Good day, and welcome to the Sigma Additive Solutions Second Quarter 2022 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 morning. I'd like to thank you all for taking time to join us for Sigma Additive Solutions Second Quarter 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 morning at 8 a.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.

Thank you, Chris. Good morning, and thank you, everybody, for joining us today. Q2 0022 marks my first full quarter serving as President and CEO at Sigma. And I'm excited to share with you the progress our team has made in transforming the business to a scalable software solution and quality standard for the additive industry. To help everyone get a clear understanding of the progress we are making and the opportunity that we have, I've divided my remarks into 3 discrete segments. First, results and how we're building the foundation and growth and profitability with our new business plan. Secondly, zooming out on the additive market trends and updates, why additive manufacturing is just now growing into its potential and how that motivates us to wake up every day with definitive purpose at Sigma. And finally, after Frank's discussion of the financials, I'll discuss the key performance indicators we are monitoring as we execute our business plan with highlights of how OEM partners fit into this in more detail. On results, I'm pleased to report that we are making progress that the business is starting to move from the sale of a few expensive perpetual license, hardware and software systems each quarter, to building software-only solutions that augment and add to our subscription-based reoccurring revenue stream. There is certainly still work to do, but we believe this is setting the foundation to allow partners and OEMs to leverage our background IP with our current software solutions, putting us in a position to have PrintRite3D installed on thousands of production printers. The second quarter of 2022 was critical in laying the groundwork for our business. Some noted updates. Revenue grew quarter-over-quarter, tracking with the implementation of our business plan. A backlog and subscription revenue tail is starting to emerge for…

Thank you, Jacob. Our detailed financial results are contained in our Form 10-Q filed with the SEC this morning, and the press release we issued contains key highlights of our financial results. So this morning, I will provide a brief overview of our results for the second quarter of 2022. I think that it's important to note that the comparisons to past results should be analyzed in the context of our business shift in 2022. We are moving away from selling expensive perpetual licenses for PrintRite3D, an integrated hardware and software platform in which most of the cost comes from physical hardware to setting up for a future software-only subscription model with a potential for much higher margins. The business transition will continue through 2022, and Jacob and I will provide context where applicable to better note transition items. Revenue for the second quarter of 2022 totaled $237,000. This compares to revenues of $144,000 for the second quarter of 2021. The increase is due to increased unit sales of our PrintRite3D systems, revenue from subscription sales, revenue from installations related to prior year sales and increased annual maintenance contract renewals. Our gross profit for the second quarter of 2022 was $44,000. This compares to a gross profit of $28,000 for the second quarter of 2021. The gross margin of 18% in the quarter is largely reflective of the strategy shift of the company as we grow our customer base and a model more in line with the scalable software-only enterprise solution, which is currently in development. As I mentioned, in the current form of PrintRite3D, the majority of the cost resides with the physical hardware. The work we have already done to reduce this hardware and associated manufacturing costs has allowed us to move quicker to align pricing with market…

Thanks, Frank. I'll provide some further color on the financials via the key performance indicators we are tracking to monitor the progress and execution of our business plan because I think it's important to put things into context. So as we track these KPIs, there are 5 items that we're paying very close attention to. The first is revenue growth; second, order backlog; third, pipeline growth; fourth, deal closure time reduction; and fifth, partner expansion. These are the KPIs we see as critical to achieving our business plan over the next 2 years. To be clear, we are focused on moving away from only selling an individual printer solution to supporting the additive industry as a whole at scale. So let's dive into the results. Since implementation of our new business model in Q1 of this year, revenue is beginning to show growth aligned with the feedback we are getting from the market and our product adjustments and approach are better aligning with customer needs. Revenue went from $51,800 in Q1 to $237,000 in Q2, a 78% increase. I know this is not a revolutionary number from a total revenue perspective yet. But again, tracking with the implementation of our new business model, we're showing progress. To add further color, our revenue tail is beginning to develop that will help us increase our foundational level and begin to make a revenue -- begin to make revenue more predictable over time. The current backlog of orders for the third quarter is a total revenue of $240,000, which consists of a mix of subscriptions and perpetual sales. Additionally, the remaining revenue to be recognized related to year-to-date 2022 transactions is approximately $30,000. So now I want to dive in a little bit to what we're seeing from a pipeline growth perspective. We…

[Operator Instructions] The first question is from Scott Buck from H.C. Wainright.

Jacob, could you give us a sense of what subscription revenue was in the quarter of the 267?

Yes. Frank, do you have that handy, here?

Yes. The subscription revenue was $14,000 in the second quarter and $20,000 year-to-date. So it's a start, but it's a good start and will continue to grow.

Great. That's helpful. And then when we think about -- when we think about your backlog commentary, we should think of that as $240,000 in incremental revenue? Or does that include whatever subscription or recurring revenue kind of comes over from the first half of the year.

Yes. It's a mix of both, Scott. And that was actually my follow-on question, as you start to see, we certainly have kind of the monthly recognizing of revenue of these subscription models. So overnight, that doesn't turn on to be a revolutionary monthly number, but what we are seeing is growth in that area. So that $240,000 and $30,000 reference there is a mix of both those contracts out in the future as well as items that are planned for the quarter, revenue items as well. So the mix of perpetual and subscription, so as we kind of produce that transition. So we're excited to have that mix of both, and that position headed into third quarter.

Great. That's helpful. And then on gross margin, I thought the commentary you had there at the end was great. But how do you move from kind of teens where you are today to that 80%, 90%? I mean, what's the -- I guess, what's the first step, right, going from high teens to mid-20% to 30% range. I mean, what's the time line for something like that?

Yes. I think the transition will continue through this year, certainly as those margin numbers start to move. I think in the short term, you see a little bit more of that because we have the hardware mix still in here in the short term. What we do have product launch plans for third quarter and fourth quarter that start to move to that software-only product. When that hardware is removed, there's a pretty quick move to a higher margin there because you just don't have the hard cost of goods. So it's not years, certainly, but there's going to be a transition period over the next couple of quarters.

Okay. That's really helpful. And then last one for me. I'm just curious, are any of your OEM partners having significant supply chain issues? And to what extent does that impact your ability to work with them?

Yes. I think everyone is fighting it on and off right now a little bit, especially if you look at semiconductor components and more of that side of things. We see it a little bit in our product. But I think generally speaking, it may have caused increased lead times a little bit for them, but from a growth perspective, the industry actually seemed to be tracking pretty well through the first couple of quarters here. So it may be pushing some deliveries a little bit, but we're still seeing positive movement there. So I think people are doing a pretty good job balancing that challenge right now, but it certainly is maybe shifting things a little bit from a timetable perspective.

All right. Great. I appreciate the time, guys, and congrats on the progress.

Thank you. Appreciate the questions.

The next question is from Troy Jensen from Lake Street Capital.

Gentlemen, I also like to say congrats on the progress on the new business model. A couple of quick questions. I start with Jacob here. Can you just talk about larger players in the additive space, you write it off a few names that I had known like DMG and Materialise, but it seems like there's a lot of kind of large OEM partners that should be candidates or partners of yours that aren't yet. So just curious to know if you're getting traction with some of these larger OEMs.

Yes. I appreciate the question. So certainly, there -- from a market share perspective, there's a handful of 4 or 5 companies out there that own a pretty large stake of the additive market. I'm excited because we do have a deal signed with one of them that will be part of our upcoming product launches for software-only solutions, and we've made a ton of progress with a number of other -- of those OEMs to provide software solutions or potentially PrintRite3D ready, retrofit solutions to the marketplace. So I think in the upcoming quarters, third and fourth quarter, there certainly should be some movement there that's aligned with our product announcement and the software side of things.

Okay. And how about -- I always think of Sigma as more metal focused, right, pool monitoring or melt-pool monitoring. Thoughts on just kind of getting into polymers. It seems like they're a large installed base of polymer printers out there than there is in metal. I mean you pointed out that the small penetration of the metal guys will be a huge revenue contributor for you, but to expand the TAM a little bit and to move into polymers is that an option?

100%. So driving that actually is a major aerospace company for us. We're working with the tiered supply base to implement an enterprise solution for that right now. So as we look at the more holistic software offerings, I think they're extremely applicable to polymer, both polymer and metal. Especially with the API connections, we're getting to some of these larger OEMs in the near future. So I would expect us to be a little more vocal on the polymer side of things in the third quarter as we've gotten our foundation really kind of proven our first few systems in that market space, and can kind of more aggressively move that way with the software solutions that are coming out as well. And I think those are all very well tied together. And we certainly agree with the note that you said that the polymer market certainly opens up a longer established group that has some pretty significant scale to it.

Perfect. And then how about just -- have you guys talked about other software features that you guys could introduce. I mean when I think about software capabilities, I think about machine learning to make these machines more accurate, I think about MES software to make kind of production floors more productive. Have you highlighted at all? Can you talk about other directions you can take this software?

Yes. I think we had a couple of big ones and there's another one here in ties to simulation as well and the comments I made on Sentient kind of joining our ISV network. So as we look at the expansion of the products we're working on the software side, the purpose of it is really to fill the missing link right now of holistic quality when it comes from everything going on in the machine. That, for me, is a huge missing link in the marketplace from machine health to all the camera imagery as well as the melt pool that we're very well known for. All of those things are incredibly synergistic and really help each other a full quality analytics package. So we're excited to get there. And that opens up the ability to really provide full solutions with MES partners for the full quality workflow and data pedigree as well as tied to simulation and design on the upfront side of things. So really, this move is opening up the door for us to take a little bigger footprint in the market and certainly better attached to partners as well to be a module within their own offering.

Great. Awesome. We look forward to hearing about these new partnerships in the second half, and I just wish you guys luck.

Thank you. Appreciate the questions.

The next question is from Larry Holub from Holub Family Office.

Jacob, you mentioned your product council. Could you elaborate a bit more on what that is and who makes that up?

Yes. Thank you. Our product council is a group of companies from a variety of markets that are joining us to take our current solution as well as early access to all of our new software products and ensure we're completely aligned for creating a scalable enterprise solution that handles their quality needs and their organizations. And so we've taken them on and assign them program management, application support. And the goal is to create a 12- to 18-month program plan with each of them to go from our first "units" here to developing and executing on what is an enterprise scale solution for them in the quality space. And the companies that make this up are from industries you'd likely expect, there's certainly a heavy aerospace tilt to this, both in large-end user as well part provider to that space. We have some automotive-oriented additions and certainly look to grab a couple more in the medical world as we go forward. And so I'm not going to maybe tip my hand too much on the exact names that make that up, but I certainly would expect to see some of those probably in the next third quarter or early fourth quarter as part of some of our product launches as well.

This concludes the question-and-answer session. I would like to turn the conference back over to Jacob Brunsberg for any closing remarks.

Thank you, I'd like to just thank everybody for joining us today. I know we're seeing some progress here that really excites the management team of the business model resonating with the market. And what's most important to us is being close to our customers and ensuring our solutions are scalable and solving their needs and what they can feel is producible on their full enterprise-level suite from a multi-site perspective versus an individual machine. We'll continue to make progress, and we look forward to updating everybody as we do so. Again, thanks for joining, and we will talk to you all soon.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.