Desktop Metal - Q2 2021

Transcript

Speaker 0

Good day, and welcome to the Desktop Metal Second Quarter Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Jay Gentzkow. Please go ahead.

Speaker 1

Thank you, and thanks to everyone for joining this afternoon's call. With me today are Rick Fulop, CEO, Chairman and Founder of Desktop Metal James Haley, CFO of Desktop Metal ExOne's CEO, John Hartner and ExOne's CFO, Doug Zimba. Please note that Desktop Metals' 2 press releases And 2 presentations referred to on this call are available under the Events and Presentations section of our Investor Relations website. This call is also being webcast live with a link at the same Investor Relations website. The webcast and the company slides will be available for replay for 12 months Following this call, the content of today's call is the property of Desktop Metal.

It cannot be reproduced or transcribed without our prior consent. Before we begin, I would like to refer you to our Safe Harbor disclaimer on Slide 2 of the Desktop Metal presentation And Slide 2 of the acquisition presentation. Today's call will include forward looking statements. These forward looking statements reflect Desktop Metals' Annex One's views and expectations only as of today, August 11, 2021, and actual results may vary materially based on a number of risks and For more information about the risks that may impact Desktop Metal and ExOne's businesses, financial results In the proposed acquisition discussed on this call, please refer to the Risk Factors section of the Form 8ks filed today With respect to the acquisition, each company's Form 10 Q filed today and their respective other filings with the SEC. Neither Desktop Metal nor ExOne assumes any obligation to update the forward looking statements.

Additionally, During this presentation or the following Q and A session, both Desktop and Next1 may refer to non GAAP measures. These measures are intended to supplement, but not substitute Each company's financial results release contains the financial and other quantitative information to be discussed today, as well as a reconciliation of the GAAP to non GAAP measures. With that, it's my pleasure to turn the call over to Rick Fullop, CEO and Founder of Desktop Metal. Thank you, Jay. Good afternoon and thank you for joining Desktop Metal's Q2 2021 financial results call.

As As you may have seen, we announced a major transaction this afternoon for the additive manufacturing industry and Desktop Metal has entered into a definitive agreement to acquire ExOne. I'm here with Exmont's CEO, John Hartner. And before we begin to discuss this transaction and the strategic rationale, We'll each briefly review our independent second quarter results, starting with Desktop Metal. I'm very proud of our team's efforts in the quarter. The company is firing on all cylinders.

We delivered a strong revenue growth, meaningfully expanded gross margins and executed on a number of exciting developments. We've made rapid progress I'll start with a quarterly review on Slide 3 The presentation with a few financial highlights. Revenue growth accelerated in the quarter to $19,000,000 a sequential increase of 68% for the Q1 of 2021 And more than 7 50% over the Q2 of 2020. We also generated strong gross margin expansion As non GAAP gross margins increased to 25% in the quarter, up from 5% in Q1, representing a 19 50 basis point sequential increase. Moving to this quarter's business highlights.

We saw another quarter of acceleration in our customer installed base with new customer additions increasing 44% sequentially from the Q1 of 2021. This included strong growth in our metals business with solid contributions from the Production System P1, SHOP System And Studio System 2. As a quick update, our team is hard at work putting the final touches on the Production System P50, And we continue to track forward towards beginning shipments in the Q4 of this year. We also continue to grow our to enable an expanding set of applications for our customers. A few additions to highlight include cobalt chrome, Titanium 564, 4,140 low alloy steels and 316 stainless steel and metals and Flexera Basin Smile for our EnvisionTek systems.

Our forest offering, which we announced last quarter, has exceeded all expectations and is experiencing overwhelming demand. We continue to develop and scale this solution to meet the opportunity And we're thrilled by the early response. In July, we acquired 2 early stage companies that we're very excited about, Aricent and Beacon Bio. I'll touch on each of these transactions in more detail later in the presentation. The Desktop Health team continues to see strong momentum with the dental business seeing another quarter of significant growth.

And finally, we closed the acquisition of Adaptive 3 d this quarter and we're seeing fantastic demand as we bring Adaptive's best in class elastomers Market alongside our EnvisionTek platforms like the Extreme 8 ks. Moving to Slide 4, our metals business had a fantastic quarter With new customer additions more than doubling from the Q1 this year, that includes broad acceleration Across the Production System P1, SHOP System and Studio System II shipments. The P1 in particular was a standout with very strong quarter over quarter growth. We have our best people focused on deploying the production system P50 and we're very much on track to begin shipments in the Q4 of this year. We look forward to providing more color and customer response and use cases once we get those systems out in the field.

We also continue to grow our metals materials library with multiple additions. We're the 1st company to commercialize titanium Type 64 for bound metal, making VM the only company to make TI-six forty available in an accessible turnkey printing form factor with fantastic material mechanical properties, including better than rod elongation. We also are the 1st company to qualify 4,140 low alloy steel for binder jetting. This is a real workhorse material, 1 of the highest demand alloys with applications across consumer products, automotive and other mechanical components. We also qualified 316L stainless On our production system and a material that's well suited for demanding industrial applications.

As I mentioned earlier, on the M and A front, we acquired Arison, an early stage company that is pioneering multi material printing for additive manufacturing. Today, businesses print individual parts or components out of single materials. But in the future, they will increasingly look full products that are comprised of multiple materials. Erosense patented powder deposition process selectively deposits 2 or more powders To form a single, thin powder layer containing multiple materials. As the only high throughput multi material recording system in the market, AeroSense Technology unlocks an exciting range of new applications for additive manufacturing, including local optimization of mechanical properties, such as wear resistance or And the improvement of chemical and physical properties such as thermal and electrical conductivity, corrosion resistance or aesthetics.

We look forward to partnering with our new colleagues at Aricent to industrialize and mature this technology and integrate into upcoming desktop metal products over the next several years. We're also excited to support Arasynt in their ongoing independent efforts with their existing partners and to leverage DM's Scale, distribution and industry leading technology portfolio to capture new market opportunities. The future of AM is going to be multi material printing And Aerosynt is a great addition in core technology that will allow us to grow capabilities of AM 2.0 solutions over time. Turning to Slide 5, on the left side of the page, Desktop Health Business continues to build very positive momentum. Mike Jafar is putting together an extensive healthcare team that includes leaders across disciplines to progress a number of compelling products currently under development.

We'll continue to experience positive traction in the dental business with another quarter of very rapid growth, giving us confidence this team can deliver additional solutions to supplement our Industrial Business can accelerate the growth of DM overall. We believe dental is beginning to enter the steep part of the adoption curve And most parts using dentistry should be printable this decade. This week, Desktop Health also announced the expansion of the dental technology portfolio with the qualification of cobalt chrome on the shop system. The dental community will now be able to leverage the full capabilities of high speed metal binder jetting, including faster and more cost effective production of bridges, crowns, partials and more. Also in the quarter, Desktop Health completed See certification of our Flexera base and smile resins and received FDA clearance for Class II permanent indications for Flexera base.

Together, Flexera Base and Smile enable next generation digital dentures in same day full arch implant procedures. Lexera Solutions sold out within the 1st 4 weeks of launch and we're adding capacity to meet our robust demand. We're highlighting another acquisition that we're very excited about on the right side of the page. This is a small company called Beacon Bio that was spun out of Harvard University. We've developed a promising new material that can be printed on our 3 d Bioflutter systems and has potential for use in repairing damaged eardrums.

The phonograph device for introducing this material is analogous to LASIK vision correction, except it's intended for individuals who have hearing deficiencies and wear hearing aids Or who have experienced eardrum perforations, which occur in about 30,000,000 people a year around the world. Phonograph technology promotes eardrum repair We expect Phonograph will improve patient hearing outcomes by leveraging the body's natural regenerative processes. As the biodegradable graft material is slowly replaced with native tissue over time, This exciting technology is in the advanced stages of R and D and the team at Desktop Health intends to conduct additional preclinical studies and pursue FDA review with the goal of delivering a solution to the market within 24 months. We believe Phonograph And the associated biodegradable elastomer materials coupled with our leading biofabrication and 3 d printing solutions is a true platform technology with tremendous potential across A wider range of high value healthcare applications in soft tissue from cardiovascular to neuronal grafts to plastic surgery. Assisting with our broader strategy, we're excited to own the full value chain of these devices and bring them to the market.

It's still early days for this technology, but the acquisition marks the beginning of our journey to advance patient specific medicine through added manufacturing. Finally, on Slide 6, we saw another quarter of increasing customer adoption across materials as new customer additions increased 44% sequentially From the Q1 of 2021, the left side of this slide shows a number of customers that range from large brands to small companies with minimal account concentration. In highlighting 2 interesting customers on the right side of the slide, Christian Tse is a well recognized jewelry designer and manufacturer Using the production system P1 to develop several private label products to supply a variety of the leading luxury jewelry brands. Christian has leveraged the P1 to print precious metal rings at rapid rates up to 50 to 70 in under 2 hours, making it a game changer for his manufacturing strategy. The second customer we're highlighting is Poral, a precision metal parts manufacturer in Europe that utilizes the shop system to produce complex metal parts across a range of applications, including automotive, aerospace and more.

The SHOP system's minor jetting technology enables Parral to improve With that, I would like to turn the call over to our CFO, James Haley, for his review of the Q2 financial highlights. James?

Speaker 2

Thanks, Rick. Starting on Slide 8, you will see a summary of our financial performance for the Q2 of 2021. Please note, we will be referring to several financial metrics on a non GAAP basis. Reconciliation to GAAP data is included in the filed appendix. Consolidated revenues for the quarter was $19,000,000 up 68 percent sequentially from $11,300,000 in the Q1 of 2021 and also up 767 percent from the Q2 of 2020.

The acceleration was due to an increase in our metal product shipments, Specifically, Production System P1s, CHOP Systems and Studio System IIs as well as strong contribution from EnvisionTek Photopolymer Products and Consumables. Non GAAP gross margin showed material improvements, increasing to 25% for the quarter, implying a 1950 basis point improvement over the Q1 of 2021. Gross margin expansion in the quarter was primarily driven by operating leverage as revenue continued to scale across overhead costs as well as product mix toward higher ASP sales such as our metal systems. Adjusted EBITDA for the Q2 of 2021 was negative $24,500,000 versus negative $20,600,000 in the Q2 of 2020. The year over year adjusted EBITDA decline was primarily due to increased expenses related to operating as a public company, Investments in our core business and contributions from acquisitions.

We grew the Desktop Metal team to over 500 employees today, up from 171 in August of last year, as we build the company to execute on our strategic vision. We ended the quarter well capitalized with 515,000,000 dollars in cash, cash equivalents and short term investments as of June 30, 2021. And finally, moving to our guidance. We are reiterating our expectation to generate revenue in excess of $100,000,000 for the full year 2021, excluding the effects of acquiring ExOne, which we will discuss later in the call. We continue to plan to exit the year with an annualized run rate of approximately $116,000,000 and is expect continued sequential quarterly growth throughout 2021.

We are updating our adjusted EBITDA outlook to be in the range of negative $70,000,000 to $80,000,000 again excluding the effects of acquiring ExOne. This updated guidance primarily reflects expected 2021 operating losses from recent acquisitions. With that, I will turn the call back over to Rick.

Speaker 1

Thank you, James. Overall, I'm very The execution from the team in the first half of the year as we've meaningfully ramped the business from an operational perspective. In another quarter of outsized revenue growth Expanded gross margins validates the direction we're positioning Desktop Metal. We're building a great company focused on our vision of accelerating the adoption of AM 2.0 and capturing double digit share over the next decade. And I'm excited about the continued momentum and direction of the business.

At this time, I'd like to hand over the call to John and give them an opportunity to review ExOne's Q2 results prior to discussing the acquisition. John?

Speaker 3

Thank you, Rick. Good afternoon, everybody. I wanted to briefly share my views of this proposed merger as well as cover highlights of an outstanding Q2 that ExOne just reported. Firstly, I'm very excited about this combination, which I believe will dramatically accelerate the adoption of production metal additive manufacturing. ExOne being the pioneer in binder jetting has always viewed binder jetting as the most scalable, flexible and cost effective technology For metal, whether it is printed or poured.

Strong entrants like desktop metal have encouraged us all to get better, yet still mass adoption has lagged expectations. This combination Brings together 2 of the industry's leaders that combined will solve customers' challenges faster and bring the reality of production metal additive forward by years. I'm excited for our customers, our investors, our team members and the whole industry. Now for ExOne's Q2 results. We achieved record second quarter revenue, the highest level of recurring revenue and the largest backlog in company's history.

It was a great quarter and reflected the success of our strategy. I'm proud of the team across the board and particularly excited about the continued growth in recurring revenue. Our record second quarter revenue $18,800,000 reflects a 69% growth from our 2nd quarter performance in 2020. The increase was driven by higher revenues from 3 d printing machines and strong growth in recurring revenue, which was primarily from an increase in consumable materials. There was also a significant increase in revenue from Funded research and development arrangements linked to our production adoption model.

From a geographic perspective, We grew in all regions, but the Asian and Americas region really drove that growth with a combined 92% increase year on year. Recurring revenue rose 2% sequentially and 34% year on year to $8,300,000 in Q2, Demonstrating success from our strategic initiatives in this area. Backlog of 48,700,000 Increased 27% year on year and 2% sequentially. New orders remain strong, While execution on installations continue to improve. During the Q2, we progressed on both remote installations and getting people on the ground around the world.

We are pleased to have executed well during the quarter and believe we continue to have a strong backlog and new orders, which will support our future growth. Shifting to margins. For the Q2 2021, we recorded gross margins of 26%, A sequential increase compared to a 27.8% Q2 of 2020. The decrease was primarily due to the continued impact of operating inefficiencies and challenges driven by the COVID-nineteen operating environment and resulting higher input costs. For the Q2, our total operating expenses increased to $10,200,000 compared to $6,900,000 in the prior year period.

This is consistent with our plan to support our growth. Moving to the balance sheet. Cash, cash equivalents and restricted cash as of June 30 Decreased to $129,500,000

Speaker 1

from $138,300,000

Speaker 3

at March 31. The decrease was driven by cash outflows from the operations of $7,300,000 mostly due to our net loss And net cash outflows for working capital changes driven by increased inventory to support expanded contractual backlog. In conclusion, I'm very proud of what ExOne has and will accomplish to move binder jetting ahead. We're very optimistic about our position in the market, and we believe this combination will truly accelerate additive manufacturing And the transition of traditional manufacturing to a more sustainable future. With that, I'll now turn the call back over to Rick,

Speaker 1

The acquisition under the Events and Presentations section of the DM Investor Relations website. In addition to the fantastic quarter, We're thrilled to discuss a landmark moment for the Desktop Metal family in the AM industry as a whole. We're announcing today that we've This transaction cements Desktop Metal's leadership in additive manufacturing for mass production. We really believe this transaction will encourage and radically accelerate the adoption of AM for high volume applications by offering our customers a more comprehensive and targeted set of solutions that combine the best of both companies, especially across printing of end use parts in metals and technical ceramics as well as cores and molds for digital castings. For our shareholders who may not be aware of X1, X1 was one of the first companies to develop and commercialize binder jet technology, Conat of MIT that was originally invented by 1 of Desktop Metal's co founders, Elie Sachs.

Most of ExOne's products sequential binder jetting compared to our single pass jetting technology, which offers higher throughput. However, ExOne has a great portfolio and a number of assets that are attractive and complementary to our own product portfolio, and I'll talk about this in further detail as we go through the presentation. The company is a leader in printing of Digital Castings, an opportunity with less than 5% penetration and it holds a strong position in direct metal printing and ceramics printing. ExOne's installed base is now approaching 500 systems. These are used for volume production And an estimated 28,000,000 parts were printed across ExOne's customer sites and adoption centers in the past year.

We have more than 45 materials either qualified or in R and D. That includes single alloy metals, metal matrix composites, Technical ceramics and materials for digital casting such as printed molds and cores. The company has a strong and growing backlog that stands at $49,000,000 as of June. And as John just discussed, we did $32,000,000 of revenue in the first half of the year. That's 30% growth over the year In a 44% sequential growth from Q1 to Q2, and this is a company that grew about 11% amid COVID lockdowns in 2020.

Unlike many other companies in the 3 d printing industry that flatlined and contracted during COVID. Taking a step back, I'd like to remind everybody of how we think about acquisitions in the context of our growth strategy. We're focused on developing 3 primary areas of the business In order to reach a double digit share of the additive manufacturing space over the next decade. Print platforms for mass production, recurring revenue via materials that enable key applications In parts, our killer apps are additive with high margins. X1 checks each of these boxes.

Turning to Slide 5, There are 5 key points that underpin this transaction, which we ultimately believe will accelerate the adoption of AM 2.0 for mass production. First, this combination creates the leading metal additive manufacturing portfolio across speed, cost, resolution and part size. 2nd, we believe this will accelerate the rate at which we can introduce new materials to the market to meet customer demand. 3rd, We see an opportunity to leverage ExOne's sand 3 d printing technologies in combinations with DM's low cost hardware to make digital casting more accessible and lower cost for our customers. 4th, our complementary go to market and support efforts will enhance our combined ability to reach more customers and provide a more effective global support network.

And finally, there are significant opportunities to optimize our combined manufacturing and supply chain efforts to yield margin improvements over time alongside product enhancements that will allow us to attract more customers. Highlighting the first point on Slide 6. A key element of the transaction is the fact that overnight, we roughly doubled our IP portfolio to well over 600 patents issued or pending, including the largest portfolio of binder jetting IP in the market. We've highlighted some of those key patents and capabilities That I think are going to help drive adoption of AAM by customers. X1 technology also provides us with the ability to more effectively target On Slide 7, starting with the core technologies in metal, we leverage variations in binder jetting.

Desktop Metal offers single pass jetting or SPJ NexOne offers a process they call triple advanced compaction or AACT, which is a sequential binder jetting technology that requires multiple passes As a result, SPJ is faster on a per layer basis to roughly 3 seconds per layer on our production system P50 or P1 versus 30 seconds a layer for AAAT on an X1 160 Pro. The throughput of these technologies is primarily a function of the layer thickness. So when you benchmark them on an apples to apples basis, SPJ can achieve several times the throughput of However, X1 AAAT has several alternative benefits that customers may value for their applications. In particular, It is a very flexible technology that can easily be tuned to Nuna Materials. By placing both technologies under a single roof, We can more effectively provide best solutions to address each customer's specific needs.

The reality is that not all customers need to produce 100 of 1,000 of parts per hour at the lowest achievable part cost. In fact, to achieve this operating economics, systems with SPJ may require more upfront CapEx So in some markets where customers may require a larger build bed or lower volumes, AECT is a great technology and in other high volume markets like consumer electronics or automotive, SPJ is the best option for the most cost effective production. They're really complementary technologies and combining them into a single portfolio provides customers with the flexibility to optimize production based on their specific application needs and the ability to bring the strengths of each technology to meet future demands. The bottom line is that both of these technologies under the desktop metal umbrella, Our portfolio as a whole is significantly more competitive with the broader metal AM industry and will allow us to attract more customers away from conventional manufacturing processes. The breadth of our combined portfolio in metals is illustrated well on this next slide, where you can see how our combined portfolio can take customers All the way from turnkey to mass production, providing anywhere from 4 liters of throughput per day to almost 2 50 liters of throughput per day.

One of the biggest benefits of this deal is that our product portfolios and go to market strategies are highly complementary. So, X1's offerings will fill the gaps between desktop metal solutions. Even where throughputs are similar, there are differences in build volumes and vice versa. This acquisition creates a product lineup that combines throughput and flexibility and allows us to address the full spectrum of applications across speed, Cost, Resolution and Part Size. I'm also particularly excited about the opportunity to evolve ExOne's products into more turnkey solutions.

At DM, we believe fragmentation between software, hardware and materials has held back the adoption of additive manufacturing. This fragmentation has often resulted in the inability to achieve part success or high yields quickly without significant development cycles. With our world class front end software tools that include proprietary sinter simulation and build prep solutions as well as our proprietary mass produced furnace technology, which we have developed entirely in house. We believe we can evolve a subset of ExOne's products into more turnkey solutions That will make them easier for customers to adopt and to take into production. And while we continue to focus on maturing and evolving our core SPJ and Technologies, this combination will allow us to focus more on the next frontiers of additive manufacturing and to make it more accessible to larger industrial customers, including full process automation, quality control and additional scale.

Turning to Slide 10. In manufacturing, materials are what drives applications and the adoption of new technologies. So supporting more materials and better material properties are critical to driving adoption. To that end, we think this deal Will be really great for both desktop metal customers and for the AM industry as it's going to increase customer choice and the number of applications enabled by our platforms. Centimeters has a leading portfolio of over 225 materials across metals, ceramics, wood, elastomers and carbon fiber composites, And we have an additional 25 materials in R and D and on our roadmap.

Of that list of qualified and R and D materials, Just under 30 are metals and ceramics for binder jetting and the rest are bound metal and photopolymers. As a result of decades long investment at ExOne, we have an extensive list of more than 45 materials for binder jetting comprised of 23 qualified materials across metals, metal matrix composites, ceramics And Sand, in over 20 additional materials in various stages of R and D. Between our two companies, we have scientists working on qualifying similar materials. So by joining these teams, we'll be able to nearly double the horsepower here and multiply the number of materials available for our product portfolios in a shorter timeframe. In particular, those specialty and proprietary alloys requested by select customers that we otherwise would not have approached independently due to lack of resources.

We believe this transaction is going to increase the number of materials available to our customers and that's really exciting. Even as currently constructed, acquiring ExOne would Quickly bring Desktop Metal's portfolio of qualified materials to nearly 250. And I think This will lead to significant value for our customers in the long run. And the more materials available, the greater the adoption of additive manufacturing. Moving on to Slide 12.

ExOne has earned a leadership position in digital casting, also known as sand3dprinting. They've provided bindergenex solutions to casting businesses longer than anybody else and the adoption of their solutions continues to grow at a good clip. Overall though, additive manufacturing has achieved less than 5% penetration into more than 45,000 foundries around the world. AIM adoption has been limited by the cost of the equipment. And as casting has shifted overseas, there's been a huge push to develop more entry level and cost effective AM systems.

Our new RAM systems acquired through EnvisionTek address this need. However, they're still in the process of maturing this unique low cost platform. In partnership with ExOne, which has mature high performance offerings in the space, we think we can work together to, on one hand, improve productivity and throughput of single pass Technology and on the other hand, develop our low cost solutions through ExOne's proprietary binders and materials, making them more attractive to a broader set of customers For whom sand printing has mostly remained out of reach. Turning on to Slide 13. We've spoken in the past about our software capabilities and our in house Technology.

Together, these enable turnkey digital workflows for metal AM to take customers all the way from initial design to final metal part. And we're exciting Bring some of these capabilities to the ExOne platforms we will acquire. ExOne has similar mature capabilities within the sand 3 d printing to enable full digital workflows for casting applications. This includes not only significant expertise in design and simulation from a software perspective, But also hardware innovations such as automated de sanding equipment for large format sand printers. The digital casting business is best in class and utilizes scale throughout the industry.

And we look forward to leveraging these capabilities in conjunction with our RAM system to make low cost hand printing more robust and accessible to help grow this market. Moving to Slide 14, we also see an interesting growth opportunity in new markets for large format tooling, ExOne has the most advanced solutions in the market. In addition to their 420i tooling materials, they have a low cost composite tooling technology Enabled by proprietary binders. You can print large format sand tools at high speed, lay out composite, continuous carbon fiber prepreg or tape around the tool And then dissolve the tool using only tap water to obtain your part. A fantastic technology with a lot of potential.

We also see a huge opportunity around their new AM Cloud technologies, which use a panthenyl filtration technique to create durable tools for prostheticians' vacuum forming. This technology has applications for end use parts as well, such as outdoor architectural and design elements, where the durability and customizable surface finish are key. Let me focus now on the go to market efforts for the combined company on Slide 16. At Desktop Metal, we're a channel first company. We utilize our unique Proprietary distribution network to achieve broader access to the market at scale.

It's provided us with an installation capability in over 65 countries To our fantastic partners, they are excellent in uncovering sales opportunities, but their sweet spot is transactions under roughly $450,000 where the products are more turnkey and have faster sales cycles. A lot of the products that ExOne currently sells are above this price range as is our production System P50, which is a relatively high ASP. Through this transaction, our channel partners will gain additional products to monetize ExOne's more entry level offerings. While we add to our sales capacity and production system offerings by leveraging ExOne's highly complementary direct sales team members, Combined, I think there are significant cross selling synergy opportunities here. The combined company will also multiply the service capacity for our customers, including full time and fully trained reseller technicians across the globe and across our product portfolios from entry level to large format in mass production solutions.

Turning to Slide 17. ExOne has a unique business around funded R and D contracts to develop high value materials and applications for a variety For businesses, including the U. S. Government. For example, with the Air Force, they're developing a super high strength steel that's roughly 20% stronger than conventional AM outlets.

They've also got a very good relationship with leading national labs, including Lawrence Livermore and Oak Ridge. The team focused on creating these opportunities and developing special materials is world class. In particular, because a lot of our developments have dual use, While these projects help our nation solve strategic problems, they also open up frontiers for the industry and enable applications, Discovery with commercial businesses that drive incremental AM system sales and additional funded R and D business. We're very excited to bring this infrastructure in house to Desktop Metal, where we can leverage their expertise across our wider product and technology portfolio to drive growth and create additional self funded revenue streams. I want to recognize the team at ExOne that has led this effort, in particular, Rick Lucas, Who's done an incredible job driving the tip of the spear when it comes to materials for AM.

It's a really unique asset And high value team that we're bringing on as part of the transaction. That brings us to our final point on Slide 19, which speaks to the financial and operational considerations of the transaction. We see a great opportunity through this combination to optimize our manufacturing and supply chain efforts. Desktop Metal has historically leveraged a 3rd party contract manufacturing model, which requires significant upfront engineering investment that enables low cost architectures For high volume turnkey solutions and quick turnaround times for shipping products to customers. It's a great model to help make AM Conversely, ExOne's manufacturing model is quite complementary, where they perform assembly and testing in house, which is well suited to the higher BOM and larger more complex systems that make up a good portion of their revenue, including systems like the S MAX Pro.

We plan to leverage each of these models where they're best suited on a product by product basis to improve the cost structures and overall portfolio of the combined company. The acquisition will also result in additional scale that can be leveraged to drive down cost across systems and materials as well as drive fixed overhead absorption as we grow. Together, these and other future synergy possibilities across the organization represent a meaningful opportunity to realize gross margin accretion for the company and get to our long term margin targets faster. Before finishing up, I'll provide a brief overview of the deal specifics on Slide 20. Desktop Metal will acquire ExOne for $8.50 in cash and $17 in shares of Desktop Metal stock for a total consideration of 25 $0.50 per share of ExOne.

This represents a transaction value of $575,000,000 In an enterprise value of $447,000,000 net of ExOne's balance sheet of cash. ExOne's Chairman and largest shareholder, Kent Rockwell, has stated his full support for the transaction, which the ExOne Board recommended unanimously and his intention to vote all of his shares in accordance with the Board's recommendation. We expect this transaction to close in the Q4 this year, subject to shareholder approval and the satisfactory regulatory approvals and other customer closing conditions. For the sake of clarity on the transaction details, I did want to mention that the deal consideration is subject to the color described in the presentation On Slide 20 and in the press release we issued regarding the transaction, we strongly believe that Desktop Metal can increase choice and flexibility for AM customers through its acquisition of ExOne. We're excited to further cement our leadership in additive manufacturing for mass production, and we believe that ExOne's complementary technologies Go to market efforts will help us accelerate the adoption of AM 2.0 across industries and businesses of all sizes.

And with that, let's open it up for questions. Thank you.

Speaker 0

At this time, we will pause momentarily to assemble our roster. And the first question comes from Noelle Dilts With Stifel, please go ahead.

Speaker 4

Hi, good evening, Rick, John, Doug and James, And congratulations on the momentum of the respective companies in the quarter as well as coming together on the deal. I I was hoping we could start with a little bit more on the financial side of how we should be thinking about things. I'll just use my numbers for For ease, but when I look at our estimates for the year, the companies coming together would be about $172,000,000 in revenue going to more like 300 next year. Obviously, you've talked a lot about the strength in portfolio, the strength in market position, the synergies. Should we is there any are there any aspects of the portfolio where you expect some overlap to result in and maybe some cannibalization, but this will be more than offset by the strengthened Offering into the market, is there a way that we can think about that from just how you're thinking about the revenue opportunity introductory here?

Speaker 1

Thanks, Noel. I don't see much cannibalization actually. I think there's a significant opportunity to make some of the X1 products more turnkey, leveraging The center simulation technology that we've got as well as the proprietary furnace technology that we mass produce and then Especially accelerate some of the adoption of products that are in different Scales of production. So I'm excited about that and I'm also excited about the potential to expand The access to digital castings to a much broader set of customers, utilizing the mature technology that ExOne has and then marrying it with some of the RAM systems, Which offer a much more entry level, more cost effective cost per cubic inch for cast Molten Core, so there's a significant opportunity to grow the business. And I think that We're very excited about the potential for this transaction and working together and welcoming the ExOne team into the Desktop Metal family.

Speaker 4

Okay, great. And then again, I guess I'm getting a little specific, but any thoughts on as this business really continues to scale, what You're targeting from a gross margin profile? Is this a mid-40s business, something more like 50%? Any directional guidance there would be helpful.

Speaker 1

Yes. I think long term for DM, we strive to have north of 50% gross margin for our hardware. And I think that this is one area where we can help on the ExOne side as we've got a pretty sophisticated team that does manufacturing operations and supply chain that could be helpful in maturing the cost structure of renewing the supply chain for the products that ExOne does have, that takes a little bit of time. It could take 24 months to Fully execute a strategy like that, but I do see that over time, we're going to help mature the and improve the gross margins for the products across the full portfolio.

Speaker 4

Okay. And then last Question from me. Anytime you kind of see competitors come together as one, I'm curious if you can provide any additional Background on sort of this genesis of the idea that the company could be better together?

Speaker 1

I mean, I think the genesis of the idea is we've known each other for some time and And obviously, we are in the same 3 d printing space and we've been talking For some time, whether things makes we really look at a full spectrum of opportunities here at DM. And We felt like there was a meaningful opportunity here, in particular since X1 had We felt like the valuation from VWAP point of view was attractive, especially the cash position that they have made the deal possible. And we feel that time to strike us now.

Speaker 4

Great. Thanks.

Speaker 3

This is John. I'll just hi, Noelle.

Speaker 1

I think the more we talk, the

Speaker 3

more we saw complements within the product portfolio. Again, Rick's mentioned some of them. I think the low cost RAM is a great sand system as far as getting some Smaller foundries, mid sized foundries into it. I think what is needed is process knowledge and global coverage and some of the other technologies we have. That's additive.

I think even in the on the metal side, again, it's the focus we always see desktop metal focusing on speed. Great. There Parts of the market that are totally into that, we have flexibility, flexibility whether it's scale, larger sizes, build boxes Or potentially broader materials. I think again, the more we talked about it, the more we felt it was mostly complementary, Very little overlap and I think we're going to see customers adopt through our combined channels direct and indirect More of our products across the board.

Speaker 4

Yes. That makes a lot of sense. Thank you.

Speaker 0

As a reminder, please keep questions to one question and one follow-up before rejoining the queue. The next question comes from Shannon Cross with Cross Research. Please go ahead.

Speaker 5

Thank you very much for taking my question. I've been getting some comments from some investors. And I guess, Rick, can you address When Desktop Metal came out, you talked about sort of there's legacy metal printing and then there's Desktop Metal, which is part of the future Of additive manufacturing, best metal printing. And to some extent, X1 was definitely in the legacy category. So maybe you can look at go to the slide that had the products and explain what each one would be used for and therefore how they're differentiated or if you can provide some more thoughts on why you see ExOne's portfolio moving into the future?

Speaker 1

Absolutely, Shannon. So as you know, we've got a technology that's very high speed. It's our single pass jetting system that can do a layer in about 3 seconds. Some of the other capabilities that DM has is the software capability to really simulate how a part is going to just start during sintering as well as We're the only company in the 3 d printing space with inkjet based printing that Also manufactures their own furnaces and that enables a new level of cost structure. And it makes our products like our shop system or the P1 or Systems like that, very much a turnkey solution that is easy to deploy and get into the market.

And so one of the attractive features that we see here is possibility to take a portfolio that may be More complex to sell and then add our software and being able to pair it with our, sintering systems and make it more of a turnkey solution that is easier to Get deployed and I think that that's an attractive capability. So It's sort of, they're missing technology puzzles and capabilities that, I think ExOne doesn't have as part of their portfolio today. And I think Putting them together with us, it does actually make those products more compelling in the full spectrum of solutions that a customer And so I would say that another difference is the fact that X1 makes smaller and larger Build envelope systems then our P50, we're sort of in the middle. We're close to 50 liter Build envelope system that produces a lot of parts per day. They have a very, very large build envelope system in the 160 and something that's about half the size In build envelope on the 25 Pro.

And so you could imagine a future where you add FPGA capabilities to those systems and also amplify The options to customers, so you have sort of good, better, best version of Something like a P50, what today is the P50. That would take a long time to deploy and execute. But If you look at it from that point of view, that gives you a picture of how you see a portfolio evolving over time and some of the additional rationale for

Speaker 5

Okay. And then I just want to talk a little bit about liquidity and that, you're obviously picking up cash With ExOne, but you're burning a fair amount of cash, both definitely for Desktop Metal, given all the acquisitions and where you're at now with EBITDA Losses for the year and then looking at the fact that ExOne is also burning cash. So how should we think about liquidity? How are you Looking at time to cash flow breakeven for the combined company. Thank you.

Speaker 1

Yes. So I would say that on a full year basis, the plan for ExOne is not going to consume that much cash for the second half of the year. It's almost breakeven on their end. And we're utilizing Their cash to fund a significant portion of the cash portion of this transaction, Which they raised at a higher price. So I would say, I'll hand it over to James who can answer The second part of the question?

Sure.

Speaker 2

Yes. So for clarity, as we put out today, we finished Q2 with north of $514,000,000 in cash, cash equivalents and short term investments. So we are extremely well capitalized. I mean, the M and A strategy, We've been very clear about and we have lots of dry powder left after this transaction. Certainly, we are burning through cash as we continue to grow and scale the business and look at opportunities That have outsized returns over the next couple of years, but we're very comfortable with where we are and Don't foresee any runway issues whatsoever.

I mean, again, we finished with $514,000,000

Speaker 5

Thank you.

Speaker 0

The next question comes from Greg Palm with Craig Hallum Capital Group. Please go ahead. Yes.

Speaker 6

This is Danny Eggerich on for Greg today.

Speaker 1

I

Speaker 6

guess, congratulations to both sides on the transaction.

Speaker 1

Thank you.

Speaker 6

I guess looking from a broader scope, how does this affect the binder single pass jetting as a Technology and its presence in the 3 d printing market as a whole and I guess kind of the outlook of its evolution and ability to penetrate the overall 3 d printing market?

Speaker 1

I think this is going to increase the penetration of binder jetting in 3 d printing as we Essentially add more materials that can be utilized to print materials are what enables applications in our market. And There are some overlap in efforts between both of the companies and by freeing up those resources to Additional alloys and materials, we open up the number of applications that the technology is and can be used for. So I think it's very exciting. You could see synergy between what we're doing on wood with Forest and some of the large frame systems that ExOne has. You could see synergy between the single pass scaling technology and some of the Systems that ExOne has.

So there's definitely a significant opportunity as well as the AACT Recoding Technology. It has lots of areas where it's a very attractive technology. So overall, I think that It's quite complementary and putting Copelac X1 in a well capitalized enterprise like DM also helps The adoption of technology from point of view of large companies that are looking to make decisions on very, very large programs Where they now can feel more comfortable in the balance sheet and the resources behind a larger technical team to really support The adoption of technology solved. Overall, I don't see any negatives. It should accelerate the adoption of bindergene as a whole.

Speaker 6

Yes, makes sense. And then I guess, what is your sense on potentially shared between Desktop Metal and X1, meaning, maybe there were customers who were buying systems from both Desktop and X1 on more of a trial basis and then Kind of evaluating on which technologies they want to go with on a more longer term basis?

Speaker 1

I think we have some Samshares customers, so today we've got roughly between all of the DM customer base, it's roughly north of 5,000 customers. So I think that there's definitely X1 has a long history in the sand casting space with most of the Vehicle OEMs, we are working with a lot of them on the direct metal side. And yes, I would say both companies have May have some overlap, but in general, there's definitely cross selling opportunities and The ability to increase penetration of this technology at scale and get people to adopt AM for mass production, which is our goal.

Speaker 3

Yes. I'd just add to what Rick said. I think there I mean, a lot of our customers are very large customers. They have many different operations, many different requirements. We have penetration on the sand side in almost every major vehicle OEM around the world.

That's great. In Some places DMs on the metal side and some places we have other applications maybe for different materials. So I think again, it's going to work really well from a complementary standpoint. I think our customers will realize the value of both platforms and we can just bring it to them faster.

Speaker 6

Okay, great. I appreciate the color. I'll hop back in the queue.

Speaker 1

Awesome.

Speaker 0

The next question comes from Josh Sullivan with The Benchmark Company. Please go ahead.

Speaker 1

Hey, good evening. Hello. Hi, Josh. Just curious if any customers were telling you the 2 portfolios would work well together, that they needed that between the two systems or was this really the 2 of you seeing the opportunity to go to market together? Well, I don't think I mean, I think that the Synergy came from really understanding the capabilities of both companies and talking about how we could work together for a period of time.

It wasn't a customer asking us can we do this, although we do have many engagements where people use Some of the different technologies, for example, in the sand world, X1 has a very mature technology That is where they have very sophisticated simulation and they understand how to make casting very successful. We've got to have a technology that's much more cost effective with the RAM systems for the entry level Part of that market and being able to leverage those capabilities and put them together, for example, is a win win for customers. And On the material side, offering more choice to customers is definitely a win win for So there's many areas where this is a great transaction for the market and for customers and offering more choice To customers is what it's about. Got it. And then just circling back to as you guys build out the portfolio here, Hello here.

Just wanted to check-in on the Forest and Adaptive 3 d. Can you just update us where those are? For Forest, how are conversations going with Potential furniture customers and then on Adaptive 3 d, where is the product roadmap going at this point? Absolutely. I mean, We have been absolutely overwhelmed with demand on forest.

And I think it's been About 60 days since that got introduced and we are super, super excited about the prospects that are developing there. They range from some of the largest companies in the world to luxury manufacturers of furniture and all the types of products. So I think that that's going to be a major business for the company. It's something we never forecasted before. And I'm excited that that class of product is Got a lot of potential.

So we'll update everybody as we convert that interest into revenue. But That also links into X1 because they also have large frames that could be adapted to print those types of materials. So there's a real opportunity there. And then on Adaptive 3 d, we've got some real, real interest as well from large companies that We want to leverage those materials. They make the world's best elastomers and pairing that with our Extreme 8 ks, which is the largest DLP, High resolution, high speed photopolymer system in the market, I think is a win win combination.

And, we're seeing it from the types of programs that are developing From that, I think that it opens up a whole new level of cost structure for mass production of elastomers with additives. So we're excited about that. And one large point that I would say is ExOne has a technology called AMCLAD that they acquired. I think that that type of technology can also be used to do end use parts that could be very attractive and can be mass produced in either The RAM systems or their large systems not just used for tooling, but for large printed and used parts. So there's a lot of Interesting things here that we can commercialize over the next couple of years, and I'm excited about that.

Speaker 0

The next question comes again from Shannon Cross with Cross Research. Please go ahead.

Speaker 5

Thanks. I just wanted to quickly go through The sales strategy and understand channel overlap versus the potential for channel expansion, If you look at how both of your companies right now are distributing. Absolutely. And then I'll

Speaker 4

talk to you guys later.

Speaker 1

Thanks, Shannon. So yes, so we sell at the end primarily through a channel. We've got about 200 partners In over 65 countries, it is a fantastic, very scalable way to support and sell products. That type of indirect access to market is quite efficient at products that are under $500,000 ExOne in the past had been selling product almost exclusively through direct sales And they have a full team of about 20 direct sales folks plus all the support infrastructure that's required Applications engineering and all the so it's a significant go to market team. Now that type Sales team is better suited for larger ASP type products that are north of $1,000,000 like their sand systems Or even a product like P50.

So I think that we're going to make it complementary and enable our channel to still monetize very large format type of systems from a lead gen point of view, but then we're going to be able to help close those deals. And then I think that having a Service and support network globally that we have either through our internal team or through channel is also going to help accelerate installation And other things that we've got going on, not just for our products, but also for a company like X1 who had relied on Just an internal team exclusively. So I think it's complementary. We're going to make sure that we don't get channel conflict and that we remain channel first for the From the point of view of the high velocity products and actually X1 was starting to build an indirect channel For those types of products from a competitive point of view and I think that now they get a much more mature one and we're going to get the Half dozen partners that they had started signing up. So it is a net positive on all aspects from a go to market point of view.

I think it strengthens the combined

Speaker 0

The next question comes from Sarkis Sherbetchyan with B. Riley Securities. Please go ahead.

Speaker 1

Hi, everyone. Congrats on the acquisition and thank you for sneaking in my question here. Just a quick one for me. Rick, I think in your prepared remarks, you talked about bringing together your software tools, Including the proprietary Sintra Simulation and the build prep solutions and I think you do have the furnace tech here, which is important for the binder jetting process. Maybe if you can dive a little deeper into leveraging what you've done on the software side with ExOne's product lines.

Thank you. Absolutely. So one of the most complex things in binder jetting is especially when you're going to have a center product is The ability to predict what that part is going to look like after it's centered and In our company, we've put a significant amount of technical effort to turn that into a Turnkey application that gives you first part success right away or as early as possible. And one of the things that held back the adoption of Well, boiler sintering based systems was the lack of that type of software capability and a well understood sintering Process. Well, every time you change a furnace, you have to calibrate everything else.

And so that led to a lot of trial and error for competitors. And I think that it is an advantage to have to be able to add those internally developed proprietary technologies to A broader set of the market and more products and that is a great thing for adoption. So we're going to be able to leverage that. But We've got other capabilities that we're developing and you'll see them in the future as we advance the market. For example, our acquisition of Aricent, which It's just very recent.

They have a very cool technology to enable multiple materials in powder in a bed. And I think that in a couple of years, you could see products that do multicolor MIM Or where you if you have very specialized or advanced powders, you can sort of eliminate To have you can reduce the amount of material that you're actually using to print a part and other applications like that. So there are Many opportunities to advance the state of the art of the technology and essentially make better products for customers. Hopefully, that answered the question. Yes.

Thank you. That's all for me.

Speaker 0

Yes. Awesome. This concludes our question and answer session. I will now turn the conference back over to Rick Fulop for any closing remarks.

Speaker 1

So all right. I want to thank everybody for joining the call as well as Doug and John for joining me today. We're very pleased with the momentum of Desktop Metal in the quarter And really excited about the acquisition of ExOne. We're executing our long term vision to accelerate the adoption of AM 2.0 and we look forward to updating you on our progress in upcoming calls. Thank you.

The conference has now concluded. Thank you for

Speaker 0

attending today's presentation. You may now disconnect.