Sigma Labs, Inc. (NASDAQ:SASI) Q4 2022 Earnings Call Transcript

Sigma Labs, Inc. (NASDAQ:SASI) Q4 2022 Earnings Call Transcript March 31, 2023

Operator: Good day, and welcome to the Sigma Additive Solutions Fourth Quarter and Final Year 2022 Financial Results Conference Call and Webcast. Today’s conference is being recorded. At this time, I’d like to turn the call over to Chris Tyson, Executive Vice President of MZ North America. Please go ahead, sir.

Christopher Tyson : Thank you, and good afternoon. I’d like to thank you all for taking time to join us for Sigma Additive Solutions Fourth Quarter and Full Year 2022 Business Update and Results Conference Call. Your host today are Jacob Brunsberg, Chief Executive Officer; and Frank Orzechowski, the company’s Chief Financial Officer. A press release detailing these results crossed the wires this afternoon at 4:01 p.m. Eastern today and is available on the company’s website sigmaadditive.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 may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call.

Please refer to 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 Additive’s Chief Executive Officer, Jacob Brunsberg. Jacob, the floor is yours.

Jacob Brunsberg : Thank you, Chris. Good afternoon, and thank you for joining us today. As we close out Q4 2022, this marks the third quarter of our transformation as a business. I’m excited to share the progress our team has made, transitioning the business to a scalable software solution and connected quality standard for the additive industry. Today, I’m looking to provide a concise and clear update on the business. I’m going to focus on three areas. First, we are executing the transition of our business to a software-only suite that is focused on being the center of digital quality and 3D printing. Second, the market is showing signs of finally opening up, and we believe is ready and demanding a connected digital quality solution.

And third, we have partners and customers that are validating our road map and the need for this quality solution. I do appreciate there is an underlying discussion on our cash runway and its impact on our ability to achieve our objectives and possible strategic next steps. I will ensure we cover this as well. First, I will turn the call over to Frank to go through the financials. Frank?

Frank Orzechowski : Thank you, Jacob. 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 brief overview of our financial results for the fourth quarter and full year 2022. As we have discussed on previous earnings calls and disclosed in our various SEC filings, in 2022, we moved away from selling expensive one-off perpetual licenses for PrintRite3D to a subscription-based pricing model, whereby revenue is recognized over time. As a result of the deemphasis in perpetual sales of the current version of PrintRite3D as well as the change in the manner in which revenue is recognized, we experienced a decline in our revenue for both the year and fourth quarter of 2022.

Specifically, revenue for fiscal 2022 totaled $630,000 as compared to $1.7 million for fiscal 2021. Revenue for the fourth quarter of 2022 totaled $154,000, as compared to $350,000 for the fourth quarter of 2021. Our order backlog, as of today, defined as firm orders received but not yet shipped, totaled $125,000 of both perpetual and subscription sales. Additional revenue to be recognized from transactions closed in previous quarters totals $370,000, yielding a combined total of $495,000 of revenues to be recognized in future periods. Gross profit for the full year of 2022 was $280,000 as compared to 2021’s gross profit of $1.1 million. Gross profit in the fourth quarter of 2022 was $117,000 as compared to $200,000 for the fourth quarter of 2021.

Our gross margin for fiscal 2022 was 44% as compared to 66% for fiscal 2021. This decrease of 22% was a result of an increase in the price of certain PrintRite3D hardware components as a result of configuration changes, an increase in travel costs related to system installations and discounted sales to universities and research institutions as members of our act of industrial network. Before I go into detail on our operating expenses, I’d like to provide some context. 2022 marked a significant change in the way we conduct our business. And while this shift has manifested itself in lower revenue for the year, it has also had a significant impact on our operating expenses and our cash burn rate going forward. Moving away from direct sales of perpetual licenses to a focus on sales through embedded software-only products has enabled us to reduce our sales footprint and realign some of our resources towards ensuring customer success.

This has also enabled us to reduce our operations and administrative overhead while maintaining our ability to support our current and anticipated level of activity. In addition, we have been able to reduce our engineering headcount without sacrificing the delivery of our new software-only products, currently targeted for the end of the second quarter of this year. Our total employee headcount at December 31, 2022, was 25 and as compared to 33 at December 31, 2021, and our peak of 35 employees in April of 2022. And as of today, total head count stands at 19, a further reduction of 6 employees in the first quarter of 2023. Total operating expenses for 2022 were $9 million, of which $2.1 million were incurred in the fourth quarter. This compares to total operating expenses for 2021 of $9.6 million, of which $2.6 million was incurred in the fourth quarter.

Photo by Danial Igdery on Unsplash

Salaries and benefits increased by $454,000 over 2021 as the aforementioned headcount reductions did not take place until the second half of 2022. And in addition, we incurred severance and other costs related to those reductions. Salary and benefits for the fourth quarter of 2022 were $1.03 million as compared to $1.23 million in the third quarter of 2022. The increase in compensation and benefits in 2022 was more than offset by decreases in almost all of our other operating expense categories. Stock-based compensation decreased by $273,000 from 2021 as a result of fewer stock options granted during the year. Operations and R&D expenses decreased by $237,000, largely as a result of lower spend for parts and materials due to fewer perpetual sales for our PrintRite3D solution as well as lower obsolescence charges in 2022.

Investor relations, advertising and marketing expenses decreased by $81,000 as a result of a reduction in Investor Relations resources, partially offset by an increase in trade shows due to the relaxing of COVID-related restrictions. Office expenses increased by $180,000, mostly due to increased travel costs, again, because of the easing of COVID travel restrictions. Our organization costs decreased by $414,000, largely driven by fewer stock option grants to nonemployee directors and one less shareholder meeting in 2022. Net loss applicable to common shareholders for the full year 2022 totaled $8.7 million or $0.83 per share as compared to $7.5 million or $0.76 per share in 2021. Net loss in the fourth quarter of 2022 totaled $1.9 million as compared to a net loss of $2.4 million in the fourth quarter of 2021.

Turning to our cash usage and burn rate in more detail. Cash totaled $2.8 million at December 31, 2022, as compared to $11.4 million at December 31, 2021. Our working capital at December 31, 2022, was $3.6 million as compared to $11.7 million at December 31, 2021. In 2022, we used $8.2 million in cash for operating activities and an additional $389,000 for purchases of fixed assets and investment in our patent portfolio. In total, this equates to an average monthly cash usage or burn rate of approximately $717,000 per month. In the fourth quarter, however, we reduced our burn rate to $650,000 per month as a result of our headcount reductions and other expense cuts. And in the first 2 months of 2023, with the additional headcount decreases I mentioned, our burn rate has been reduced to under $600,000 per month.

I would add that this is a conservative number as it does not take into account any additional sales or cash collections. And finally, as we look to extend our cash runway to a strategic investment or sale of the company, we are seeking additional ways to raise capital and conserve our cash. And with that, I will now turn the call back over to Jacob.

Jacob Brunsberg : Thank you, Frank. As I mentioned earlier, I’m going to focus on 3 areas: execution of our business plan to set up our digital quality suite, the market timing and fit, and lastly, our partners and customers aligning around our future road map. On execution of the business plan, we are living our mission to accelerate the adoption of additive manufacturing by setting the standard for quality, and we are on the path to deliver the first holistic digital quality experience for the additive industry. As a reminder, at the heart of this is simplifying the quality experience from up to 12 disparate software licenses and multiple manual spreadsheets to a single user experience integrated into their production workflow.

This can remove the need for hundreds of thousands of dollars of software licenses and aims to shorten the approximate 2 years and $2 million it takes to currently qualify safety-critical components. We maintain a targeted launch of our software-only product suite for Q2 2023, that covers machine, process and part health. This will be an important step in simplifying the in-process quality space, providing a central hub for in-process data and open connectivity to solutions up and downstream. Our first module, Machine Health, was launched in beta testing in late 2022. And it is based off of machine log file data where we convert disparate machine log files and live streaming API data from OEMs to a standard-based format for monitoring, analytics and reporting functions.

We’ve gotten great feedback from early partners. We sincerely look forward to launching this module as part of the software-only PrintRite3D suite, which also includes our process health product for camera-based machine learning image data and our Part Health product, which is the software-only version of our core melt-pool technology. Lastly, as we have transitioned the business for software-based scale, we also made a conscious effort to align the business around this. As Frank mentioned, we have been able to significantly reduce operating expenses to align with a quicker path to profitability, including our largest cost, salary expense, by 40% from the high in April 2022, while retaining key employees for our growth. On the market, the industry has shown significant signs of evolving, application programming interfaces or APIs, are becoming more and more prevalent.

We have publicly shared some of our relationships with major OEMs like EOS, SLM, among other partners that align around their open architecture approaches. Additionally, the importance of quality is being highlighted in publications and has become a bigger section of trade show presentations. People are actively looking for ways to simplify and maximize value of the data collected during the 3D printing process. We’re actively working with the ASTM F42 consortium to help set and these industry standards in this space. As companies align towards profitability, Sigma has made demonstrable progress in 2022, connecting to other products in the AM digital quality stream. The willingness of OEMs to do this, especially those with their own quality hardware shows the progress of the industry.

In addition to this, we continue the development of the company’s intellectual property and patent portfolio. Adding IP beyond just hardware into critical analytics and machine learning. Our total number of granted patents reached 29 with an additional 40 patent applications in process at the end of 2022. This provides additional options for Sigma to explore licensing structures for the market. These connections to strategic partners paired with the near-term execution can augment our ability to scale, support the market and create value. On our partners and customers, to pave the way for our pending software products, the commercial team is ahead of schedule on strategic partnerships and integrations that provide a path to scale our software solutions and grow our total addressable markets.

The connection to different partners provides paths to simplify user experience and advance efficiency and economics of 3D printing. You may not have heard of every partner we reference today but know that the methodology behind this is connecting key pieces of the additive quality workflow. On the hardware front, we began integration with major laser scanner manufacturers, like Novanta, to ensure that melt pool monitoring hardware will be a standard part of laser scanners in the future, agnostic of the OEM printer. This removes the need for any optical retrofit and provides a path to software-only analytics on future machine generations. Additionally, we expanded our integration with existing APIs. This allows us to provide our Print right 3D product as a software-only suite for existing OEM machines and monitoring equipment, including EOS and SOM.

We have our first customer plan in Q2 for API-connected software-only solutions to the SLM quality API. As we launch our software-only suite, our addressable market through these APIs grows for Sigma’s support and scale. For the first time, Sigma expanded and in the polymer space, I might add, outside of the 3D printer and into the post processing quality with our relationship with Dimension. The quality tools we are building are proving to have value up and downstream of the program. This brings us to our software partners. We were very excited to show and discuss our connection to tool path data within process data with our friends at Dendrite. Additionally, we recently expanded our relationship with Materialise by integrating the PrintRite3D quality assurance solution into the new software solution materialized process control on their co-AM platform.

And last but not least, what this is all about the end user and their success. As we align with customers and connect their direct needs with our future product path. We have added a major space customer in 2022 that is contributing to our product council feedback across our product portfolio. In addition, we’ve added our first automotive customer and have been informed of a planned multisite expansion at a key aerospace customer, of which connects us to another OEM and potential software-only implementation. As we continue to execute our plan, lean our burn rate and focus on getting to profitability, Frank provided context to our cash runway. In order to continue, Sigma will require more capital. We continue to evaluate options to fortify our balance sheet and are happy to have retain Lake Street Capital Markets as Sigma’s financial adviser in connection with the company’s consideration of a range of strategic alternatives designed to enhance shareholder value, including a possible strategic investment, which we’ve mentioned on prior earnings calls, acquisition, merger, business combination or similar transaction.

As this is an ongoing process, we cannot comment further. Again, we are executing to our product path. The market appears to be aligning and our customers and partners are validating our trajectory. We see a solid path to scale software solutions in the additive space. Our revenue is tracking to the pivot to software-only products and subscription models. We carry a backlog into 2023 with all items totaling around $500,000. We have expanded our addressable market as we are ahead of plan on our partner integrations with 8 OEM and hardware companies, Novanta Additive Industries, DMG, Economy AMAC, EOS, Dimension and SLM Solutions and 4 ISV companies materialize AMFG, Sentient Science and Dendrite, with more pending. We had an extremely exciting last two weeks in this industry where we saw the launch of the first almost entirely 3D printed rocket, 84% by weight from relativity space.

SpaceX had 61 launches in 2022, nearly double the 31 launches that conducted in 2021, and we are starting to see the airline industry approach recovery to pre-pandemic numbers, with expanded 3D-printed parts and new platforms. Along these lines, GE announced investments in manufacturing, including $16 million targeted for 3D printing. Finally, the Biden administration recently lifted the $50 million cap on money that could be spent by the Department of Defense without congressional approval, specifically regarding critical supply chain for electronics, kinetic capabilities, castings and forgings, minerals and materials and power and energy storage. These topics have relevance to the 3D printing industry and the advancement of supply chain support.

Looking ahead, we continue to move with great urgency in our business transition to put ourselves in a position to be at the home for connected digital quality to support qualification and production across thousands of machines at hundreds of customer sites. We look forward to keeping you updated as we go forward. With that, I will turn it over to the operator for Q&A. Thank you. We will now be conducting a question-and-answer session.

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Q&A Session

Operator: We take our first question from the line of Scott Buck with H.C. Wainwright.

Scott Buck : Jacob, can you talk a little bit about whether or not the current, I don’t know, elevated level of macro uncertainty is having any impact on the conversations you’re having with either OEMs or potential customers?

Jacob Brunsberg : Yes. I think certainly, the macroeconomic environments have presented a change in the valuations and what’s going on in the market. I think, honestly, COVID even before that, I think had a probably bigger impact on starting the trajectory in the sense that people really are focusing on profitability and core business. I think that, honestly, in reflection is one of the bigger reasons you’re starting to see an openness in the marketplace. There’s an urgency around profitability and focus. What I see that doing is actually increasing collaboration in the market. It may be a little counterintuitive, but what we’ve seen is an acceleration of some of the work, with OEMs opening some of their platforms, as well as other software companies looking to generate more revenue by connecting solutions in the marketplace.

I think that’s plays really well with our strategy to connect and really merge some of our technology with OEMs and make us more simple user experience from start to finish in digital quality. So I think it’s continuing to augment the fact and focus on profitability. But I think honestly, some of these trends were started probably a couple of years ago as well.

Scott Buck : That’s helpful. And then the growth in the backlog, is that coming from new customers or, I guess, expansion of current customer relationships?

Jacob Brunsberg : Yes. I think the interesting thing here for us is that we were perpetual based before, right? So every single thing was a new sale because it was sold perpetually. So as we look at that transition in 2022, outside of maybe some maintenance contracts that were lower dollar value, the majority of our sales are all our new sales. But the start of these sales are kind of our start towards that subscription model. So we’re seeing more and more of our revenue transition into that subscription landscape, which is why you see us actually carrying a backlog in the future quarters, which is something that was outside of things that were bought, but not yet installed prior was about the only thing meeting that criteria. So that tracks with our subscription plan and our software launch, which we hope will help level out that revenue over time and kind of continue the growth keeping that consistency month-to-month from a revenue perspective.

Scott Buck : That’s helpful. And then last one for me. I’m just curious whether or not you guys think you have maybe a little more room to cut on the OpEx side if you have to and then get even tighter than they are currently.

Jacob Brunsberg : I think you definitely always have those options. We’ve really been thoughtful about our approach to this now to really allow our ability to still grow and target the growth that we have. Certainly, depending on situations, there are options there. But we’re really focused on running lean and giving ourselves the ability to really grow here as we launch our software platform in Q2.

Operator: We’ll take the next question from the line of Troy Jensen with Lake Street Capital Markets.