Laser Photonics Corporation

Greetings and welcome to the Laser Photonics fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brian Siegel, and best relations for Laser Photonics. Thank you. You may begin.

Thank you, Melissa.

With me today are Wayne Tupouola, Razor's Protonix CEO, Peter Evans, who recently joined us as president, and Bill Campbell, who just joined us as interim CFO. Wayne will introduce the company, its opportunity to disrupt the market for corrosion control and other applications. Peter will discuss the strategy and the plan for this year, and then Bill will review the financial results for the year ended December 31st, 2022. Any forward-looking statements made during this conference call, whether general or specific in nature, are subject to risks and uncertainties and may cause actual results to differ materially from those which the company anticipates. These risks and uncertainties include, but are not limited to, the specific risks and uncertainties discussed in the reports that we filed periodically with the SEC. Laser photonics assumes no obligation to either update any forward-looking statements that we have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. During remarks, management may make reference to adjusted EBITDA, a non-GAAP measure. Management believes that its measure of adjusted EBITDA provides useful information to both management and investors that supplement its core operating results. And the earnings release, which is posted on the IR page, includes a reconciliation of adjusted EBITDA to its merit comparable gap measures, net income or loss for all periods presented. I will now return the call over to Wayne Tubola. Wayne?

Thank you, Brian. Welcome to our year end 2022 earnings call and our second as a public company. As most of you know, we came public at the beginning of our fourth quarter. We raised net proceeds of $12.9 million, mostly for growth capital. I'm going to briefly highlight our results before discussing the opportunity for Lasaltonics to create significant shareholder value in the years to come. However, first, I'd like to welcome Peter and Bill to the team. Both have great experience at technology and industrial companies and significantly strengthen our leadership team. Now that they're on board, we can move forward with many of the growth investments we outlined in our S-1. Before I get into our fourth quarter results, I'd like to apologize to our investors for the delay in reporting. This was our first audit as a public company, and we took the extra two weeks to ensure we were accounting for our expenses directly and directly tied to our IPO correctly. This delay extended the audit, and when combined with the extra time it took to update our 10K, caused us to file an extension to report our results. But with that behind us now, our fourth quarter results were down slightly year over year, while full year sales grew by 18%. Both came in lower than our expectations for a couple of reasons. First, we are in the very early stages of disrupting a process that has been around for over a century with the use of technology. As such, sales cycles and subsequently developing processes and standard operating procedures for these systems can take an extended period of time, which until we can scale this business, can cause lumpiness on a quarter-to-quarter basis. Additionally, combining this dynamic with an uncertain economic environment, we are seeing decisions take longer than they did a year ago. While we don't see business going away, we believe there are circumstances where individual customers may delay purchases or follow on orders. And Peter will address our plans for addressing this in his section. Now I'm going to discuss the considerable opportunity ahead to disrupt the market for corrosion control and other materials applications. Laser Photonics is a clean tech company that utilizes proprietary laser systems for cleaning and removing corrosion and other materials from metal and other substances. As the only alternative to sandblasting, our technologies have the potential to empower engineers and designers to adopt laser blasting, which provides manufacturers with reliable and high-performance solutions that facilitate their productivity, especially relating to the MRO industry, taking it to new levels. Our market encompasses the industrial depainting, surface preparation, coating, and corrosion control space. This includes media blasting or sandblasting, dry ice blasting, and laser cleaning or laser blasting. According to Global Market Insights, the value of the laser cleaning market was estimated at $9 billion in 2021 and projected to be $12 billion by 2025, including laser cleaning for maintenance repair operations. We believe we are positioned to take advantage of the megatrend where most Fortune 1000 companies are doubling down on health safety, and sustainability in line with the ESG mandates. As such, market growth will be driven by the increased demand for robotic cleaning technology, growth in the automotive industry, and demand in the construction and metalworking industries. Additionally, with regulatory pressure on media blasting and the higher cost of both media blasting and dry ice blasting, We believe that efficient laser cleaning or laser blasting will disrupt the abrasive sandblasting market and emerge as the clean, efficient, and low-cost alternative blast cleaning method. While a lot of what's driving our growth has been consistent for a few years now, I expect it to accelerate as we go through the rest of 2023 and continue over the next several years. Today, we're still on top. of the first inning of this multi-billion dollar long-term opportunity to replace existing methods for removing corrosion and other materials. Companies with these needs want products that are better for their workforce and better for our planet and are therefore focused on sustainable solutions. And we have the solutions. We have the best way to make sustainable laser cleaning products for the planet. And we do that by using concurrent engineering, starting with a process, a multidisciplinary team, an integrated design model, a facility, software infrastructure. We're the experts. We're the top 10 world's leading integrators of fiber lasers according to market studies. We sell our laser cleaning equipment products globally to end users and principally to Fortune 1000 companies. as well as to agencies of the U.S. government, including the U.S. military. For 2022, approximately 5% of our net revenues were from the U.S. government, either as a prime contractor or as a subcontractor. We believe our valuation proposition here is extremely compelling, and we hope to grow this number going forward. Our laser cleaning systems are sold under the Cleantech brand and come in a number of different laser strengths from 50 watts to 4,000 watts. We are pressing the components threshold. We take the latest technology like laser sources and optics, put them in an already established engineering platform, and we incorporate the correct optics which produce the desired effects of laser source that is powering some of the fastest removal rates in the industrial world today. Everything from rust to paint to epoxy and to some of the toxic coating markets that are, again, really on fire right now. Today, our technology is used in the maritime and shipbuilding, aerospace, automotive, space exploration, nuclear and energy, manufacturing, military and defense industries. We have sold our cleantech products to organizations and companies, including Coca-Cola, Detroit Diesel, a division of Daimler North America, Daimler North America, the U.S. Army, Navy, and Air Force SOCOM, and the Veterans Administration, to name a few. Most of these initial sales were to allow these organizations to develop their standard operating procedures and processes for laser cleaning. but we believe there represents a significant follow-on opportunity with these customers, as well as opportunity to penetrate other parts of these organizations. Finally, we believe there are potential acquisitions that we can make to enhance our product portfolio, enter new markets, or vertically integrate into our manufacturing. We believe that these initiatives, which will increase our expense run rate, are central for us to scale the company in the years to come. In summary, our technologies have the potential to empower engineers and designers to adopt laser blasting as the only known alternative to sandblasting that provides manufacturers with reliability and high-performance solutions that facilitate their productivity, especially related to the MRO industry taking it to new levels. Now I'll turn the call over to Peter who will provide details on our plans for 2023.

Well, thank you, Wayne. I'm really excited to join the team and I look forward to capturing the opportunities I had for laser photonics. Our strategic plan for the next 12 to 24 months centers around two key areas, sales and customer support personnel and expanding our distribution channels. Starting with sales personnel, We are looking to recruit senior account managers that are proven hunters and closers with deep vertical experience and existing contacts with key decision makers at current and potential customers. To accomplish this, we have brought a number of leading search firms that specialize in our key verticals from automotive, department of defense, shipbuilding, maritime, aerospace, energy, manufacturing, oil, gas, heavy duty, such industries as over-the-road agriculture and construction. I believe this will provide efficient coverage to optimize opportunities while still exercising financial prudence. Additionally, we are looking to double the number of inside salespeople to handle inbound inquiries and sales to smaller accounts. Further, to support our broader sales team, we plan to hire and integrate a strong customer service team. Finally, we plan to invest in and expand our distribution and partners networks. We haven't spoken about this with investors until now, but we have a program called the Service Partner Network, or SPN. The SPN supports entrepreneurs in our communities creating MRO services, services businesses using our cleantech technologies. Through the SPN, members get exclusivity for a particular territory, We help them secure equipment financing, if necessary, to purchase one or more Cleantech systems and then provide warm or hot leads and other support to help them establish their businesses. The key benefits are the accelerated market penetration through the establishment of service businesses using our Cleantech systems. SPN members will also go out and do demonstrations at potential or other customers that can drive our incremental sales. the potential to identify and penetrate smaller industries and customers that we may not have been able to identify with our existing sales efforts. Today, we have 12 members signed up and we are looking to grow this number significantly over the next 12 to 24 months. To accomplish this, we will need to put in a place, a dedicated team to support these members. Finally, we are clearly, we are in the early stages of building a strategic global distributor network. This network will focus on well-connected, experienced partners with strong financial bases. Now I'd like to switch gears and set some expectations or targets for these initiatives. For our key account manager, our goal is to fill these roles by June 1st, 2023. This allows approximately six months potential revenue to be realized. I expect these sales would come from low risk, high yield businesses, that our experienced hires would have immediate access to through prior experience and relationships. I also expect additional sales will be realized from our increased inside sales effort. Beyond this year, I expect to continue to build the pipeline for our higher engineered systems, which have a sales cycle of six to 12 months, which will help drive sales in 2024 and 2025. With respect to our standing of our SPN and dealer distribution networks, in 2023 will be a year for vetting potential members and partners, and therefore, we are not building any significant revenue contribution from them during 2023. In summary, 2023 will be an investment year with the goal of positioning the company to drive accelerated sales growth over the next several years. I'm excited about this opportunity to create significant value for our investors in the years to come. Now, I'll briefly turn it back to Wayne to provide some details on how all this translates into our financial expectations for 2023. Wayne?

Thanks, Peter. As you can see, we now have in place a strategy and a roadmap to drive future results. As you know, we finished our first quarter on March 30th. While we did add some new customers, economic uncertainty continued to lead to a slower sales cycle. For the full year, even given Bill and Peter just joined the company recently and have been focused on reporting our results, we are not ready to provide guidance except to say that this is going to be an investment year and we expect to report losses. Between now and when we report forced first quarter earnings in about a month, we will evaluate our forecast with the hopes of providing additional information on our outlook on that call. Now I'll turn it over to Bill for his discussion of fourth quarter financial results.

Thank you, Wayne, and welcome, everybody. Our fourth quarter revenue declined 3% to $1.2 million. For the full year, revenue increased 18% to 5 million. For the fourth quarter, gross profit increased by 61% to 0.6 million and gross margin improved nearly 2000 basis points versus last year to 49.9%. For the full year, gross profit increased by 35 percent to 2.9 million, and gross margin increased 700 basis points versus last year to 57.9 percent. For the fourth quarter, operating loss increased to 1.9 million from 72,000 last year. The decline in operating margin was largely due to the expenses of 1.9 million associated with the IPO, while we also did some hiring in our marketing department during the quarter. For the full year, operating loss was nearly 1 million versus net income of 0.6 million last year. These items contributed to a net loss in the fourth quarter of $1.9 million as compared to net income of $42,000 last year. Q4 loss per share of $0.36 compared to a profit of a penny a share in the prior year. As you can see, excluding the IPO-related expenses, we would have been roughly breakeven

for the quarter.

For the full year, net loss was equal to our operating loss of nearly 1 million versus net income of 0.6 million last year. Full year loss per share was 18 cents versus EPS of 12 cents last year. For the full year, adjusted EBITDA increased by 21% to $1.2 million compared to $1 million in the prior year. From a balance sheet perspective, we finished the year with about $12.2 million of cash and equivalents with no debt. That concludes the prepared remarks for today. We can now move to questions.

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we'd ask that you each keep to one question and one follow-up. Thank you.

One moment while we poll for questions. Once again, ladies and gentlemen, it's star one to ask a question at this time. Mr. Siegel, at this time, I'll turn the floor to you for any other questions.

Thank you. Yeah, we have a number of questions that have been written in. Wayne, this one's for you. You made a big deal about hiring salespeople several months ago. Why haven't you made any progress over the past five or six months?

Yeah, thanks for that question. You know, in the event of ramping up a company such as ours, it takes time to put out the campaign, the program, to hire the right talent. You know, as we've just released – in our most recent press release of bringing on the high caliber talent search companies such as Corn Furry for military search caliber individuals. I believe that it takes a while to prepare and it also takes a certain particular budget to respond to this campaign. Waiting for the funding to take place to implement our programs and I think Peter just spelled it out for us as far as what his intentions are, and I think we'll become successful in implementing. But the delay is definitely due to the events that took place and where it's culminated to be where we're at today. I think we'll execute on it now going forward, and I think we'll be able to produce the correct results that our investors are looking for.

Okay. Thanks, Wayne. The next question is, we were hearing so many positive announcements regarding interest in our lasers. Could you put a little more meat on the bones as to why demand slowed so dramatically? And has there been any more recent activity as we approach the second quarter?

Yeah, I think the interest level is quite high. Obviously, we took to market a disruptive technology that was going against an archaic, antiquated system or industry that creates a hazardous environment. And obviously, a lot of their end users were also receiving detrimental health issues, such as silicosis of the lungs. So the end users want to look for a solution, and we have it. And I think with all of the ESG mandates that companies are having to comply with, they're looking for a cleaner solution, a more efficient way to do this. And we see a high level of interest coming in, especially from our Fortune 1000 customers that we are so familiar with.

Okay, great. Thank you.

Bill, this question is for you. How much stock has the company bought back under the $2 million share buyback? And with the stock selling well below the IPO price, will you be getting more aggressive on the buyback?

Yes. Thank you for the question, Brian. Regarding the buyback, the two actions that need to be complete prior to the buyback, the board approval and the public disclosure, have been completed. To date, we have not executed any buybacks of that authorization. We have been proceeding using the funds as outlined in the S-1 with our first priority involving internal growth. We will continue to evaluate the optimal uses for the cash, thus keeping the buyback as a viable option going forward.

Thank you.

This is for Wayne or Peter. How many sales have you made through the SPN to date?

Peter, I'll let you get that one. Yeah, so right now we have 12 people, small businesses that we have signed up. So each one of them, when they purchase, they purchase a machine. Either we finance it or they buy it outright. With that system, as it's just starting off, we see them doing a couple different things. One, buying the system, starting their own cleantech business. calling on smaller businesses to clean and then obviously adding more machines to their portfolio. And then as we see a second stage as then becoming a dealer distributor for us, well, they'll go to again, minimal size companies that we don't have our outside sales team calling on and calling on them to sell machines to them also. So it's a really interesting concept and it really helps out small business America and which is one of our ideas behind it.

But at the same time, it also helps us to increase our brand out there in the market.

Great. Thanks.

Operator, we've got a dial-in question, if we can take that one.

Sure. Our next question comes from the line of Chuck Lipson with CLS Security Associates. Please proceed with your question.

Yes, I hope you can hear me. You know, we have been hearing so many orders in the fourth quarter there. I just have trouble deciding why haven't they evaluated it by now, those pilot orders, and going forward, why have sales flowed so dramatically? The economy is definitely, you know, a little fragile, but this is a groundbreaking technology, and I'd like to hear, you know, why we haven't had a little more momentum in Q1 and hopefully going forward.

Yeah, I think, thank you for your question. You know, when we basically were looking at finishing off fourth quarter, we had a huge pipeline developed and we were counting on that pipeline to be fulfilled. We had customers that had POs ready to be executed. Obviously, the decision-making process took a little longer and they basically decided to carry those orders on to 2023. But those orders are still hot. We're expecting for the execution of those orders to take place this year. But because of the economic turmoil, I believe that some of the customers are taking a more conservative stance moving into 2023, which is the reason why we fell a little short on our revenue. Okay.

Could you also give like some sort of indication? When a person buys this laser, what kind of savings are they seeing, you know, say in the ship or what they're using it for? I know it's faster, it's environmentally friendly, but what kind of cost savings could you see using your laser versus traditional sandblasting or other techniques?

Yeah, thanks for your question on cost effectiveness when switched over to this technology. Obviously, the upfront cost could be high, but the long-term effects is detrimental to how they can mitigate the hazardous environment and also the loss of life or destruction of health of life kind of outbalances the return on investment. But fractionally, it could compare to $0.06 per square foot opposed to $6 per square foot using sandblasting equipment. So it's quite a cost-effective way to approach surface treatment and I believe that customers are getting excited about this technology. However, it is a transformational feat. People are used to the archaic method of using sandblasting and we're trying to implement our gain in scale model to which we allow them to to redesign equipment to help address this transition. So they first adopt this, and then from there they start to adapt into using this technology.

So if I heard you right, there's like a 90% plus cost advantage in using this technology, six cents versus $6 a square foot, plus an environmentally safer solution?

Correct. And again, it's due to the long-term use of this. And I think it's beneficial in the long term.

And if I could ask something, Wayne, time is another constraint when you're using sandblasting. It takes a lot more time to set up, to have all the legal suits and covers and everything to protect where we're able to get right in and get to work and get out of there. So time is also another return on investment. Thanks, Peter.

Sounds like it should be a fairly easy sale of those sort of benefits.

It's a high-tech product, so it still has to go through that discussion.

But when you're able to show X versus Y, it's definitely a night and day.

Okay, Paul. Hopefully, the purchasing orders come in realizing that in the future. Good luck.

Thank you.

Thank you. Okay.

So, we have another question that was written in. Is laser cleaning large exterior ship hulls as effective as sandblasting time-wise, and does it achieve better results?

I think if we look at, thanks for that question, by the way, I think if we look at the amount of media that is required to address that type of a project, you know, they need to expel a minimum of 2.5 tons just to cover a particular area. And if there's smaller projects, let's say there's 100 meter by 100 meters of of space, it could be the right application for it, and it could be cost savings, you know, during the learning curve of implementing this. So, you know, laser cleaning is not a magic wand. It's used strategically to lower the cost, and it definitely does that, as Peter had mentioned, you know, in time saving and setup time. And some of these project managers are addressing cost right now. and they want a more effective, efficient way to do it. And once they incorporate this into their processes and procedures, I'm sure that they'll realize the return on investment.

And I've got one last question for Peter. In your first few weeks on the job, what are your initial thoughts on the opportunity for laser photonics, and in which end markets do you see the most opportunity over the next 12 to 18 months?

Great question. Thank you. Yeah, the excitement is real. This product, and from my own research before I joined the company and now inside the company, it is really a disruptive technology that we will be bringing to the customer, and It will, you know, it will be a paradigm shift from what they're currently using. And as Wayne has pointed out, you know, people are dying and it's, it's horrendous for our environment. So that gets us in the door. It gets us in the door when we're able to come in with this disruptive technology. Um, and that's exciting. And again, as I'm hiring this team, I'm hiring people that are able, not only laser experience, but they're able to get into these different locations, um, to a higher level, to a decision maker. So we're not just taking, you know, we're getting as much quicker than we would if we had to train people on the job. I think one of the points in the previous question was about, you know, the ROI and so forth. One of the things that we're doing is we're going in with that customer and we're analyzing what they're doing today with the sandblasting, what they're paying, how long it's taking them, and we're showing them the comparison. And when you see that, that's something that, you know, aggressively makes you want to make a change. at that point. So my biggest targets right now that I see where we can really hit the low risk, high return automotive, Department of Defense is a very large one with their $3 billion budget just to clean their naval ships and energy with the nuclear plants and the decommissioning of the nuclear plants from wind turbines to so forth. Those are really the top three that we're hitting immediately. Um, but at the same time, we're hiring for the other industries just as well, heavy duty, um, and so forth. So there's a, um, there's quite a lot of opportunity out there. And again, as a disruptive technology, it's really exciting.

Great. Thanks, Peter. That's a great answer. Uh, one more question just came in, uh, Do you need additional funding over the short term?

Bill, that's for you. Yes. Thank you for the question. As you can see in our financials, we closed the year with over $12 million in cash, and the quarterly burn rate was just over $1 million. So based upon that current cash burn rate and our projected activity, we do not foresee any cash needs at this time, new external funding. that would be required in 2023. We do keep that option open, though, as new opportunities may arise, but at this point, that is not foreseen.

Great. Thank you.

That seems to have concluded all the questions, so operator, you can close it out.

Thank you. Ladies and gentlemen, this concludes today's Question and answer session and thus concludes today's call. We thank you for your participation. You may now disconnect your lines and have a wonderful day.