Sigma Labs Inc (SASI)

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http://seekingalpha.com/article/2062973-sigma-labs-filling-in-the-cracks-of-3-d-printing?isDirectRoadblock=false&source=email_rt_article_readmore&uprof=45


Sigma Labs: Filling In The Cracks Of 3-D Printing
Mar. 3, 2014 10:26 AM ET | About: SGLB, Includes: OVTI

Disclosure: I am long SGLB. (More...)

Editor’s Note: This article covers a stock trading at less than $1 per share and with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Introduction

Many investors are already familiar with 3D-printing companies such as Voxeljet AG (VJET), 3D Systems Corp. (DDD), Arcam AB (OTCPK:AMAVF) and Stratasys Ltd. (SSYS), and the tremendous gains each stock price underwent. It may be true that these stocks' valuations are overpriced, however the 3D-printing industry as a whole is still taxiing on the runway. There are still many 3D-printing companies within specific fields that remain undiscovered or lack advancements, which prevents their popularity. These small market niches are where the remaining undiscovered companies like Sigma Labs (OTCQB: OTCQB:SGLB) will revolutionize 3D-printing.

The Opportunity

One of the least developed markets in the additive manufacturing field is that of metal manufacturing inspection. Specifically, the primary deterrents are the inability to inspect, control, and accurately predict how well the finished result formed and behaved during the manufacturing process. This is because there are currently no accepted standards for Real-Time Process Control during the actual printing procedure. Terry Wohlers, a well-respected additive manufacturing advocate, remarked that "System reliability and process repeatability are challenges, especially when using AM for manufacturing. System manufacturers are addressing these challenges with real-time process monitoring and control software…" in an interview on Engineering.com. An in-process, real-time monitoring system is necessary for the creation of a much needed 3D Quality Certificate and to the further adoption of metal additive manufacturing.

The Solution

Sigma Labs' solution for the much needed 3D Quality Certificate is to develop an in-process monitoring system, which is patented PrintRite3D. PrintRite3D consists of four aggregated technologies, each of which addresses a current metal manufacturing complication. The PrintRite3D technology has seen much approval and interest from defense organizations and large aerospace companies, which are either awaiting product commercialization or providing additional capital to speed up the commercialization process. Confirmed examples include, GE Aviation, which has signed a JTDA with Sigma Labs (geaviation.com), Metronic Systems LLC has signed a JTDA with Sigma Labs to bring the PrintRite3D Inspect unit to commercialization faster(PRNewsWire), and Defense Advanced Research Project Agency (DARPA) is funding Sigma Labs' research at Honeywell Aerospace (HON) to create an Integrated Computational Material Engineering (ICME) framework procedure to better predict material properties in 3D-printing (PRNewswire). To better understand the PrintRite3D technology, let's analyze the general complications prohibiting the general adoption of metal manufacturing over Original Equipment Manufacturers. Here are some of the solutions Sigma Labs will provide to hopefully advance the wide-spread implementation of additive manufacturing.

The Analysis

There are three major problems that are preventing the transition from conventional OEMs to additive manufacturing OEM technologies. These problems are constructed around getting the right quality, getting the right shape, and the post-inspection times for products. An overview of Sigma Labs' PrintRite3D technology can be found at B6sigma.com.

Post-Inspection Time: Driving the three applications is the PrintRite3D SensorPak, an auxiliary hardware kit that rests on the AM machine and generates the appropriate data. With the use of the suite of applications, the overall expected printing process (including post-inspection time) is expected to be decreased exponentially. In an article by DesignNews, Ann R. Thryft, a senior technical editor for materials and assembly, stated that "A reduction of about 25% may be possible in the total AM time required for making the LEAP parts due to this new inspection technology. The technology is also expected to help assure build quality and repeatability by verifying part geometry and quality." The additional 25% of the additive manufacturing process consists entirely of post-build inspection procedures. The PrintRite3D technology eliminates the required post inspection processes by conducting the inspection real-time. This allows for the immediate use of a recently manufactured product, compared to that product waiting days or possibly even weeks for post-inspections processes.

Accurate Quality: As for producing the right quality, Sigma Labs is currently developing the PrintRite3D Inspect application, which verifies quality mm²-mm². The Inspect application assesses the quality of the 3D-printed object layer by layer on the machine, in real-time. All of the data collected by the SensorPak about the object, is run through the Inspect application to verify that each layer was manufactured with the right quality. The Inspect applications data will be simultaneously comparing each layer's predicted quality against the actual quality that was printed. This improves the process reliability to provide a more accurate and predictable outcome. Sigma Labs' technology offers solutions for companies in the biomedical, defense, and aerospace industries especially, because of the importance of quality in each and every individual part. The Inspect module also provides the allowance for repeatability, which is attractive to mass-production industries that are interested in printing 25k of the same exact prototype.

Accurate Shape: Currently, scanning the outside of object to determine its precise measurements, is very challenging, and requires either an X-Ray or a CAT scan of the object. In defense, aerospace, or biomedical parts, the complexity of some parts would make scanning the part more expensive than actually building it. This is a major flaw with the printing process and prevents industries that need critical parts from integrating 3D-printers. The PrintRite3D Deform and Thermal applications provide printers with the sense of "sight" during the printing process. The two applications allow the printer to determine an object's geometry, thermal profile, residual stress and distortion, as the object is being printed. If each printed layer comes out according to data that the SensorPak, then the object can be accounted for as correct immediately. This increases the printer's versatility, thus allowing the creation of more complex shapes. This versatility will enable the targeting of many more applicable industries.

The Customer Base

As the patented PrintRite3D technology is transitioning from developmental stages to commercialization, Sigma Labs is gaining more attention from big league industry leaders. On October 16-18, 2013, Sigma Labs' CEO Mark Cola participated on a panel for the Additive Aerospace Summit Conference. At this venue, Sigma Labs addressed the current challenges and opportunities in the metal AM industry to help accelerate the AM industry at a faster pace. Featured on Sigmalabsinc.com is a summary of the Summit Conference, which noted that among those present were General Electric, U.S. Navy, Northrop Grumman (NOC), Defense Advanced Research Projects Agency (DARPA), AIRBUS SAS (EADS), Stratasys Ltd., National Aeronautics and Space Administration, The Boeing Company (BA), as well as other prominent players within the 3D Printing market space. Many of the previously mentioned entities have already started integrating the use of metal AM technologies and have shown an interest in the PrintRite3D technology. When Sigma Labs achieves commercialization, not only will PrintRite3D draw in various sources of revenue, but it would be a very desirable asset to many AM industry leaders as well.

The Competition

The current methods companies use to scan the insides of finished additive manufactured objects is very expensive and complicated. Current technologies involve either taking a CAT scan or an X-Ray of the object, and if the object is complex, the scan could be more expensive than the actual printing process. Other companies working on advancing 3D-Scanning and real-time monitoring are Omnivision (OVTI), which recently partnered up with Google (GOOG) on February 25, 2014. The two entities are working on "Project Tango", an app for Android allowing the phone to follow motion and create a 3D-map of its surroundings. Omnivision is providing sensors (OV4682 and the OV7251) that provide data to track motion and enable depth analysis for Google's Tango development kit. I don't believe that Omnivision will target the additive manufacturing industry, mainly because the OV4682 and the OV7251 use video recording and cameras to produce the scanning ability, while Sigma Labs' proprietary technology computes large amounts of data and mathematical equations to as its "scanning" technique, providing a more accurate outcome.

The Financial Situation

Sigma Labs functions as two independent entities. The first company is Sumner & Lawrence Limited, a consulting firm which provides high-level scientific consulting for the federal government. The other segment is Sigma B6, providing advanced materials, manufacturing, and in-process monitoring systems for high-end clients. Sigma Labs has a 52-week range between $.02-.28 and is currently trading at $.14, indicating high volatility and the potential for total loss. Sigma Labs' beta of 2.4 indicates an increased level of risk as well. However, a recent Reuters report noted that Sigma Labs with a current ratio of 10.37, minimal liabilities, and a gross profit margin of 53%, had pretty healthy financials. Sigma Labs' cash reserves decreased 500k to 150k as they are transitioning to early stages of commercialization. Their annual revenues have grown 23.72% (YoY) from 797.35k to 986.50k while net income improved from a net loss of 910.13k to a decreased net loss of 685.57k, resulting in an EPS of (-.0007). Those results are clearly nothing to rave about, except for the realization that all of the revenue was earned through Sigma Labs' consulting firm, Sumner & Lawrence Limited. In fact, throughout 2013 Sigma Labs had not recorded any revenue from Sigma B6 (holder of PrintRite3D). I believe that is about to change based on recent news published in a PRNewsWire article that mentions Sigma Labs' delivery of two PrintRite3D quality assurance systems to a leading international aerospace company, which is expected to generate $750,000USD just for evaluation and testing. This provides evidence to support the insight that Sigma Labs will experience a large financial re-positioning in the near future. If investors were to assume that the eight companies previously mentioned at the Summit Conference each requested the delivery of two PrintRite3D units just for testing and evaluation, the outcome would be $6m in annual revenues.

The Financial Risks

A company that spends 75% of its total cash reserves in one year, should make investors second guess their investment. With a remainder of only 150k in cash reserves, investors in Sigma Labs will be matched with even more associated risks as the company nears the bottom of its cash reserve. Even with Sigma Labs' subsidiary, Sumner and Lawrence, allocating annual revenues that increased roughly 23% (YOY) to just under 1m, the expenses involved with transitioning Sigma B6 to commercialization may drain Sigma Labs' available cash reserves. If commercialization takes longer than projected, the company may be faced with devastating financial restraints. If commercialization takes longer than expected the threat of a stock dilution may present itself, however I doubt the company will dilute the shares outstanding again, seeing as it just underwent a private placement of 43,750,000 common stock to RockVille Asset Management LLC on Jan 13, 2014 (Yahoo.com). Sigma Labs is a small-cap stock with a market cap of only 76m, trades on the OTC market and is currently trading for under a dollar. Stocks of this nature involve increased levels of risk for investors. I have contributed my own analysis for the viewing of the general audience and am sharing my personal opinions of Sigma Labs based on my research. I highly advise all investors to conduct their own research before investing their own money.

The Conclusion

Research leads me to believe in 3D-printing and all of the possibilities it presents. For that reason I remain long on Sigma Labs. The current manufacturing system is rudimentary and soon to be obsolete. Sigma Labs' technology may very well herald the future of 3D-printing as a manufacturing application. Additive manufacturing will influence many miscellaneous markets and offer unimaginable solutions. Sigma Labs represents just one of the many existing undiscovered companies that may revolutionize the 3D-printing industry.