Q3 2021 Sigma Labs Inc Earnings Call
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Good day and welcome.
Welcome to the Sigma Labs third quarter 2021 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 Executive Vice President of MZ North America. Please go ahead, Sir you may begin.
Thank you and good afternoon I'd like to thank you all for taking.
Time to join US for Sigma Labs third quarter 2021 does this update and results conference call. Your hosts today are Mark <unk>, 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 four one P M. Eastern today and is available on the company's website Sigma.
My Labs, Inc. Dot 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 maybe subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please.
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 would like to turn the call over to Sigma Lab's, President and Chief Executive Officer, Mark <unk>, Mark the floor is yours.
Thank you, Chris and good afternoon, everybody and thank you for joining.
Referred to quarter conference call, we're going to structure. This call differently than we have past calls to give you some more insight into our plans and to put some additional context around our financial results.
First I'm pleased to say that Q3 was a very good quarter for Sigma labs, and the number of <unk>.
Third the increase activity that I mentioned on last quarter's call is beginning to result in revenue growth I believe it's a clear indication that additive manufacturing and the entire industry.
Specifically three D metal printing is coming into its own in transitioning out of what.
Waives certain recalls the trough of disillusionment.
However, as I said in July quarterly financial results are somewhat of a lagging indicator I'm more focused on leading indicators for Q4 and more importantly, 2022 and 'twenty to 'twenty three.
Our objective as a company isn't.
What goes to have a record quarter. Our objective is to achieve our mission of accelerating the adoption of <unk> metal printing and in so doing build a company with a strong culture that attracts and retains talented people developed technology and products with a sustaining competitive advantage and provides.
Isn't just a significant return to our shareholders.
At this point I'd like Frank to go through the numbers and then we are going to dive a bit deeper into some of the financial metrics and put them in context of our business plan and the progress that we've made in 2020 one.
After that I'll provide.
Provide color on the quarter and what we are seeing as the market accelerates Frank right.
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 first provide an overview of those results.
I'd sum followed by some additional remarks.
Revenue for the third quarter of 2021 totaled $700000 as compared to revenues of 249000 for the third quarter of 2020.
The increase in revenue was due to increased print right three D unit sales, including the company's first multi unit.
Which was to a U S department of energy contracts as well as a single unit sale to a U S National Laboratory.
Year to date revenue at September 30 of 2021 totaled $1 3 million as compared to 638000 for the same period in 2020, an increase of 664.
And I'd say dollars or 104%.
Gross profit for the third quarter of 2021 was 535000 as compared to 151000 in the third quarter of 2020, resulting in a gross margin of 69% for the nine months ended September 32021.
Versus 37% for the same period in 2020.
Total operating expenses for the third quarter of 2021 were $3 million as compared to total operating expenses of $1 4 million for the same period in 2020, an increase of $1.6 million.
Of that total increased one point.
<unk> thousand billion is due to increased salary benefits stock based compensation and recruiting expenses related to the addition of 13 full time employees during the first nine months of 2021.
Expenses related to trade shows and travel due to the easing of Covid related restrictions increased by.
300000, while noncash stock based compensation to not unemployed directors and consultants contributed 164000.
The remaining increase was primarily due to research and development costs related to ongoing hardware and software development work and higher insurance premiums in 2021.
Our cash used in operating activities for the three months ended September 32021 totaled $1 5 million compared to $1 2 million in the third quarter of 2020, an increase of 300000.
Cash used in operating activities for the nine months ended September 32021 totaled $4 8 billion.
By almost compared to $3 7 million for the same period in 2020, which represents a 30% increase primarily as a result of the increase in our net loss.
The net loss applicable to common shareholders for the third quarter of 2021 was $2 5 million or 24 cents per share as compared to a net loss.
Million or <unk> 42 per share in the third quarter of 2020.
Now turning to our balance sheet, our cash balance totaled $13 1 million at September 30th 2021 as compared to $3 7 million at December 31, 2020, the increase in cash during the year as a result of a net 13.
Of two $3 million in cash proceeds related to public and private offerings during the year and $1 1 million from warrant exercises.
Our working capital was $14 million at September 30 of 2021 as compared to $4 3 million at December 31 2020.
Stockholders equity totaled $14 nine.
<unk> seen a timber at September 30th 'twenty, 'twenty, one as compared to $5 2 million at December 31, 2020.
Thanks, Frank I know, let's put some context around those numbers what additional insight can you give us as to why our expenses seem to be growing much faster than.
9 million shareholders might have anticipated.
Well most importantly, we made a significant investment in our people and our infrastructure this year as.
As we saw the size of the market opportunity ahead of US we realized we needed to add resources to be in a position to take advantage of it. So it was a required investment if we are in fact.
To achieve the mission you outlined in your opening remarks.
First I'll speak about our employees like most companies compensation is our single biggest expense comprising about 45% of our total expenses.
We have added 13 full time employees since the beginning of the year, we have increased our sales team from two.
<unk> two seven in an effort to increase our opportunities presence in our pipeline specifically, we've added a senior director of sales in the U S. Western region, an area sales manager for the European Middle East and Africa region, and three technical sales engineers, one of whom is in Europe to support our business development and sales efforts.
We've added a total of seven engineers, including three software engineers and for applications engineers, who will be furthering our machine learning and AI initiatives as well as increasing our manufacturing capacity and ability to perform customer installations and field support.
And most recently as many of you already know Jake Brownsberg.
Has joined our management team from GE as senior VP of product management and strategic relationships.
But it's not enough just to attract and hire new employees, we must retain them as well the orphan and perhaps an overused phrase employees are our most valuable asset could not be more true than at Sigma a labor market.
It is extremely competitive and our highly trained skilled and talented employees are heavily recruited by others.
To that end, we have made additional investments in our employees designed to ensure we remain competitive in the marketplace.
This also aligns well with and reinforces our employee first culture.
And then.
In addition to salaries and benefits increased equity related compensation and noncash expense. So everyone in the company from non employee directors to executive management to employees and consultants. We believe that this is an important component of aligning shareholder company and employee interests and that everyone in the growth and success of Sigma.
Sigma while also helping us to conserve cash.
I would make two final points with respect to our operating expenses. One is that although we will continue to add resources and invest in the company is needed. We believe the majority of that investment has been made this year and therefore, we expect the rate of increase to slow for the foreseeable future.
And two it is important to keep in mind that when comparing our expenses to last year 'twenty 'twenty expenses were significantly lower than they might otherwise have been due to the effects of COVID-19 restrictions on our business.
Okay. Frank I appreciate that now lets talk about gross margin.
Have we been able to increase it and where does it.
It has to be for us to be able to make a profit.
It's a combination of several factors first sourcing certain components from multiple vendors has enabled us to find alternative supply sources as well as lower raw material costs.
Second engineering enhancements, particularly around optics redesigns.
And computing power and storage have lowered cost while improving unit performance in fact, some of the spend you see in the research and development category is directly related to these enhancements.
Third we have become more efficient and our customer installations, which started when COVID-19 forced us to rethink how we do installations and also support.
Our customers.
Our legacy rapid test and evaluation program is largely a thing of the past.
<unk>, we do today are much shorter in duration with clearly defined objectives and we're certain outcomes in terms of ultimately leading to unit sales.
And fifth we are engaged with our lean manufacturing expert.
Experts to assess and improve our production process, which has improved our controls lowered labor costs and improved efficiency.
Now you also asked about our gross margin going forward and specifically how that relates to our ability to become profitable.
As I mentioned earlier, our gross margin at September 30 was 69%.
Which is above our targeted range of 60% to 65% for this year.
As points of reference our gross margin for all of 2020 was 27% and at June 32021. It was 59%. So we've seen significant improvement through the first nine months of this year.
We've targeted our gross.
<unk> in the 80% range as our goal.
We expect to get there by first having our OEM partners provision the hardware components of our <unk> units and ultimately moving to an embedded software only product within the Oems printers themselves. In fact, two of our OEM partners have already committed to taking the first step.
Margin is running hardware.
Ultimately this is where we believe we will get the leverage in our business model that will allow us to increase volume without a commensurate increase in overhead.
However, with all of that said, we do expect that there will continue to be a hardware component to our product for the foreseeable future due to the existence of the retrofit market.
Will prevent the time that will take Oems to take over the hardware positioning.
Alright, thanks, So we're getting somewhere how about cash burn what can you tell us shareholders about that.
Well cash burn is a factor of several things of course, an increase in operating expenses, which we've experienced but also the timing of when revenue.
Get booked and cash is collected as well as other investments we've made.
As we've mentioned before that we are seeing a positive trend in increased revenue to date. It is lagging behind the investments I. Just discussed also we booked revenues of 459000 towards the end of September but receive payment in October and we have another outstanding.
Revenues received both from a customer that is GDP collected soon.
We also had to replace the laser in our in house metal printers. This year and taken together. These items have negatively impacted our cash usage by about $600000 in the first nine months of this year.
Going forward, we expect that our cash burn will flatten out as inquiry.
Standing the news begin to outpace increases in expenses.
Thank you Frank.
So you can see that not only are we executing on our plan, but we clearly understand our path to profitability.
Well as our capital requirements. Additionally, we are beginning to build.
<unk> infrastructure to support our growth and increase overall efficiency.
No I said that was the last question, Frank but I would appreciate it if you would explain what we have done over the past quarters to structure the company to support many multiples of the existing business in a profitable manner.
Sure.
Well, we've undertaken several initiatives designed to ensure we embed the leverage we will meet in our business model going forward first adopting lean manufacturing principles as I've discussed as an important component of ensuring we are as efficient as possible in our production processes.
Second we've made an investment in a number of software applications, which have increased efficiencies.
By reducing manual input, including our product lifecycle management program advanced inventory modules of our general Ledger system, a new customer relationship management program and a project tracking and management system, which helped keep everyone focused on our goals through enhanced and more efficient communication.
Even in.
The company of our size things can go off the rails quickly of communication is poor and the left hand doesn't know what the right hand is doing.
Thank you Frank and by the way a company our size is extremely fortunate to have the CFO of Frank's caliber.
Since our market opportunity and how far we've come over the past year there are four.
Our main takeaways.
First there's widespread agreement regarding the need for a third party in process quality monitoring system.
It's interesting to note that traditional manufacturing went through a quality revolution in the mid 20th century.
It was seen as the father of total quality management TQM.
Famously said you can't inspect quality into our product at the end of the process.
That's exactly what we do with additive manufacturing when we rely on post processing C. T scans or destructive analysis of apart by that time, you have wasted material machine time production.
<unk> time, and you have loss precious time to address whatever issue caused the need for the part in the first place.
Secondly, our technology continues to be validated by the most sophisticated and advanced end users of <unk> metal printing first by end users than by universities and research.
Search organizations by three D printer Oems and most recently by a federal agency that has a compelling need to address the quality and are seeking a trusted source to monitor the manufacturing process across a heterogeneous set of printers.
As I mentioned in Q3, we had our first.
As was mentioned earlier in Q3, we had our first multi system sale to a contract with the department of energy.
One print right three D system was in support of an additive industries metal fab, one quad laser printer, which by the way it comes print right three D ready.
The.
System is to monitor the quality of parts printed on an S. L M dual laser printer.
We also sold a print right three D system to a national laboratory and an international University. Additionally, we recognize revenue from engineering services for several proof of concepts.
Our engineering team led by Darren Beckett continues to innovate and share our knowledge to help accelerate the adoption of three D metal printing.
Most recently, our engineers collaborated with a group of researchers from the University of Nebraska, Drexel University, and Navajo Technical Universe.
Third city and developed a new process for detecting flaws in laser powder bed fusion three D printed parts that used digital twins.
And finally in addition to leading edge technology, we now have experienced executives and sales personnel joining sigma because they see the need.
Universe solution like print right three D. They.
They want to be part of a company that is dedicated to advancing the industry and is capable of executing on a plan that will offer them a future career opportunities a year ago. We had one employee who was located in Europe with additive experience.
Need for today, our field organization collectively has over 70 years of experience from diverse additive Oems and end users such as E. O S. S. L. M. G. Three D systems, Stratasys materialize, JP additive and others.
At four onex.
Germany. This November this team will not only be staffing ARPA.
But also DMG mores additive industries and materializes to highlight print right three D seven pointed out.
So as I mentioned earlier, one quarter disappointing a record setting it doesn't change our.
And trilogy.
We have a three year plan to maximize our addressable market opportunity and as I discussed at a recent Investor Conference.
As we look towards expanding outside of metal to other materials. The total addressable market for our technology increases several fold and it becomes very.
Our Australia large.
Looking ahead, almost all of the leading indicators that we measure and track, including visitors to our website.
Suspects added tursi, our CRM system subscribers through our online content.
Our overall 12 month and overall pipeline.
Their number and size of prospective deals the number of multi site opportunities and basic sales activity point towards the ability to grow the company at an accelerated rate.
Our OEM partners by the way are experiencing similar increased levels of activity.
In summary, despite.
Covid, we have made excellent progress in 2020, one we expect to enter 2022 with momentum they fully staffed field sales team capable of managing multi site deals and an experienced management team that has proven their ability to execute even during the most challenging times.
With that Frank and I will be glad to answer any questions you might have operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is in the question queue. You May press star two.
As you move your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys, one moment, while we poll for questions.
Our first question comes from the line of Scott Buck with H C. Wainwright you May proceed with your question.
Hi, Good afternoon, guys I appreciate all the additional.
Detail on the call this afternoon.
You're quite welcome.
So first for me Mark I was hoping you could maybe provide a little bit more color on the pipeline.
Where are we versus a quarter ago, and where are you guys seeing the most momentum there.
The pipeline continues to grow a month after.
After a bump so I would say compared to last quarter, it's probably 20% bigger than it was going into Q3.
And that's always difficult to measure precisely, but generally speaking it's increased over Q3 as we look at Q4, it's definitely increased over.
January of 2021 so we're looking at a I think a very.
Good 2022 as far as where we're seeing it from it is the vertical industries that we focused on you saw this quarter, we had federal government department of energy type related.
Sales.
We see that continuing we also see more activity in space exploration and department of defense related type of initiatives. We're also beginning to see some traction with or Oems in Europe that have been especially hard hit by Covid.
Right.
That's really helpful Mark and Frank just unclear on the ads what kind of Opex.
Not guidance, but what color could we expect to see the.
The stock comp I mean, a little bit going forward I mean, it sounds like.
A fair amount of this quarter stock comp was kind of one time tied to you know tied to the hiring.
During the quarter.
Yeah, well it was it's two things one is that one is the hiring the second part of it is we made the annual grants to employees in August this year, so the third quarter versus the second quarter and the way that we make the grants theres a 25% vest on the data.
Eight of the grants. So you do have a you do have an extra expense.
On.
When that grant is made and then it'll level off for the remainder of the vesting period. So so that's what you're seeing there. So to answer. Your question is yes, you'll see that you'll see that go down.
Okay, Perfect and then last one for me on the recent sales.
El tires during the quarter can you remind us kind of what the ramp up process is for those guys and when we can expect to see some contribution on the top line from those hires.
Sure.
Reason, we hired experienced people from the companies that I mentioned earlier.
So that we can get them up and running very.
Quickly, they're all familiar with the industry. They know where the machines are they know where the customers are and they know the customers pain point relative to going from prototyping into production.
And as we've discussed many times the primary pain point or one of the primary pain point is consistency and lack.
Of quality and those two things have a direct relationship to the economics of three D metal printing. So we expect that.
These people to be up and running very quickly at the beginning of 2020 to them because of the experience and background that they have.
That's perfect I appreciate.
Appreciate the time this afternoon guys.
Youre welcome Scott Thanks for the questions.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Martin Roth with Baron Capital Management. You May proceed with your question.
Hi, good afternoon and.
Thank you for the improved communication.
I'm wondering about the following.
Apparently you.
Don't go in blind you go into companies that have.
Our interest in three D printing.
Do you find that there are some companies.
And even get into the door.
Companies that have a three D printing initiative or companies that have.
I have not yet started initiative I'm not quite sure well, that's lumped them together on all of them.
The words is there a possibility that some of these companies are addressing what.
As you can think of our larger needs than quantity.
That's a very good question and it really depends on where they are in their in their curve relative to their expertise if they're very early into using three D metal printing and if they have one.
They center or two printers from one manufacturer and they're producing a relatively simple part.
They have more things to worry about than quality because quality isn't that important for them given the type of part they're producing.
If they're a multi printer location or a plant.
One that has multiple printers from multiple manufacturers and they're moving up the part volume complexity curve, which basically means they're making more complex parts and higher volumes. They will encounter the issues that our software and our system addresses so if.
On the right hand side of that curve relative to their adoption and utilization of three D metal printing, they're aware of the problem and there are seldom any doors that we cannot get in if they're on the lower end of the curve.
They're probably not interested in we're not they don't have a compelling reason to adopt.
Their technology yet.
Thank you do you see any.
The printer manufacturers offering quality control.
As part of their package.
Yes, all of the major three D metal printer manufacturers have a monitoring system that they sell.
Separately to their printer.
Its equivalent in price to ours, which is 100000 to 150000, depending on the type of number of lasers. The machine has a lot of them do not so very many because they don't provide actionable information.
Formation to the end user they provide data but that data isn't.
Analyze to the point, where its used to identify and classify a defect and in our case, even begin to predict when a defect might happen.
So they all have a monitoring system. However, they only work on there.
<unk> Center.
Seldom do they provide the type of analytics that we provide.
Okay. Thank you Youre welcome.
Ladies and gentlemen, we have reached the end of today's question answer session I would like to turn this call back over to Mr. Mark <unk> for closing remarks.
Well.
Thank you very much I appreciate it and I appreciate everybody's time and attention I hope that you. The format today was informative I know those are the questions that I ask at the end of the quarter and at the end of each month, and we thought shedding some light on the context and putting context around.
The financials was important this time.
Going forward, we're looking at a pipeline, that's growing and industry, where the acceptance of <unk> metal printing is accelerating and where the need for our technology is seen across the board from all constituents that are either study.
Well I think are using three D metal printing so with that if anybody has any follow up questions. Please don't hesitate to contact myself or Frank or MZ or Stephen Gersten, and we'll be glad to answer any follow on questions and we'll look forward to speaking to you at the end of the quarter.
Thank.
Thank you again for your time.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.
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