NextTrip Inc (NTRP) 2020 Q1 法說會逐字稿

Good day, and welcome to the Sigma Labs First Quarter Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Chris Tyson, Senior Managing Director 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 First Quarter 2020 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'd 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 thanks for joining us today. The question that is on everybody's mind is, what is the new normal? And no, I'm not talking about COVID and going to the movies or getting on an airplane. I'm talking about Sigma Labs when it comes to revenue and results. In uncertain times, I believe that companies should provide more rather than less information. I can't predict the future with any more certainty than anyone else, but that during these times of uncertainty, we'll endeavor to provide you with more information, allowing you to measure the size of our market opportunity, our progress and our ability to execute.

So let's start painting the picture of Sigma's new normal by answering the questions that you're most interested in. What does Q1 tell us? What does revenue look like going forward? What have we done with expenses and cash management to reduce our burn rate and extend our runway? What is the current status of our RTE? What progress are we making on our strategic milestones? And how will COVID affect the company short term and long term? Well, I hope that covers most of your questions because we have a limited time. If I've missed them, I'll be glad to answer them during the Q&A to the extent possible as a public company.

I've been very consistent in my belief that we will have increasing revenue quarter-over-quarter for the foreseeable future. I first made that statement in early Q1, and nothing has changed in that regard. We did increase Q1 revenue over Q4, just not as much as we had planned. We also didn't factor in a pandemic shutting down most of the world. Throughout most of Q1, we were working towards a forecast of over $400,000, and even with COVID gaining momentum in late February and early March, I felt comfortable with that forecast. We had one order for 2 machines or roughly $200,000 that was committed to us by one of our very successful RTE customers who is under NDA, and they ended up pulling the order in the last days of the quarter based on a corporate mandate to freeze all capital expenditures. The company happens to be a supplier to the aerospace industry, so you can understand the reluctance to spend money. That order would have put it over $400,000. And we do expect the order sometime in the future, but we just don't know when. So we did experience some negative short-term effects directly attributable to COVID. I expect that this is the case with most companies, and there's little that we can do to mitigate that risk.

Analyzing our current pipeline, I feel very comfortable in saying that I believe we will increase our Q2 revenue over Q1 by 50% to 100%. We actually have enough activity currently to generate more revenue than that in Q2. However, given the uncertainties of times and what happened with that purchase order at the end of Q1, it's only prudent to be on the conservative side. Of course, we can't predict whether this may change given the uncertain impact of COVID and what it might have on our customer suppliers and thus our business.

I would like to explain one other factor regarding recognized revenue. As many of you know, PrintRite3D is an integrated software and hardware solution that's connected to a printer. We recognize revenue for a system upon shipment. However, in order to ship a system last week of the quarter, we had to order components by mid of that quarter. The lead time for some of our components is up to 6 weeks. And because we're retrofitting printers from different manufacturers, there are several permutations and combinations of hardware. So it's not like we can order 5 or 10 of the same units to fulfill any order. We have to forecast our inventory requirements based on which opportunities are most likely to close and when. And as you know, it's both a science and an art.

On the other hand, to preserve our cash, we need to closely manage our inventory. So there will be situations where we have received the firm order, but have not shipped the system and therefore, recognize the revenue in that quarter. If and when we experience a situation like that, our revenue number could swing dramatically. However, we will just move into the next quarter, and it will not be material to our revenue for the year unless, of course, it happens in Q4.

On the other side of the equation, our expenses and cash burn, we raised $4.1 million in gross proceeds year-to-date. As Frank will explain, our cash usage in Q1 was unusually high due to trade accounts payable that had built up in 2019 when our financing was delayed until the end of January. Additionally, we incurred several other onetime expenses in the quarter. When normalized for Q1 cash usage, extraordinary payments, we have actually reduced our cash burn by $100,000 a month by taking the following actions. First, we reduced executive management overhead with the most recent changes. We deferred all Board of Directors' cash compensation till the end of the year. All employees deferred 15% of their salaries and commissions for 5 months, May through September. We've reduced our IR and PR costs. We've reduced our travel, both due to COVID and also before COVID. We've reduced our cost of goods by approximately 33% or $20,000 per standard system by reconfiguring the platform without any degradation of processing. And finally, we've transitioned, as I've mentioned in the past, from expense of RTE to straightforward agreements with 90-day acceptance criteria, which dramatically lowers our cost of revenue. While all these actions were designed to lengthen our runway and preserve our cash as we continue to build our pipeline and increase our revenue, on the strategic front, we continue to make progress with multiple hardware OEMs, software vendors and with end users moving towards serial production. We expect to be able to update you on progress of those opportunities on our next call.

I've had several questions about RTE that we've discussed in the past. And the first thing that I'll note is that every RTE we've done has progressed positively from the first one with Materialise to the last one under NDA in Japan. All are expected to result in building revenue streams for the future. So here's a quick update on their status. We just are about to ship Airbus, this system next week, where we'll begin the RTE 2, where they will go through a qualification process for a production part. We continue to collaborate with their team on a weekly basis. The global energy and technology company that we've talked about often is intersuccessful completion of their RTE 2, and we expect to move forward with them at the conclusion of this phase. For those of you not familiar an RTE 2, it is a test and evaluation on a second different type of printer, sometimes with more lasers than the first printer.

Materialise, we expect to close our first joint sale this quarter to new OEM who will be deploying the integrated offering with their printer. And then we have 3 RTEs that are under NDAs. The first is a major contract manufacturer, and that's the one that postponed its purchase order. The second is a major international machine manufacturing company. And we have concluded RTE 2, concluded our certification on the printers, and we're currently negotiating contract terms for a strategic alliance. We expect to conclude those discussions this quarter. And the last was an RTE for a major Japanese tool manufacturer, and that's going very well, and we expect to conclude that this quarter or early next.

So the picture looks as follows. We have increasing quarter-over-quarter revenue. We have reduced our expense run rate. We've lowered our most monthly cash burn by $100,000 a month. Every RTE that we have invested in has been successful, and we believe will lead to future business. And we transitioned from expensive RTEs to straight contracts with the option for a 90-day evaluation period. So given that, you might wonder why would we stop doing RTEs if they've been so successful and what are we going to replace them with.

Well, a year ago, we had to do RTEs in order to get access to different printers from different manufacturers and prove that our technology worked. That was the only way that we could do real test at customer site. We were essentially at that time begging companies that we didn't have a relationship with to trust us and work with us. Today, we're in a much different situation. However, prospects still want to try before they buy. So we'll be producing the at-Sigma RTEs, where prospects will be able to self-qualify via an interactive web process, engage with our engineering team to review their requirements and then send us a CAD file plus metal powder, and we will initiate a build on our printer and give them remote access to PrintRite3D for a period of time, and they'll be able to exercise the system remotely. So they will have full access to the latest PrintRite3D production series, building their product, their part with their metal. This is substantially more efficient and cost-effective for both the prospects and Sigma and we hope, will produce the same results.

So we have everything going in the right direction. Now it's a matter of timing and trajectory. We believe that at the macro level, the thing that will help the trajectory is the COVID crisis and how it exposed major weaknesses in the current manufacturing supply chain. Over time, they've become too complex and too rigid and can't respond quickly to any type of disruption, be it COVID or war, political unrest or a natural disaster. The lack of agility results in shortages of critical parts and components. In order to mitigate this risk, many experts are seeing acceleration in the adoption of 3D printing as manufacturers move production closer to where the part is needed.

Tom Friedman, the author and New York Times journalist said when asked, what will be different when we get through this, the second answer on his list was 3D printing will explode. We see this change positively impacting our business in 2021 and beyond as companies build new 3D printing factories closer to where the part is needed. Many envision factories that can be changed in a matter of days to address specific urges. This will increase the demand for 3D metal printing. And I say in 2021 because it takes a while for these factories to be built and to equip them with 3D printers, and the effect on various industries is uncertain.

In conclusion, the picture of the company that I have tried to paint for you is one that's cautiously optimistic for the short time with what we believe to be increasing quarter-over-quarter revenue of 50% to 100% and increasingly optimistic long term, as we believe that 3D metal printing will become a more significant percentage of the worldwide manufacturing capacity.

With that, I'd like to turn it over to Frank Orzechowski who'll give a brief overview of our financial results. 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 concise review of our financial results for the first quarter of 2020.

Revenue for the first quarter of 2020 totaled $221,730. This compares to revenues of $64,450 for the first quarter of 2019. The increase in revenue was due to PrintRite3D unit sales to 2 research universities as well as revenue recognized under the legacy rapid test and evaluation of RTE programs during the quarter.

Our gross profit for the first quarter of 2020 was negative $22,973. Our first quarter 2020 gross margin is primarily a function of ongoing support of the legacy rapid test and evaluation programs, including equipment upgrades and additional travel and labor costs early on in the first quarter. And as Mark noted, we have ended this old traditional program, and the remaining legacy RTEs that we have will be winding down over the next couple of months.

Our total operating expenses for the first quarter of 2020 were $1.6 million. Total operating expenses for the first quarter of 2019 totaled $1.5 million.

Cash used in operating activities for the first quarter ended March 31, 2020, totaled $1.5 million compared to $1.1 million in the first quarter ended March 31, 2019. As Mark noted, this was unusually high due to trade accounts payable carried over from 2019 due to a delay in securing our financing and is not representative of what management expects going forward. In addition, we made several one-off nonrecurring payments in the first quarter, including paying off the remaining balance of our note payable and our annual NASDAQ membership fee.

Our net loss for the first quarter of 2020 was $1.6 million or $1.30 per share as compared to a net loss of $1.5 million or $1.60 per share in the first quarter of 2019.

Cash totaled $0.6 million at March 31, 2020, as compared to $0.1 million at December 31, 2019, and $1.9 million at March 31, 2019. And subsequent to the close of the first quarter, we further fortified our balance sheet in the form of $1.5 million offering that we closed on April 6.

I'm also happy to report that we are in active negotiations with OEM partners for strategic alternatives who currently see the immense value in our enterprise and look forward to providing an update on that front as they develop.

With that, I will now turn the call back over to Mark for closing remarks.

Thanks, Frank. And before we open the line for Q&A, I'd like to thank our Chairman, John Rice, for his dedication to Sigma during his time as CEO, and I look forward to working closely with him as we execute on our plan to increase revenue and increase shareholder value. So thank you, John. And with that, I'd be glad to answer any questions that you might have.

(Operator Instructions) Our first question comes from David Lavigne with Trickle Research.

So I just want to make sure I understand the sort of the RTE alternative, I guess. So going forward, somebody will send you a design and sends you the -- whatever powder they prefer or use for that particular design, and then you're going to create the product for them and then send it to them for evaluation. Is that how that's going to work?

Well, actually, it's better than that. And if you recall, I spoke one time, I forget exactly what call it was on, about the user who told us that they were using the system more than ever before from home because it became their eyes on the manufacturing process when they couldn't be on site. So we thought about that, and we said, well, what if a prospect could send us a CAD file and also the powder they use, and we will build the part on our printer, and while it is being built, we will give them remote access to PrintRite3D that's aligned with that printer and they can monitor the build of that -- their part with their metal on our printer and have the same experience they would have if we install the system on their machine and they build that part. The only difference will be they build on our machine as opposed to theirs, but the same powder in the same part. So we'll be able to provide a part that has defects or anomalies in it. We'll be able to tell if we can detect those in real-time as the part is being built. And then when they get done, they can do a correlation and do their own CT scan on that part to ensure that our analysis and the actual build and the correlation was close, if not exact or better.

And that's a sort of a process that you've started or begun to roll out? Or have you already -- you've already done that with some people? I'm just wondering if people are receptive to that. Or how they're receiving that...

Well, we don't know yet. We have done the at-home RTE with 1 customer, and it became our beta customer or our alpha customer for that program. We'll be rolling out the website of the program in about 2 weeks, and that will allow somebody to self-qualify, go through the process, say, yes, I'd like to go through the program, work with our team, set expectations and then we'll send us the CAD file and the powder. And we'll see how it works. It's the closest thing that we can do to putting -- to -- the alternative of traveling to put the system on site. And in the end, I think it's going to be more productive for the customer or prospect than giving us time on their printer to do an installation.

Our next question comes from [George Piscato], a private investor.

My question is around Materialise. If I heard properly, we're expecting to close the first deal with Materialise in the current quarter, Q2. Generally, how are we going around how we team with Materialise to sell? Is this to Materialise's existing base? Is it to a new base? And how would you describe the status of that joint selling campaign?

This is to a new customer, to both Materialise and to Sigma. They brought us in January. We did a joint sales call to a new 3D metal printer manufacturer who is looking for both the control and for monitoring system. And they selected us. They actually sold -- presold the first system, and we'll be implementing our combined system on their machine, hopefully, sometime at the end of this quarter.

Okay. And one final call. I was intrigued by the ongoing discussions referred to by the CFO of a strategic investment in Sigma. Is that by a traditional OEM manufacturer that we're in discussions with? What's the profile of the company or companies we're in discussions with for a strategic investment in Sigma?

George, we're looking at all of our opportunities when it comes to funding -- meeting our capital requirements of the company. And the profile varies from financial investors to industry strategic investors. So we're not quite sure which way we're going, but we're looking at all alternatives that are in the best interest of the shareholders in the company.

(Operator Instructions) Next question comes from Tony Christ with Capital Securities Management, Inc.

Can you give us the share count right now? And I tried to look a little bit at the history of it. It's gone up and down so much, it's hard to keep track. And also, with respect to options, I know there's a new executive, usually, there's options involved. What their conversion price is? And how many? And then I have a part 2 also, if that's all right, sir.

Sure. Before you get to part 2, I'm going to ask Frank to answer part 1.

Sure. Yes. So currently, right now we have 3,086,151 shares outstanding. With respect to total warrants and options outstanding -- common underlying those securities, it's another 5.4 million outstanding, which would be a fully diluted number of 8.5 million, and that takes into account the financing that we closed on April 6.

What revenues will we receive were that all exercised and converted?

Right now, if they were all exercised, we'd expect to receive about $7.5 million?

That's good. Okay. And then part 2, have you -- I got on the call a little late, and I apologize if I missed this, but did you give guidance for revenue going forward? I read both your very well written letters to shareholders. And -- but I'm wondering if you did give guidance or any kind of guidance you might offer at this time.

Sure. And what I said earlier was that I expect quarter-over-quarter revenue growth of 50% to 100%. So if you take the $222,000 that we did this quarter, some 50% growth would put around $350,000 and 100% growth would put around $450,000. So that's the bandwidth. And of course, I have some caveats around that regarding what might happen that we're not sure of regarding COVID and also when it comes to shipping and recognizing is different than sometimes booking the revenue because of the lead time. But I feel very confident that we have enough opportunities for foreseeable growth quarter-over-quarter of 50% to 100%.

That would be really exciting. And I'm not personally too worried about COVID because the Chinese Communist Party flu is no more severe than the Hong Kong flu was in '68/'69 or the Asian flu was in '57/'58 or for that matter, the 2018 flu, which killed 80,000, hospitalized 485,000 and killed 188 children. I can only find 3 children under 18 that have died from it. Not that -- but to put it in context, I've never in my life seen a government act so coercively to stop an economy.

Well, Tony, I appreciate your comments, but I think I've answered your question, 50% to 100%...

Our final question comes from [Bill Chapman], a private investor.

Mark, you mentioned you're a new client with your arrangement with Materialise. Now does that imply to me and all of us that the closed loop is something that is marketable?

We're getting awfully close, Bill. We can do it. And so the intent of our relationship is to move towards closed loop and then offer the closed-loop solution to new OEMs that are coming into the market and to the retrofit market. So that's the intent of our relationship, and we wouldn't be signing up new customers if we didn't expect to be able to offer that.

At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Mark Ruport for his closing remarks.

Thank you. I hope that we've answered your questions. I know some of you are long-term investors and some of you are new to Sigma. I'd like to tell people that when they look at the company, consider us as an 18-month or 2-year-old start-up that did its work last year in the laboratory and with expense of RTE, and now we're rolling out and commercializing our product. We would have hit the $400,000 in Q1 if it wasn't for the last minute issues that were encountered by our customer. And you can imagine if you're a main supplier to aerospace and what's happened to that industry, how reluctant you are to spend your capital right now. But even regardless of that, we expect to see the revenue growth I've talked about. We've taken the actions to reduce our expenses or cash burn, and we're looking for opportunities to fund and get new capital into the company that are friendly to the company in the best interest of the shareholders.

With that, I do think it's an exciting time to be looking forward for Sigma, and I look forward to sharing with you the update next quarter. Thanks again for your time and your interest, and we'll speak to you in about 2 months.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation, and have a great day.