the machine and we’re building customer relationships there and hope to expand on those. We’re also of course responding to inquiries, request for quotes, both from customers here in North America as well as abroad. And then I think lastly I just should touch on that we continue to perform on our programmatic activities, our engineering contracts such as the ones that are listed there with the Edison Welding Institute sponsored by NIST, America Makes program which is led by General Electric Aviation and the DARPA sponsored program which is led by the Honeywell Aerospace team out of Phoenix, Arizona. So all of those programs are underway and we’re delivering our -- meeting our milestones and deliverables as those programs progress. We had a bit of a delayed start to the America Makes program but nonetheless it’s slowly ramping up and we anticipate that to sort of achieve its steady-state progression as the second half of the year gets underway. So I think with that, moving on to Slide 5, financial update. So just want to highlight a couple of things for you. So we've ended the first quarter with $3.6 million in stockholder equity which includes $2.5 million in cash and equivalents, so we seem to be well-positioned for the next 12 to 18 months. We believe we have adequate cash on hand and engineering contracts to basically allow us to achieve the revenue milestones that we’ve set for ourselves and the new business developments that we’re actively seeking with respect to both the software PrintRite3D sales as well as contract additive manufacturing activities. So at the end of the day I think the path to profitability seems to be intact and as the year builds in 2015 and beyond we seem to be in good shape to achieve our internal milestones and deliverables. So I think with that just going on to Slide 6. We'd like to thank you of course for being an investor and shareholder in Sigma Labs. We greatly appreciate that and I think with that, we would like to turn it over to you and allow you to ask us some questions if you’d like.

[Operator:]

[Operator Instructions] And our first question is from Holden Lewis at Oppenheimer.

[Holden Lewis:]

I think you said in your release that you got the EOS machine and that you have equipped it with your software, so made those modifications if you will. I think EOS does great job as parameter sets. Do you have any measurable that talk about what sort of upgrading I guess I would say with your software does to improve what it can do for you?

[Mark Cola:]

Measurables, yes, great question, Holden and so what our software enables us to do for our customers is basically provide them with a quality certificate of the build whatever that might be that we’re making for them and what that quality certificate basically does, it provides them objective evidence of compliance that the products that we produce for them was built in compliance with their design intent. And so effectively what that means is that they now have a record that they can use to show their customer whoever that might be and it may be a regulatory agency that that they built it in accordance with the procedures that they set out to do.

[Holden Lewis:]

And so that gives you sort of a quality control element but was that capability – did that capability not exist on EOS machines to this point and so it’s brand new or how should I think about the way in which you’ve improved on the machine if you will?

[Mark Cola:]

Yes, so another good question, thanks. The current machines of course as delivered by EOS are capable of providing feedback that the machine has functioned as the machine was intended to do or instructed to do. What we're providing is an added or independent measure of quality of the product that it produced. We’re not measuring that the machine functioned as it was supposed to do, that’s EOS’ business. But we are as an independent measure of the quality of the product produced, the machines do not do that right now. The machine basically says I moved and turned on and functioned as I was supposed to do whether you got a product out or not, we don't report on that. That’s effectively what EOS does. What we do then is we’re an independent yardstick if you will or measuring stick of the quality of the product produced. And so you never want to basically use the same measuring device that you build a product with to measure the quality. There’s always need to be an independent sort of measure of the quality.

[Holden Lewis:]

And then just last thing from me is – if that is successful as a part of that machine, using it for yourself or you’re upgrading your own machines, how does that translate ultimately into it becoming more of a standard on EOS or other machines that are sold not to you?

[Mark Cola:]

Yes, and so we of course and use the good term that would like to be the standard and so how you become the standard with anything. First and foremost, you be one of the first ones out there with an offering and we are with our INSPECT and we will be soon with our DEFORM and software suites. And so by de facto we become the standard measure that people adopt and begin to use. And so – and I just want to add that it's not just an EOS machine, it just happens to be the one we bought but the our technology is integrable if that’s the word, with other machine manufacturers. So we’re machine agnostic. Our quality assurance technology, PrintRite3D and the associated hardware and software will integrate into any other existing 3D metal printer out there, whether it be from Renishaw, SLM, Concept Lasers, 3D Systems, the list goes on and on and I think maybe that's it.

[Operator:]

Our next question comes from Paul Shoemartin [ph], private investor.

[Unidentified Analyst:]

Good morning. My questions go to when might we see the revenues attributable to the Honeywell sale or the grants, I think it was GE that got the other PrintRite system. When are those anticipated to show up?

[Mark Cola:]

So revenues for the Honeywell system we booked in the quarter there received and so I expect that to show up in the second quarter numbers. With respect to the GE, and perhaps you need to repeat your question there for that one please?

[Unidentified Analyst:]

I believe that under, it was the America Makes grant, you delivered a system to GE and there was also supposed to be a system delivered to Honeywell as well as Aerojet Rocketdyne, those revenues I am curious about.

[Mark Cola:]

Yes, those are programmatic revenues, those are associated with the milestones and deliverables we are required to achieve for that program .And so there’s two elements to that. There were systems delivered to GE when they purchased them and I believe it was the end of 2013 actually. So those systems have been delivered, they bought those almost 2 years ago now and have been in test and evaluation principally actually under our joint technology development agreement with GE. Those have been under evaluation. They will of course be used as part of the America Makes Award program because they are already there and they are already installed. So we’ve received that revenue and that’s been booked a year or two ago. With respect to the programmatic efforts, this program which was awarded some time ago has taken considerable time to get all the subcontracts in place by GE to their subcontractors. And so those subcontractors to GE are Sigma Labs, Aerojet, Honeywell and there is a couple or two or three others. And so it’s actually GE that has been a long pole in the tent here and getting those contracts in place. They are working them. As you can imagine it takes some times when you get two large corporations together to work out all the details .And so it’s slowly being ramping up as the subcontracts have come in place. Once the subcontracts are in place from GE to let's say Aerojet, or GE to Honeywell, it’s then that Honeywell or Aerojet will release subcontracts from themselves to us for additional systems. And so that kind of a cascading series of events that need to occur here. So we had a bit of a slow start. We expect that to be finalized here in short order and in the second half of the year to sort of reflect those revenues you were referring to as we begin to meet our milestones and deliverables.

[Unidentified Analyst:]

My last question that I would ask is several months ago you made a statement to the effect of it, may not be an exact quote that Sigma Labs was in lockstep with GE .Would you still stand by that statement as I have said it or is there anything you could add to that at the current time?

[Mark Cola:]

Sure. Thank you for the question. The lockstep, yes, so interesting wording, we couple of years ago signed our joint technology development agreement with GE which included activities, which we concluded some of them last year and began additional ones this year .We continue to meet or exceed those milestones and deliverables as we’re progressing through 2015 and we seem to be -- yes, good words -- in lockstep with them as they move towards production.

[Operator:]

The next question is from Paul Briard, Private Investor.

[Paul Briard:]

I understand basically that this quarter, the FAA approved the first 3D printed aerospace part. Do you foresee Sigma having a big role in providing that data and quality assurance for FAA approval? And my second question is are you incorporated in Materialise the software as yet?

[Mark Cola:]

Great questions. I will let perhaps Vivek answer the first relating to FAA certification.

[Vivek Dave:]

Sure. So again with respect to some of the comments that Mark had made earlier, quality -- ultimately quality from the FAA in the aerospace perspective is defined as the ability of the part to meet very stringent mechanical properties and survive in the end-use environment. And so our system is a key part of that and for all of our aerospace customers we do anticipate and we are a 100% focused on helping them make that case to the FAA. So hopefully that clarifies that issue.

[Paul Briard:]

Is it – and how about Materialise – are you in their software, they just reported a big enhancement of their 3D printing software, I am wondering if your product has any footprint in that as yet?

[Mark Cola:]

It does not as yet. We continue to work with Materialise to bring that option to the table.

[Paul Briard:]

Last question, I understand that your software works in a lot of different printers. Would it we also work in EBM type printers such as what Arcam provides?

[Mark Cola:]

I might let Vivek can answer that, actually.

[Vivek Dave:]

Yes, sure. So really the key to our system is the ability to get data out of the machine .And so we have had previous success in electron beam processes and work that we'd done for example for government clients. And so there is nothing intrinsic to the PrintRite system which prevents it from working on electron beam .It's all a matter of - can we get the right sensor data? Will the software be able to work with that sensor data? And so we see no limitations or restrictions in that regard.

[Operator:]

Our next question is from Ron Nissan [ph], Private Investor.

[Unidentified Analyst:]

Hello, the question I had is just to get a better understanding of what your business model is for how you sell PrintRite. I know you have different modules of it but are you selling the system on a licensing basis where you get a monthly revenue or is it a sale of the software and then upgrade later on. If you could articulate that a little bit in more detail, I’d appreciate it.

[Mark Cola:]

Yes, sure. So we -- the model we envision for end users that may have an existing machine basically is software as a service .And so it's a licensing model where they acquire the associated hardware and the software license and as part of the software as a service agreement, they get ongoing support, bug fixes, upgrades, technical support, phone support and so on. So it’s a monthly -- annual license with the monthly support or annual support service contract.

[Unidentified Analyst:]

And in the case of a large client which most of yours are – it seems like they’re going to be where they may have multiple machines that are running your software, for instance, GE’s operation where they are using for their jet engines parts. Will they be licensing -- will be a separate license for each one of their printers that they have in their production line or will it be -- would you negotiate some kind of an overall deal with them or what are your plans for that?

[Mark Cola:]

Yes, so the plans of course would be, when we reach that point in time would be to negotiate a site license for them or with them.

[Unidentified Analyst:]

And is it tied in any way to the number of production units that are produced or is that simply the number of machines that will be hooked up with the software and hardware?

[Mark Cola:]

The current model would be tied -- the site license will be tied to machines, not necessarily articles produced on that machine.

[Unidentified Analyst:]

And one final question if I could and this is going to be somewhat of a guess I am sure on your part and -- but it has to do with the breakout that you foresee as far as the amount of revenue you anticipate in let’s say the next 12 to 18 months that are coming from your sales of PrintRite versus your contract manufacturing services. Do you have any sense of – if it’s going to be like a 50

[Mark Cola:]

While I might not have exact percentage breakouts as moving – let’s look at it this way. Moving forward in time we are committed to delivering on our programmatic activities which for the moment is a large portion of our revenue forecast. And over time as we move forward in the next 12 to 18 months we see reversing.

[Unidentified Analyst:]

So you see your contract services as growing pretty significantly then?

[Mark Cola:]

No we see -- yes ---

[Unidentified Analyst:]

When you said programmatic – I am kind of assuming when you say programmatic –

[Mark Cola:]

Oh, programmatic. So if you go to Slide 4, the last bullet, engineering contracts, I will use that terminology. So we’re committed to delivering on those engineering contracts which is a large portion of our revenue and the other three – two bullets there, PrintRite sales and contract AM increasing and engineering contracts decreasing.

[Unidentified Analyst:]

And as far as the breakout between PrintRite sales and contract additive manufacturing, do you have a sense of what the ratio of those might be?

[Mark Cola:]

Well there again, we expect both of those to increase with time. In terms of a breakout, I don't have a breakout. We’d like to see – of course both increase and anticipate both of them increasing and adding capacity in both of those areas.

[Unidentified Analyst:]

My question kind of went to the fact that it would be a significant cost for you to buy another EOS machine of course. So you have a certain capacity to produce things with the capital that you've invested in at this point. So I wasn’t sure this year you anticipated that portion of your business to grow so much that it would start to – you’d start to invest additional capital into that line of your business versus increasing maybe the personnel that you need to do to continue to expand your PrintRite3D sales?

[Mark Cola:]

So it's a good question and so without putting any hard numbers or percentages on it, if the question is you have one machine, you’re not going to add additional machines, which aspect is going to grow quicker, it’s going to be the PrintRite3D sales because the machine can only produce so much in a given year, one machine without adding capacity. And so looking forward, if that was the scenario, one machine, no additional AM machines then it’s probably a 3 to 1 ratio, we would expect more PrintRite sales than contract AM.

[Unidentified Analyst:]

And given that your business is expanding there, are you anticipating adding employees in the future?

[Mark Cola:]

We will, of course, our staffing plans going forward include additional staff in the areas of sales and marketing and operations support as both of these ramp up, these activities, PrintRite sales and contract AM.

[Operator:]

Our next question is from Aaron Shoe at DISMA [ph].

[Unidentified Analyst:]

My question was concerning your expansion initiatives in the next 12 to 18 months. Could you comment on what those initiatives may be?

[Mark Cola:]

Expansion initiatives, well, we expect to expand our revenue through the sales of our PrintRite technologies as we had new capabilities such as our DEFORM module and eventually later in this year our analytics database aspects and the expansion in the contract AM side will come from basically increased orders for prototyping and maybe even small lot production orders for AM customers.

[Unidentified Analyst:]

My next question was -- are you currently doing any work with Arcam and Philips at the moment?

[Mark Cola:]

We are not currently engaged with Arcam or Philips, assuming that Philips the electronics –

[Operator:]

Our next question is from Mark Group, a private investor.

[Unidentified Analyst:]

Good morning guys, gentlemen. Again I as well want to say congratulations on the milestones that you have met and we certainly appreciate all the work that we know is going on there. As investors we are actually pretty knowledgeable with the efforts that are going on with the Sigma Labs but one thing that is a little confounding to us is when we go out and scour the world for information on current status of additive manufacturing, there is definitely the impression that the other key players in the industries are not acknowledging Sigma Labs technology. And so my question is do you feel as though Sigma Labs is getting a fair shot at rolling out a solution to IPQA need or do you feel that say machine manufacturers are not wishing to allow Sigma Labs to break into that and they are being built into the machines themselves. Do you anticipate that it is all going to come Sigma Labs ways as a solution to the industry?

[Mark Cola:]

Is it going to come our way. I like the way you ended that question, Mark. So there are of course efforts internally at the equipment manufacturers to of course come up with their own sort of flavor or solution to what they interpret their customer requirements to be in the area of quality assurance, some or most of which we’re aware of. I believe a lot of it as you can imagine when an OEM machine producer sets a path for a series of products to address this, they have a schedule and they are driving to meet that schedule, to basically get it in the hands of their sales folks. And so they are committed to their own paths right now and probably want to see where they can take it on their own initially. I think that's more of a push technology and what we're hoping to achieve which I think addresses the last comment you made is more of a pull where they are seeing a pull from their customers that the solutions they require are being better met or fulfilled perhaps by the product offering Sigma Labs has. And so we continue in terms of a fair shake -- we believe that we're giving due consideration to our technology capabilities by the fact that we've been engaged now with General Electric Aviation for a couple of years and the joint technology development agreement we have with them in the Honeywell, test and evaluation agreement we have in place with Honeywell Aerospace, the Materialise, a joint technology development agreement, the similar sort of agreement we have in place with Additive Industries which is a unique startup company with a promising AM technology and their interest in adoption of our quality assurance technology for their AM product offering. And so are we getting a fair shake? Yes. Would we like to see more? Of course.

[Unidentified Analyst:]

The only other question that I have is closed loop efforts. Through closed loop efforts on the machines, that seems to be absolute necessary fulfilled function and there's really nothing out there that is indicating that anyone has true complete closed loop systems in control of the machines themselves. Do you anticipate that Sigma Labs will be able to bring that to the table sometime here in the near future of actual through closed loop control?

[Mark Cola:]

So let me first offer a couple of thought. I’d like Vivek to provide some thoughts there as well. The first is closed loop process control, the first question, is defined how and so somebody need to tell us what they mean by that definition first .And secondly, that’s a Holy Grail, a lot of people want to achieve that for a lot of different industries and technologies, it's not always as easy as one might think. And then the third of course is it's not necessarily a panacea for this technology or any other type of technology principally because at the higher end component user realm typically like aerospace -- typically once they've locked down their process and established and characterized their process, they don't allow and they don't like it when operators or the machine in this case in closed loop control take control and make changes because they’ve locked down their process and they simply don't like changes made to it. Perhaps Vivek has some additional thoughts on that.

[Vivek Dave:]

Yes, so, closed loop control in this case means something very different than when we think about a CNC machine. When you think about an end mill, it's relatively simple. You upload a part file, the cutter goes around, there's relatively little that can go wrong. In this process we’re melting metals at very high temperatures over thousand degrees C. Things are moving, things are distorting. There are so many other things that are changing in the process. As Mark said closed loop control may not always be the right answer because an aerospace company may have a hard time if each and every build is a little bit different. Now how do I know if all of them are the same or will behave the same because they all had slightly different parameters based on what the machine decided to do. What we’re after and what we stay narrowly focused on is quality as defined by the ability of the park to work in the end-use requirement, is it strong enough, will it survive temperature, will it work as long as it's supposed to? And so are we technologically compatible with closed loop? Absolutely. I mean the technology exists now but I think we have to be careful on how we define it and how we go forward for different industries and specifically not losing track of at the end of the day what they really care about is will the part work in the end-use environment. And that's really our primary focus and if you can do it in a closed loop control, lights out factory manner that's great but it may not be possible in all circumstances.

[Mark Cola:]

I was just going to add one last though to that was – and you’ve seen, have tuned up by the fact of your question and that is in order to achieve a closed loop control scenario whatever that might be as Vivek said, the first steppingstone is doing what we're doing, which is understanding the process, monitoring it, reporting on it and producing a quality product. Once you establish those stepping stones that lead you to the path that takes you to close loop control. End of Q&A

[Operator:]

There appear to be no further questions. I would like to turn the conference back over to Mr. Cola for closing remarks.

[Mark Cola:]

Well thank you very much. We greatly appreciate everyone's attendance today, really are interested and greatly appreciate all your questions. And I think with that, we will just say thank you again and we look forward to talking you in the next quarter.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.