Sigma Labs, Inc. (SGLB) CEO John Rice on Q4 2018 Results - Earnings Call Transcript

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Sigma Labs, Inc. (SGLB) Q4 2018 Earnings Conference Call April 1, 2019 9:00 AM ET

Company Participants

Scott Gordon - Co-Founder and President, CORE IR

John Rice - Chairman and CEO

Nannette Toups - CFO

Conference Call Participants

George Grifka - Private Investor

Operator

Good morning and welcome to the Sigma Labs Earnings Conference Call for the Year Ended December 31, 2018. All participants will be in listen-only mode. [Operator Instructions] Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. A replay of this call will be available approximately one hour after the call through May 1, 2019.

I would now like to turn the conference over to Scott Gordon, President of CORE IR, the Company’s Investor Relations firm. Mr. Gordon, please go ahead.

Scott Gordon

Thank you, Annette, and thank you all for joining today’s conference call to discuss Sigma Labs’ corporate developments and financial results for the year ended December 31, 2018.

With us today are John Rice, the Company’s Chairman and CEO; and Nannette Toups, the Company’s CFO. At 8 a.m. Eastern Time today, Sigma Labs released financial results for the quarter and year ended December 31, 2018. If you have not received Sigma Labs’ earnings release, please visit the Investors page at www.sigmalabsinc.com.

During the course of this conference call, the Company will be making forward-looking statements. The Company cautions you that any statement that is not a statement of historical fact is a forward-looking statement. This includes any projections of earnings, revenues, cash or other statements relating to the Company’s future financial results, any statements about plans, strategies or objectives of management for future operations, any statements concerning proposed new products, any statements regarding anticipated new relationships or agreements, any statements regarding expectations for the success of the Company’s products in the U.S. and international markets, any statements regarding future economic conditions or performance, statements of belief and any statements of assumptions underlying any of the forgoing. These statements are based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Some of these risks are described in the section of today’s press release titled cautionary note on forward-looking statements and in the public periodic reports the Company files with the Securities and Exchange Commission. Investors or potential investors should read these risks. Sigma Labs assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so.

It is now my pleasure to turn the call over to John Rice, Chairman and CEO of Sigma Labs. John?

John Rice

Good morning and welcome everyone. I’m pleased to join you today from the Spring Investor Summit Conference in New York City, where it is pretty, but not as pretty as New Mexico. To report on Sigma Labs results for last fiscal year ended December 31, as well as the final quarter of the year. And I will just dedicate my remarks and pretty much entirely to corporate developments because there's a lot of content in the year.

So starting out, as many of you know the principal challenges that Sigma Labs faced when I took the helm in August 2017 was to transform the company from an R&D company with a very high potential R&D product into a company capable of commercializing, hardened, reliable, high-performance market-ready products, and then go into market.

So the success or failure of most software companies is directly proportionate to the proximity that it maintains with end-user customers prior to and as the software has been architected and while it is being written and until it is tested by customers and released.

Great software is great when it meets customer-specific, self perceived requirements, and when it does so in a fashion that is smooth and intuitive to their industries’ end users. That makes the businesses flow and perform better. So as you may recall following our exit from the R&D mode in September 2017, we focused our technology developments and marketing personnel on the model of functioning as much as possible as or as if we were integrated teams with the technologists and manufacturing experts in a small number of high-tech, high-end customer companies with whom we have been working.

We teamed with them because we needed to learn their cutting-edge customer requirements in order to rapidly evolve and fashion our architecture capabilities, our performance, and user friendliness to meet those needs. And they teamed with us because they had needs for more insight into in-process quality assurance in 3D metal manufacturing.

At this point, we’d owe great thanks and I'm going to give it to them now as I have individually to Aerojet Rocketdyne, Baker Hughes, Fraunhofer Institute IAPT, National Institute of Standards in the United States, NIST, Pratt & Whitney, Siemens, Solar Turbines, and Woodward for helping Sigma to define the high performance customer needs that our PrintRite3D was being designed to meet and that were largely met when we released PrintRite3D version 4.0 in November of 2018.

So products like those are always going to be evolving and improving in response to new customer and technology requirements and insights. But we believe that 4.0, which we released in November is a really strong, very unique platform upon which we can base continued in-process quality assurance development and maintain leadership we hope in the market.

To us in Sigma, November 2018 signaled the end of the beginning and the refreshing beginning of our post startup drive for commercial success. On the marketing front, pilot testing of our new Rapid Test and Evaluation Program or RTE, started in September 2018 and it was then launched to the general market at the Formnext Conference in November concurrent with the release of PrintRite 4.0.

We are working hard to cultivate and develop a robust pipeline of new prospects with this program. The way the Rapid Test and Evaluation Program works is that we and the customer agree to a 20% upfront down payment for our product and agree to a reciprocal test protocol that the customer defines roughly as what technical outcome is necessary for us to conclude that we ought to buy PrintRite3D for our production machines. And the customer then pays for a third-party laboratory to use CAT scans, destructive testing, and other means to confirm or refute, Sigma's parts diagnosis from the sample runs we do.

My first take away from this program is actually that Sigma is really capable of being rapid, a typical Rapid Test and Evaluation. Installation takes less than three hours and then teaming with the customer, we can print -- begin to print the parts required for the evaluation to take place that day. It takes several days or weeks to complete those runs. And the customer during that time, on average, wants to induce as many problems as they can think of to test the capabilities of our product. So this is not a passive enterprise.

My second take away from this is that our customers in the outside laboratories appear to define the word rapid by using geological time as their standard when it comes to the turnaround of lab results, and as well as internal customer analysis, reporting chains of command, they seem to not be as rapid as we would like. So anyway I would regress [ph], as it is we’ve won 5 major Rapid Test and Evaluation customers since September 2018 in additive manufacturing, providers, contractors to oil and gas services for themselves and aerospace industry clients too.

Today, without any further enhancements to our product that our team actually is now developing, these customers are receiving our unique TED tool, and with it they can quickly identify and implement control file adjustments in order to offset what are inherent built in inconsistencies in virtually -- and well in all 3D manufacturing metal equipment. This improves quality before scale manufacturing begins on that machine, and that's a very important statement.

This is a fundamental first step actually required to obtain closed loop control and to best of our knowledge we are the only company in the markets that is able to achieve it. So we wake up excited every day because we believe this is such a simple and powerful game changer.

PrintRite3D then does more. Once our TED tool has optimized the calibration of an added machine to offset its inherent anomalies, PrintRite3D's TEP Thermal Energy Planck tool enables us to work with customers -- enables to discern and determine the signatures of problems that are particular and peculiar perhaps to their products design, perhaps to the scan strategy of the machine or any number of more selective strategies of events. And with that signature, we are learning a precursor to a quality problem. Signatures are emerging, something is going wrong. The trend is towards a problem.

And so we are able to see the problem, recognize what it is and therefore provide a process engineer with the possible solution or probable solution for that before that has become a rejected part. And this is really the other major data information that will be required to ultimately attain closed loop control. And on this we are again -- we are the only company in the market that we are aware of that is achieved this.

So I’ve been thinking of how to characterize the TEP tool as a metaphor, and so I have in mind the image of those weather maps we often see of a hurricane developing as a little small storm in the Atlantic just off West Africa. And once seeing that threat just imagine with me if you had a tool to dispel the storm before it grows and before it endangers, that is TEP, but not for hurricanes. It's for 3D metal manufacturing problems.

So our two PrintRite3D tools, TED and TEP, right now enable manufacturers to materially increase quality yields and to substantially cut time and labor and material costs, other required -- otherwise required just to spool up for production, much less and have higher yields in it. And that is really meeting customer needs as they have to find them for us today.

So, finally as you know, we announced proof-of-concept of closed loop control last June. In every development I’ve just described with TED and TEP, brings us closer to market and productizing that capability. We hope to bring the first closed loop control in the market in the next 12 to 18 months.

So as a stopping point for a moment here to go on to commercialization, it is wonderful to have a product that can service process engineers with a deep and diverse analytical tool for in-process quality assurance. But to commercialize our product, it is now just as wonderful to have a product here in early 2019 that technicians who are not advanced process on generics [ph] and not advanced technologist can nevertheless use functionally and practically to oversee kind of sure quality improvement in their manufacturing production setting.

My conclusion on these technology and product topics now is that we have positioned ourselves with a product that is designed to meet customer explicit request and needs that we meet now to get out and sell it. So it is what we have done and it is what we’re doing to accomplish our next mission of get out and sell it.

First to support high-technology sale, a small company really needs third-party verification it's product performance. There is a lot of vapor sold in this world and [indiscernible] to provide hard data and credible proof that the claims one makes for our product are true. So to this end, over the past 8 months we’ve been expanding our presence and our participation with leading influential and important additive manufacturing third-party centers of excellence.

We were recently named a member of the Manufacturing Technology Center in Ansty Park, U.K. And the membership here is important because it enables Sigma to share and provide expertise and solutions for a number of the centers projects and importantly to network us with the centers existing members including their leading aerospace companies.

Meanwhile in Germany, Sigma was named a member of the Additive Alliance with Fraunhofer IAPT, a leading network for Additive Manufacturing in Europe. As we reported in February, we’re the first U.S company to be granted a membership in the Alliance or part of a global research consortium formed to advanced development and implementation of additive manufacturing. So we’re able to demonstrate our technology to key players in the market of metal AM in Europe through the neutral trusted intermediary, Fraunhofer.

We [indiscernible] a collaborative research and development alliance with them more recently to test and validate our product to quantify machine process inconsistencies and in-process thermal signatures, which would be a demonstration of TED and TEP for which will be available to the members of the Fraunhofer in Europe, which range from the major company -- include pretty much all the major companies we’re targeting for sales.

In the United States, Sigma entered into a Cooperative Research agreement, CRADA, with the National Institute of Standards and Technology which uses PrintRite as an analytical tool for developing industry standards and we hope becoming a standard in and of itself. So while we have avoided research or R&D customers, we have gone to these institutes because they become third-party confirmation and verification of what our product does as they release white papers and other information to the market. We consider this a very important building block for our credibility.

So it's our hope that expectation reports flowing out of these three entities will get the data, the substantiation and examples of PrintRite has proven necessary means to measure and to assure in-process quality. And also we hope to become the quality assurance standard in and of itself.

So the next thing we need is people selling our product. A year-ago when I gave this report, Sigma had one person in sales and marketing, Ron Fisher. Ron is our Vice President of business development. He join Sigma as after having a successful lead in the startup technology -- on the sales startup technology that turning to be in its niche. In his capacity at Sigma, he until recently was a technology herald, a C-suite door opener and a very successful relationship builder to the notable companies that I was thinking [ph] earlier, those relationships were created by Ron. And those companies are the folks whose needs we have now met in the foundation block of 4.0.

In order to carry the company's message and the product into the market, Ron started building out and training the sales team last year. Markus Meidenstein joined us 11 months ago, he is based in Munich, he is calling on European prospects. Richard Proctor joined us last summer and provides technical support and co-selling with Ron and Markus to European relationships with customers. And in the U.S., we announced last week the appointment of Justin Joiner as the company's new business development manager. So we've gone from 1 to 4 to the selling team. Each of these good men has deep knowledge and experience in additive manufacturing and each has proven technical capability and that -- and each has proven sales performance.

So as you can see your company has done many of the important things it takes to build a successful company. And indeed you and we will certainly measure Sigma in the coming two years by the speed of market adoption and sales dollars. This stage it's my test, by the way, now to tap [ph] and temper expectations with the reminder that we’re a small company selling to a very large end-user companies and very large OEMs. We are selling into a market composed of large mature companies and each one of them is trying to foster what is still an emerging market in the 3D metal serial production.

So such a market really is unlikely to act with speed or agility, although one or two within might. And our principle challenge is building staged successes commencing with a Rapid Test and Evaluation Program. What we’re doing so far from this new initiative is that most of these companies expect to proceed that’s rapidly than we can and they’re sort of model is to order one unit and then with the success order two or three more test units perhaps to fit on different brands of AM machines, one of the things we’re discovering is few companies have dedicated themselves to a single AM machine manufacturer and therefore a lot of these production lines have a combination of equipment.

So our product must be able to service all of those brands in order to be useful in the production setting and by the way that is not in our opinion a problem for us. That's an opportunity. Our product is the only way we can figure out how they possibly get those machines is to behave similarly. The average folks we’ve talked with so far with them after having 1 to 3 test units functioning ultimately be able to decide whether to order our products in units or tens of units. So this means that major accounts in the Rapid Test and Evaluation Program may be installed on only 1 to 3 machines in the course of 2019 and you have the potential for significant multiple machine orders in the following year and that’s the market that we are in.

So the first major indicator of success in 2019 and the measure that we will be looking closely at is how many Rapid Test and Evaluation accounts are in place with companies with whom success could mean 20 to 40 machine orders in the next 24 months thereafter. And, yes, we will be out hunting for the unicorn outliers to bid who might move faster than that, but like our investors, we will probably have to be impatiently patient.

So with this company report, I want to pass this back over to Nannette Toups, our CFO and Nannette will discuss our financial results for the fiscal year, and then we will be open for questions. Thank you all. Nannette?

Nannette Toups

Thank you, John, and good morning, everyone else on the phone. I will now discuss the financial results for the full-year of 2018.

During the fiscal year 2018, we generated in aggregate $388,574 in revenue as compared to an aggregate of $641,049 in fiscal 2017. The primary contributors to the $252,475 reduction were revenue decreases of $149,929 from government program work and a 900,208 -- I’m sorry, $198,289 reduction in new system sales. These were partially offset by increased contract AM service sales in 2018 of $101,712. This is an anticipated result of the shift we made from an emphasis on government and private industry funded research and development sales to our Rapid Test and Evaluation focus in 2018 that John discussed earlier.

Our cost of revenue for the fiscal year ended 2018 was $270,107 compared to $272,372 during the same period in 2017, a decrease of $2,265. The lack of reduction in cost of revenue corresponding to the revenue reduction is attributable to the different product mix resulting from the shift in sales focus.

Sigma's total operating expenses for fiscal 2018 were $5,687,271 as compared to $4,267,654 for fiscal 2017. That’s a $1,419,617 increase. The increase was primarily due to higher salaries and benefit costs associated with the hiring of six employees between September of 2017 and July of 2018, and the accrual of severance costs provided on the employment agreement of our former CTO and President. Also contributing was higher stock-based compensation in 2018.

In fiscal 2018, our net other income and expense was a net expense of $5,358 compared to a net expense of $525,526 in 2017. The 2018 net expense was comprised of net interest income of $31,213, which was offset by a $36,733 write-off of patent. The fiscal 2017 net expense number was primarily comprised of noncash adjustments we had to make for the reevaluation of derivatives and amortization of debt discounts related to debt and equity financing activities in 2017.

Sigma's total net loss for fiscal 2018 increased by $1,149,660 overall. Operations contributed $1,669,827 to that loss, but that was slightly offset by the other income and expenses component being a $520,000 -- $167,000 lower loss. As of December 31, 2018, we had $1,279,782 in cash and a working capital surplus of $1,052,015 as compared to $1,515,674 in cash and a working capital surplus of $2,273,801 as of December 31, 2017.

In addition, on March 15, 2019, the company closed a public offering of equity securities resulting in net proceeds of approximately $1,679,230 after deducting commissions and other operating expenses paid -- payable by the company as part of the transaction.

With that, I will turn the call back to John.

John Rice

Thanks, Nannette. So in conclusion, I would reiterate that we believe that we have transformed the company into a state-of-the-art innovator with a powerful tool that people can use now and we believe that next steps in the technology will sustain their hunger and need for the product, once we have proved out our initial sales effort. So our challenges in the coming year are very different from what they were over the past two years. We have created value and our task is to demonstrate its proof and make sales of it. That said, thank all of you and let's do the questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question today comes from George Grifka, a Private Investor. Please go ahead.

George Grifka

Thanks for taking my call. Can you hear me, John?

John Rice

Yes. George, how are you?

George Grifka

Great. Being good. Thank you. Just a couple of questions. I understand the comment we have to be impatient being patient. But we have five RTE contracts, the last was announced in January, I believe. How do you guys think about the timing of some of those or all of those to convert to real licensing with multiple units.

John Rice

Yes, we have no bad news on all five in terms of outcomes. We do have in each case, there seem to be internal issues in the customers in terms of, okay, hold off on that machine because we need to finish something before we put you on that type of thing. So there are no health issues on any of those relationships, and there's nothing that I am aware of that is negative. Therefore, the answer to your question is we expect them to move slowly and efficiently, and if things go as they have so far, I would expect good outcomes.

George Grifka

Okay. And the last question is how do you see -- how do you guys think about the pipeline for more RTEs, and how -- and what kind of visibility do you think the shareholders can get on that?

John Rice

Well, my personal hope is that we’d be able to average having in selling one of -- sort of one of those a month for the balance of the year. Things never work that way, but it -- but in terms of an average that may very well be spot on. And if that is the case, what that would mean is that we have continued -- remember we have rigid criteria for this. We don't want these to be tire kicking experiments. This is a major commitment of intensity and resources. So we are charging our sales folks to qualify these customers very carefully. Be sure these people are manufacturing enough parts already or buying enough AM manufactured parts already, that is a sensible commitment to mount our equipment on the machines. Be sure that they are aware enough of their quality issues and concerned enough about them that they have a level of urgency that would keep the product -- project going and so forth. So that is not everybody. That's a restricted highly qualified group, and if that -- if those criteria continue to be met as well as they have so far, those -- that's a really sound customer base from my point of view for the expansion that we hope to take place. So, I describe to you the inverse funnel effect of this program. When they dealt with one, they advanced to three and then they have to make a decision do we mount this on 10, 20 or 30 machines.

George Grifka

Right. Okay. Very good. Thank you. And is that also applicable in the same way for OEM potential relationships?

John Rice

Thank you for asking that because I was remiss in not speaking more to not -- as you know, as all shareholders know, our principal market ultimately is going to be met with and through OEMs in our opinion. So those negotiations are very important. Our job in terms of those negotiations, my job became much easier in November with the clarity of the 4.0 release. And so, we’re not doing an RTE with the OEMs in the same way that we are with the end users, but we are following the same guidelines and same principles and we expect the same outcomes.

George Grifka

Okay. So we take -- should we take it that there are ongoing OEM negotiations taking place?

John Rice

We’ve stated that publicly and that is correct.

George Grifka

Okay. Thank you.

John Rice

You bet, thank you.

Operator

[Operator Instructions] Since there appears to be no further questions, I would like to turn the conference back over to John Rice for any closing remarks.

John Rice

Well, I thank all of you for taking the time on this bright and early morning to be with us. I appreciate the support you and interest you are showing for Sigma, and we hope to justify your curiosity and those of you who have the faith as we take the company forward. Have wonderful days and goodbye.

Operator

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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