Good day, and 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 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, everybody. And thank you for joining our third 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 in a number of ways. The increased 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 in the entire industry, specifically 3D metal printing is coming into its own and transitioning out of what Gartner calls 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 2023. Our objective as a company isn't just to have a record quarter. Our objective is to achieve our mission of accelerating the adoption of 3D metal printing, and in so doing, build a company with a strong culture that attracts and retains talented people, develops technology and products with a sustaining competitive advantage and provides a significant return to our shareholders. At this point, I'd like Frank to go through the numbers, and then we're 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 2021. After that, I'll provide some color on the quarter and what we are seeing as the market accelerates. 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 first provide an overview of those results, followed by some additional remarks. Revenue for the third quarter of 2021 totaled $700,000 as compared to revenues of $249,000 for the third quarter of 2020. The increase in revenue was due to increased PrintRite3D unit sales, including the company's first multi-unit sale, which was to a U.S. Department of Energy contractor as well as a single unit sale to a U.S. National Laboratory. Year-to-date revenue at September 30, 2021 totaled $1.3 million as compared to $638,000 for the same period in 2020, an increase of $664,000 or 104%. Gross profit for the third quarter of 2021 was $535,000 as compared to $151,000 in the third quarter of 2020, resulting in a gross margin of 69% for the nine months ended September 30, 2021 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 increase, $1.3 million 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 almost 100,000. While non-cash stock-based compensation to non-employee directors and consultants contribute $164,000. The remaining increase is 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 30, 2021 totaled $1.5 million, compared to $1.2 million in the third quarter of 2020, an increase of $300,000. Cash used in operating activities for the nine months ended September 30, 2021 totaled $4.8 million, 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 $0.24 per share as compared to a net loss of $2 million or $0.42 per share in the third quarter of 2020. Now turning to our balance sheet, our cash balance totaled $13.1 million at September 30, 2021 as compared to $3.7 million at December 31, 2020. The increase in cash during the year is a result of a net of $13.3 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, 2021 as compared to $4.3 million at December 31, 2020. Stockholders' equity totaled $14.9 million at September 30, 2021 as compared to $5.2 million at December 31, 2020.

Thanks Frank. And now 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 some of our shareholders might have anticipated?

Well, most importantly, we made a significant investment in our people and our infrastructure this year. 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, going 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 to 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 four 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 Brunsberg 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 often and perhaps overused phrase, employees are our most valuable asset could not be more true than at Sigma. The labor market 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 in addition to salaries and benefits, we've increased equity-related compensation, a non-cash expense to 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, invests everyone in the growth and success of 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 as 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, 2020 expenses were significantly lower than they might otherwise have been due to the effects of COVID restrictions on our business.

Okay, Frank, I appreciate that. Now let's talk about gross margin. Why have we been able to increase it and where does it have 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 our material costs. Second, engineering enhancements, particularly around optics redesigns and computing power and storage have lowered costs, while improving unit performance. In fact, some of the spent you see in the research and development category is directly related to these enhancements. Third, we have become more efficient in our customer installations, which started when COVID forced us to rethink how we do installations and also support our customers. Fourth, our legacy rapid test and evaluation program is largely a thing of the past. The RTEs we do today are much shorter in duration with clearly defined objectives and more certain outcomes in terms of ultimately leading to unit sales. And fifth, we have engaged with a lean manufacturing expert 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 30, 2021, it was 59%. So we’ve seen significant improvement through the first nine months of this year. We’ve targeted a gross margin in the 80% range as our goal. We expect to get there by first having our OEM partners provision the hardware components of our PrintRite3D 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 of provisioning 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 and the time that will take OEMs to take over the hardware provisioning.

All right. Frank, so we’re getting somewhere. How about cash burn? What can you tell the 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 revenues get booked and cashes 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’ve just discussed. Also we booked revenues of $459,000 towards the end of September, but received payment in October. And we have another outstanding receivable from a customer that is due to be collected soon. We also had to replace the laser in our in-house metal printer this year. And taking together these items have negatively impacted our cash usage by about $600,000 in the first nine months of this year. Going forward, we expect that our cash burn will flatten out as increased revenues 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 as well as our capital requirements. Additionally, we are beginning to build an infrastructure to support our growth and increase overall efficiency. Now I know 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 need in our business model going forward. First, adopting lean manufacturing principles as I’ve discussed is 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 efficiency by reducing manual input, including a 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 a company of our size, things can go off the rails quickly if 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 a CFO of Frank’s caliber. When I assess our market opportunity and how far we’ve come over the past year, there were four 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. Deming, who is seen as the father of Total Quality Management or TQM, famously said, you can’t inspect quality into a product at the end of the process. That’s exactly what we do with additive manufacturing when we rely on post-processing CT scans or destructive analysis of a part. By that time, you have wasted material machine time, production time and you have lost 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 3D metal printing. First by end-users, then by universities and research organizations by 3D printer OEMs and most recently by a federal agency that has a compelling and need to address the quality and is 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 through a contract of the Department of Energy. One PrintRite3D system was in support of an Additive Industries MetalFAB1 quad laser printer, which by the way, comes PrintRite3D ready. The other system is to monitor the quality of parts printed on an SLM dual laser print printer. We also sold a PrintRite3D system to a national laboratory and an international university.…

[Operator Instructions] Our first question comes from the line of Scott Buck with H.C. Wainwright. You may proceed with your question.

Hi. Good afternoon, guys. 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 month after month. 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 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 our OEMs in Europe that have been especially hard hit by COVID.

Great. That’s really helpful Mark. And Frank, just so I’m clear on the kind of OpEx not guidance, but color. Should we expect to see this stock comp come in a little bit going forward? I mean, it sounds like a fair amount of this quarter’s stock comp was kind of one-time tied to the hiring during the quarter.

Yes. Well, it was – it’s two things. One is the hiring. The second part of it is, we made the annual grants to employees in August of this year. So the third quarter versus the second quarter and the way that we make the grants, there’s a 25% vest on the date of the grant. So you do have an extra expense when that grant is made. And then it’ll level off for the remainder of the vesting period. So that’s what you’re seeing there. So to answer your question is, yes, you’ll see that go down.

Okay, perfect. And then last one for me. On the recent sales hires during the quarter, can you guys 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. The reason we’ve 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 customer’s 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 points is consistency and lack of quality. And those two things have a direct relationship to the economics of 3D metal printing. So we expect these people to be up and running very quickly at the beginning of 2022 because of the experience and background that they have.

That's perfect, Mark. I appreciate the time this afternoon, guys.

You're welcome, Scott. Thanks for the questions.

[Operator Instructions] Our next question comes from the line of Martin Roth with Ferret 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 interest in 3D printer. Do you find that there are some companies you can't even get into the door?

Companies that have a 3D printing initiative or companies that have not yet started initiative? I'm not quite sure.

Well, let's lump them together. On other words, is there a possibility that some of these companies are addressing what they think are larger needs than quality?

That's a very good question and really depends on where they are in their curve relative to their expertise, if they're very early into using 3D metal printing. And if they have one printer 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 plant 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 in higher volumes, they will encounter the issues that our software and our system addresses. So if they're on the right-hand side of that curve relative to their adoption and utilization of 3D 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 and, we're not – they don't have a compelling reason to adopt our technology yet.

Thank you. Do you see any of the printer manufacturers offering quality control in as part of their package?

Yes. All of the major 3D metal printer manufacturers have a monitoring system that they sell separately to their printer. It's equivalent in price to ours, which is $100,000 to $150,000, depending on the type of the number of lasers the machine has. A lot of them do not sell very many because they don't provide actionable information to the end user. They provide data, but that data isn't analyzed to the point where it's 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 their printer and seldom do they provide the type of analytics that we provide.

Okay. Thank you.

You're welcome.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Mark Ruport for closing remarks.

Well, thank you very much. I appreciate it. 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, an industry where the acceptance of 3D metal printing is accelerating and where the need for our technology is seen across the board from all constituents that are either studying or using 3D metal printing. So with that, if anybody has any follow-up questions, please don't hesitate to contact myself or Frank or MZ or Steven 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 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.