Good day, and welcome to the Sigma Labs' Second 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.

Thank you, and good afternoon. I'd like to thank you all for taking time to join us for Sigma Lab's second quarter 2021 business update and results conference call. Your host today are Mark Ruport, 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 4:01 p.m. Eastern today and is available on the company's website, sigmalabsinc.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 Lab's President and Chief Executive Officer, Mark Ruport. Mark, the floor is yours.

Thank you, Chris, and good afternoon and thanks for joining our call today everybody. It would be an understatement to say that I am disappointed by the lack of revenue in the second quarter. However, it's also an understatement to say that I am excited about Sigma's future as I have ever been. I realized that those two sentiments are at odds with each other, but it's often the case in emerging markets, such as additive manufacturing, and new technologies like PrintRite3D, both can be true. One quarter doesn't change our strategy. We fully intend to run the race, not get distracted and stay focused on our long-term opportunity, which in my experience and opinion is larger than I previously thought. I'll explain why I'm so confident in the future after Frank Orzechowski, our CFO, reviews our financials. Frank?

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 provide a brief overview of our results for the second quarter of 2021. Our revenue for the second quarter of 2021 totaled $144,000. This compares to revenues of $168,000 for the first quarter of 2020. While second quarter revenues decreased slightly over the same period last year, year-to-date revenues for the six months ended June 30, 2021 totaled $602,000, an increase of 55% over the same period last year. Our gross profit for the second quarter of 2021 was $28,000. This compares to a gross profit of $110,000 for the second quarter of 2020. The gross margin of 20% in the quarter is largely reflective of the timing of expenses incurred in connection with installations versus our ability to recognize associated revenue. Our year-to-date gross margin for the six months ended June 30, 2021 was 60% and is within our targeted range for the year. This compares to a gross margin of 22% for the same period in 2020. Total operating expenses for the second quarter of 2021 were $2.17 million, while operating expenses for the first quarter of 2020 totaled $1.53 million, an increase of $640,000. Our salaries and benefits were $985,000 for the quarter, an increase of $380,000 over the second quarter of 2020 largely as a result of average full time headcount increasing by 10 over the same period last year. Stock based compensation was $116,000 for the three months ended June 30, 2021, compared to $271,000 for the same period last year, $155,000 or 57% decrease. This decrease is primarily due to stock options awarded to employees in June of 2020.…

Thanks, Frank. Now let's take a closer look at what happened in Q2 and then we'll look forward and talk about what supports my belief about the future, despite the bumps in the road. In reviewing a quarter, it's important for you as investors, to know that we have not lost any of the opportunities that we are expecting. In Europe, the slowness of the recovery related to COVID has had a negative impact on some of our direct deals. It has also slowed the sales ramp up of our OEMs that are European based. However, other delays were due to several one-off circumstances that were totally out of our control. And let me explain a couple of them. In one case, we were doing an @Sigma RTE, which some of you might know is the final step in the sales process. An @Sigma RTE is a rapid test and evaluation where we take the customer’s CAD file and build a part on our printer in Santa Fe. We then give the prospect remote access to an instance of PrintRite3D that monitors the part during the build process. In this particular case the laser on our EO system failed just as we started to build. We ordered a new laser, but because of shortages and delivery delays, it took almost a month to get it installed and calibrate our printer. Due to the last month the deal split out in the quarter. The prospect was actually here in Santa Fe last week and reviewed the data from the completed build with our engineering team. After a successful visit, we expect the purchase order soon. In another case, the contract was being done through a trading company in Asia that required full cash payment from the end user, before they would…

Thank you. And I'll be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Scott Buck from H.C. Wainwright. Your line is now live.

Hi, good afternoon, guys. Thank you for taking my questions. I'm curious, it sounds like you guys made a handful of hires, could you give us a little color on where you're hiring and maybe what the hiring outlook is, especially on the sales side for the remainder of the year?

Sure. We just hired another salesperson in Europe. We hired a technical support engineer in Europe. We hired a couple engineers here in Santa Fe. And we also hired one or two people full time and part time on the manufacturing logistics side. From a sales perspective, we now have three sales teams in North America, and two sales teams in Europe. And that compares to one in each, North America and Europe a year ago.

Great, that's helpful, Mark. And second, can you help remind me or remind us what the sales cycle is and give us a sense of the visibility that you guys have into the business over the next six to 12 months?

Well, I'll try, but given the last quarter, I don't know how successful we will be. But what we see right now, the sales cycle in some cases is long, depending on whether they're starting their initiative, in other cases is short, depending on the competency of the buyer. So for instance, the deal that we did do this quarter was a four month sales cycle, we have a couple that have extended longer than that. What we're seeing though, given our focus on aerospace, space exploration and defense, the procurements are being driven by regulatory pressure. And that regulatory pressure appears to be shortening the sales cycle. Of course, this quarter, next quarter will determine whether that's true or not. But that's what we see happening within the industry.

Okay, that's very helpful. And then in terms of pipeline, can you help give us a sense in order of magnitude, maybe what the pipeline looks like at the end of June versus March? And then versus the year ago quarter for whatever that's worth?

Sure. Generally speaking, if we look at the pipeline for the second half of the year, it's at least double of that, triple than what we saw in the first half of the year.

Okay, perfect. And then last one for me, guys. How should we be thinking about cash burn for the remainder of the year, kind of consistent with the first half or should we start to see a little bit of improvement as we get to the later stages of the year?

I'll ask Frank to answer that. Frank?

Well, I think ultimately it's going to depend on sales, but from an operating expense standpoint, purely from there, you're going to see the cash burn will increase a little bit. And the reason why is because some of the hires and the expenditures were made later in the quarter. So it wouldn't – the run rate wouldn't be reflective of the entire first half. But so we do see it increasing a little bit on the OpEx side. However, given the sales and the revenues that you were looking to book in the quarter, think that it's not going to be significant and in fact, offset some of those increases, and you might see it come down, but the wildcard is booking the revenues and collecting the cash.

Okay, great. That was really helpful, guys. Thanks again for the time.

Thanks, Scott.

Thank you. Our next question today is coming from Jon Gruber from Gruber & McBaine. Your line is now live.

Hi, good afternoon. That was the ultimate dog ate my homework quarter, given that how has that changed your outlook for the full year on the revenue side? And maybe you can give us some guidance on Q3 revenue, given a lot of these things you say are non-recurring?

Jon, thanks for the question. It is the ultimate dog ate my homework quarter. However, if we look going forward and we look at the one-time issues that we dealt with in Q2, we are very positive going forward in Q3 and Q4. You have to expect me to be a little bit hesitant on one-hand, but we see the pipeline as I mentioned, increase every month right now. We're seeing our sales people get much more proficient at moving things out of the pipeline or moving them in based on qualification. And as I said, we see the regulatory pressure, especially in space exploration and aerospace, having a ripple effect from one customer to another customer in the supply chain. So all those points are very positive second half of the year, as far as specific revenue guidance, I'm not going to provide it today. But I'll go back to what I said earlier, the opportunity is larger, the pipeline is larger, and we expect to capture the deals that we missed or didn't – weren’t able to close in Q2, and add some to that.

Thank you.

Thank you. Our next question today is coming from Anthony Charos from Symmetry Group. Your line is now live.

Hey, I had a just a quick question. Could you provide some color on how the relationship with Materialise is developing or not developing?

Yes. No, it's developing. They've had – given COVID in Europe, it's slowed down a little bit from a transaction perspective. However, one of the deals, two of the deals actually that we are expecting this quarter are due to the Materialise relationship, where the customer is using MCP as their control system. We also have two OEM possibilities that were working on the second half of the year, that are also using Materialise’s Control Platform. And we were bought into both of those deals by Materialise. And finally, we're working jointly on the integration of PrintRite3D to the Control Platform to give better control of the printing process, both to the end user and also to make some machine decisions moving towards closed loop. So we work with them very closely, the relationship is yielding some good opportunities for us. And we expected to continue in that manner.

Excellent. That's encouraging news. I appreciate it more. Thanks.

You're welcome.

Thank you. Next question today is coming from Scott Billadeau from Walrus Partners. Your line is now live.

I think several of my questions have been answered. I just wondered, could you – you mentioned a couple of deals slipping? Is there a way you can quantify what those are? Or give us a sense just to find out if the dog, didn't need the homework? What kind of grade we would have got for the homework?

Boy, it's a very good question. So I guess that the best way to quantify that is in addition to the couple of deals that I mentioned that had specific causes to them. I believe that both DMG and Additive and I believe, I know that they both would have had more activity. So I believe that the best way to quantify is that we probably slipped or missed the opportunity on four or five deals that we were counting on. And you can do the math from there. So….

Got it. Great for probably and then any, as you brought on new. As you mentioned, you got three North American sales groups two in Europe, coming online, as expected, the funnel looks kind of as you’d expected, search to do, obviously a little learning curve to find out what how it flows through the funnel. But in terms of what's going in the top of the funnel, maybe characterize that if you're comfortable doing so.

Of course, so let's go to the sales people first. And, they've done this for a long time and sales success of salespeople is difficult to gauge, but usually about 50% of them actually make it and begin to make money for a software company. So we started increasing our sales team last year. We added a very senior person. He's produced very well this year, and he expects to have a great second, but the second half of the year. The two sales people that – or teams that we brought on board in North America, one we let go due to lack of visibility to understand and grasp the technology. The other one is doing very well rolled to the pipeline, and he expects to make a good amount of money in the second half of the year. When we look at Europe, the existing sales team is very good. We just added another sales team in the second quarter. And we'll see, how he produces. But the initial signs all point favorably. So if you look from a sales perspective, I’m very comfortable, when you have six teams and you only lose one or one is not performing or not expected to perform, that's a really good percentage. Of course, the proof is in the pudding in the second half of the year. The other thing is that I mentioned earlier, that six month mark is a really important mark for a salesperson. As a sales manager, if they don't have a pipeline and aren’t forecasting in the third quarter that they're here, they're probably not the right hire.

Got it. All right. I appreciate it.

You're welcome.

Thank you.

Thank you. We reached end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

Great. Well, thank you again for joining the conference call. As I said, it would – it's an understatement to say I'm disappointed but it's also an understatement to say that I'm not excited. I expect to see a lot more activity. And I expect to see us to execute. As the market turns, COVID becomes less of an issue. And as I mentioned earlier, our sales force gets up to a point where they can execute and bring in deals. So with that again, thanks for your time and attention and if you have any follow-up questions, please don't hesitate to call me or get in touch with MZ. Thanks again.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.