Chris Witty - Investor Relations Mark Cola - Co-Founder, President and Chief Executive Officer Murray Williams - Chief Financial Officer

Good morning and welcome to the Sigma Labs Fourth Quarter Fiscal 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to today’s moderator Chris Witty. Please go ahead.

Thank you. Good day, ladies and gentlemen, and welcome to the Sigma Labs’ fourth quarter conference call. Following management’s prepared remarks, we’ll hold a Q&A session. With me today is Mark Cola, the company’s President and CEO; and Murray Williams, it’s CFO. I would now like to provide a brief Safe Harbor statement, which is also shown on Slide 2 of our fourth quarter presentation, which is being webcast. This conference call may include forward-looking statements that represent the company’s expectations and beliefs concerning future events that involve risks and uncertainties and may cause the company’s actual performance to be materially different from the performance indicated or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company’s expectations are disclosed in this conference call and in the company’s Annual Report and Form 10-K for the fiscal year ended December 31, 2016. All subsequent written and oral forward-looking statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise after the date of this conference call. Please turn to Slide 3 of the presentation. And I’d now like to turn the call over to the CEO, Mark Cola. Mark?

Thank you, Chris. Good morning, ladies and gentlemen. I’m delighted to be here with you today and have the opportunity to speak with you about the progress Sigma Labs has been making and some of the recent highlights and business outlooks for the upcoming quarters this year. And so, with that if everyone is looking at the slide deck, if you turn to Page 3, I’d like to go over a few recent highlights that have developed over the last few months since the closing of last year. And most importantly, I think is the completion of our public offering, the recent offering, where we were able to raise $5.8 million to keep the company moving forward in meeting its objectives. And also in conjunction with that was the ability to uplist to the NASDAQ Capital Market following a reverse stock split, which as you all understand opens the doors of broader base of institutional investors that we’ve been interested in having joined Sigma Labs. And so the - that all culminated in March 2, ringing of the NASDAQ opening very, very exciting time for Sigma Labs and our stockholders. And so with that the other really interesting developments in the last few months of course are the street strategic alliances that we’ve been able to form with some other leaders in the AM industry, Morf3D, in particular and Jaguar precision machining. Morf3D and Jaguar share a unified vision of the future with Sigma Labs in terms of what the industry is looking forward today when we say the industry remains the additive manufacturing industry. There has been lots and lots of tremendous effort expanded on the parts of all of these entities and the ability to form strong alliances allows us to offer our combined customer base a more…

Thank you, Mark, and thank you shareholders for all of your continued support. To begin with, I’d like to point out that we ended the year with approximately $400,000 in cash and approximately $1 million in stockholders equity. But please keep in mind that these results are prior to the closing of our recent public offering that Mark mentioned, where we raised $5.8 million in gross proceeds. That raise now gives us the financial security and ability to execute our business plan and it obviously gives us a very good strong balance sheet. That along with our recent contract wins that Mark mentioned like the OEMs, Pratt & Whitney, Aerojet Rocketdyne, as well as our strategic alliance with Morf3D and Jaguar gives us a great opportunity for accelerated top line growth in 2017. During 2016, we maintained strong margins coming in at 76% gross margins, with revenues of approximately $966,000, the cost of sales of approximately $228,000. So we believe our strong margins will continue into 2017 and beyond. All these things combined with the tight management - with tight management of our overhead expenses puts us on a solid path towards profitability. And with that, I’d like to open the floor for questions.

We will now begin the question-and-answer session. [Operator Instructions] Okay, our first question is from Kevin May [ph], who is a private investor. Please go ahead.

Hi, Mark, how is it going?

Good Kevin. You?

Great. I just want to congratulate you guys on a great year. Everything seems to be moving forward.

Thank you.

With this Morf3D, you mentioned then as well as Jaguar, is Jaguar going to be a part of this possible merger?

So the opportunities, well, so the answer is, we’re exploring the business opportunities between the three entities. But you have to look at it from the standpoint of what they bring to the table. And really it’s all about providing a full integrated complete solution set and everybody brings their strengths at the table. And so we’re considering how best to move forward.

Okay. As well as with Morf3D specifically, do they have contracts set up, or a certain amount of printers or personnel that as a good fit for Sigma right now?

Absolutely. And so, Morf3D brings tremendous strength in the areas of computer-aided design, computer-aided engineering, even computer-aided manufacturing. And so you can visit their website and see their complete product offering and services. And it’s a very nice complementary fit with Sigma Labs and our technologies and services.

Yes, I did take a look at their website with them being a private company there wasn’t too much information that I got in-depth about. But I see they do have some value there. With the GE Aviation 4027 project, where do we stand with that?

I don’t know by a number 4027. GE Aviation referring to the America Makes program?

Correct.

Yes, so that is winding down. Final reports are being prepared. The final presentation was actually given a couple of weeks ago. I believe it was the 15th of March in El Paso, Texas. I was in attendance and GE Aviation presented. It was tremendously well received by the audience. As a matter of fact after about the 20th question we received, the person asking the question said, the reason you get so many questions, because we’re excited about the fact that you guys actually have data to present, because it appeared apparently compared to the other programs that had been presented previously. So we were quite pleased with the reception we got.

Okay. With the presentation of the data with GE Aviation, the scope of that project was defined as creating a commercial product for mass production of parts. Where does GE Aviation find with their - with that outcome where they are at?

So, it’s a great question. And to put a fine point on, it wasn’t to create a commercial product, we have a commercial product. It was to validate and the commercial product we had offered and basically move it forward to a production-ready state. And I believe we’ve achieved those objectives. So the results that were presented demonstrate that and yes, I think that’s what, what can be shared at this point.

Of course, sounds great. Do you - in the earlier releases and that’s one that stated that with the funds earned from the offering, you guys are going to purchase new U.S. printers. But the PR you guys just put out would be leasing to Morf3D. Are you still planning on purchasing printers, or where we are with that?

Yes. So you’re absolutely right. We - part of the use of the proceeds would be for possible use of acquiring new equipment and we’re currently evaluating what that might look like right now.

Okay. So we’re not sure for print - purchasing new printers at this time?

No. We’re evaluating our options at this time.

Okay.

I’d appreciate all the questions, Kevin, and I’d like you to get back in the queue. But I want to make sure others have an opportunity to ask some questions.

Okay. Yes, that’s fair. Okay, thank you for all the information.

Yes, you bet. Thank you, Kevin.

[Operator Instructions] Our next question comes from Paul Tamarkin, who is a private investor. Please go ahead.

Hi, Mark.

Hi, Paul.

I’d like to get a little bit more into details of the printing aspect.

Sorry, Paul, can you move a little closer to your speaker? It’s not quite as I can hear you?

Is it better? Last conference call, you indicated that the printer that you have was fully booked through the end of the year. Does that fully booked status continue now?

So you’re absolutely correct. We were at the end of last year, the machines capacity was booked. It is currently utilized, but not fully.

Okay. And [what’s the] [ph] trying to move with Morf into this printing alliance cooperation, whatever the exact term may be? There was a brief period of time on your website, where it was indicated there was an expectation of $3 million in revenue for this year. Can you comment on that, because that expectation disappeared after a few days?

I’m not entirely quite sure what you might be referring to. But Sigma is anticipating increased revenues and top line growth this year, yes.

Well, what I’m referring to is, there was a PR on the website in the news, which announced the contract with Morf3D but for a very short period of time did have a number associated with that. And I guess my curiosity is, the anticipation with printing was that number put there with the anticipation that three new machines would be needed in order to fully satisfy the requirements of the contract in terms of productivity?

So I think the best way to address your interest is that, Sigma Labs and its strategic alliances and partnerships is fully anticipating again that the results of these will add to our top line growth. And so I think that’s about all I can comment on right now if there was a number projected out there, I can’t speak to that now.

Okay. Let me move a little bit, you’re talking about a wider acceptance of the PrintRite systems. I - if I recall correctly, the last conference call there was an indication of approximately a dozen PrintRite systems has been out and licensed, is that correct? And secondly, if that’s correct as of the last conference call roughly 2.5 months ago, are there more systems out there now today than there were at that time?

And the answer is yes to both. We’ve added, of course, systems to the likes of Pratt & Whitney, Siemens, and the other announcements we’ve made.

And is there a quantifiable number of the additional since mid-November?

Sure. But I probably don’t have an on top of my head. So we know for sure, Pratt & Whitney got one. We know for sure, Siemens got one. So that adds two. And I’m trying to recall if we’ve added additional systems beyond that.

In terms of the expectations with revenue, is there any guidance that you can give as to the increased rate of revenue that you expect, I don’t think it’s going to be flat and linear through the year? Is there any kind of guidance you can give that, because the limited revenues, I’m not saying this people not trying to sell product. What I’m trying to say is the adoption of the product with - for use within the additive industry. Can you give any guidance estimation as to where you see that rate of acceptance coming and what it might be?

So, yes, it’s a great question. And so what we fully expect as a result and I suppose you expect as well is that, with the addition of new early adopters Pratt & Whitney, Siemens, as two examples, as well as now the addition of OEMs that are working with us to embed the technology. We fully expect that there will be increased sales as a result of those activities either doing more with the existing customers we have, as well as now doing additional sales with the new OEMs, as they begin to sell and - market and sell their products with our technology embedded in. And so, yes, we fully expect there to be more than less as we end the year. And quite honestly, we fully expect to be adding new early adopters to our technology additional end uses. And so when I use those terms early adopters, I’m referring to the end users, the Pratt & Whitney, Siemens, and others like that as opposed to OEMs, which are the guys making the machines. But we fully expect to be adding to both of those programs throughout the balance of this year.

Am I correct in my understanding that with the printer OEMs when you partner with them that they will embed print price that they’re doing with and it’s only when the customer says, yes, I want this option within the machine that you’re going to see revenue out of that, or are these OEMs somehow buying the PrintRite system from Sigma at some discount to include, so there’s actually a purchase of PrintRite by the OEM rather than the end user?

So the latter part of what I think you just asked is actually addressing the installed base of customers that have 3D printers. And so in that case, we would work directly with the end user to retrofit an existing installed base. And that’s one of the verticals I was referring to. The first vertical is actually what you just described initially, which is the OEM partner program is basically an opportunity for OEMs to bundle our technology into their product offering. So when it turns up at their customer site, it is fully bundled with their product offering. So those are two verticals that we are continuing to pursue on. I might use different terms, I’m sorry for the confusion there. But yes, when OEMs join our partner program and we announced a commercial alliance with them, that’s basically for them to license the technology from us to embed into their product offering as a result of that then there’s revenue flow to Sigma.

And because I firmly have the position that PrintRite is only going to be widely accepted within the additive manufacturing community. After there are some kind of standards that are promulgated via FAA, some of the major insurance folks like Lloyds or whoever, and that those standards would reflect the kind of technology that PrintRite uses. Can you comment at all about any kind of progress being made towards the promulgation of standards, acceptance of standards that you’re aware off, any timeframes, any information on that issue?

Sure. The Standards Organizations serve an important role for the wider community and industry. I mean, they set guidelines. They don’t tell people how to do things. They provide guidelines. And so, for example, America Makes & ANSI, A-N-S-I, the American National Standards Institute have put forward their recommendations for certain guidance for additively manufactured parts, where they had a 182 page document that was issued recently that that speaks to all of the points that the broader community needs to be made aware off and all the activities they may be going on within the standards community, such as NIST, the National Institute of Standards and so on. So they’ve provided some interesting and good guidance. The FDA has also provided draft guidance for additively manufactured parts. And again, I want to be very clear that it’s simply guidance and that is meant to be used by end users as they develop their internal standards for their own production of AM parts. And then, the FAA is not too far behind in terms of providing their draft guidance. We actually had a visit from the FAA last fall - late last year actually, where they were meeting with us directly and reviewing our technology, because they too are looking to provide guidance to end users making components, because their concern any of these standards or regulatory agencies, their biggest concern is to ensure the products safety across the supply base, if you will. And so, they’re broadly sort of providing as how can I say it, guidance to the community, such that when they adopted and put it in place, they know the boundaries within which they have to work. And most of the guidance that we’ve seen is right in line with what Sigma Labs has been putting forward in terms of their product offering for In-Process Quality Assurance, others call it in-monitoring. But we’re actually setting some of those standards and directions and we see that somewhat reflected in the guidance. So the customers today that are using are following that guidance. They’re not hampered or hindered by it. The fact that it may be out or not complete - completely out in the case of the FAA, because they can still provide technical data packages, if you will, that fall in line with the draft guidance it’s made available. So it’s not hindering the industry at all. I think that’s kind of where your question was going towards. Did that help?

Yes, it helps some.

Okay.

I don’t expect to be able foretold the future of these things. But it just seems to me that once there is a - I don’t know in from the tour of acceptability from those who are going to qualify for our service set, what it takes for being qualified that’s when manufacturing companies are going to be likely to move forward in terms of accepting and utilizing the product that it maybe a misunderstanding but…

Yes, I know. Again, I think, yes, it’s fair to put a fine point on this that again the guidance is just that guidance. It’s not like they put out a recipe cookbook. It says here’s the steps you have to follow, that’s not what a specification from these regulatory agencies does. That would be very restrictive. What they do is provide draft, I’m sorry, broad guidance. So that an end user, lets you somebody specifically. Let’s say it’s an aero engine manufacturer can basically plot out their internal quality requirements to fall in line with the guidance that’s presented. So it’s not a recipe per se, but again, I seem to be stressing the same words, it’s guidance. And so there’s no one that’s being hampered by this at the moment. There are examples of articles on airplane wings today there were 3D printed. It just - it took a larger data package in order to make that possible than perhaps you would have liked. I think, Paul, with that I’m going to offer the same suggestion, I offered to Kevin earlier is that, if you’ve got more questions, we’re really anxious to answer them. But I want to make sure that others perhaps have an opportunity as well. So if you could get back in the queue, I think we greatly appreciate that.

Certainly fair, and thank you for taking my questions.

Yes, thank you. I appreciate all your support.

Okay. This is the operator. [Operator Instructions] Our next question comes from Mark Rupp, who is a private investor. Please go ahead.

Good morning, guys.

Good morning.

I think it’s still morning out there.

Yes. It is, yes.

Yes. Just a couple of questions. Today’s press release on the $500,000 note to Morf3D probably more appropriately the consortium that you guys are putting together for the contract managing - a contract manufacturing vertical, that is aiding financing this consortium effort as a note if Sigma Labs actually going to see interest income on that, or is that just money that you hope to recoup down the road with income from actual contract printing?

So, yes, that note carries a 7% interest rate.

Okay, very good. Do you anticipate Sigma Labs reaching a profitability status in 2017?

So we certainly hope, it’s very hard for us to obviously predict the future. But we set things in place that gives us a strong possibility of achieving profitability. But we still have to execute and things that fall in place. So we can’t guarantee that we will be profitable.

Okay. It’s looking - it’s coming closer though, right?

We’re on the right path.

Yes. So I mean, we’re getting a better picture of these verticals that that you guys are establishing for the company, and I see how the parts work and all that. Word on the street is that, PrintRite3D is very good at identifying print builds that deviate or don’t deviate from a specific data set for the build by that no sensor-based in-situ system is very good at identifying when parts that do deviate are in fact bad parts. And so then, of course, you’ve got to do your destructive and nondestructive evaluation on it. So it’s not the really the Holy Grail for the industry. Do you - but do you think that the end users and the OEMs will go ahead with serial production with what PrintRite3D can do at this time, or do you think they’re going to wait around until they have the whole enchilada to make it work for them?

No, I think what you’re seeing and starting to see evolve is that, customers are moving to that IPQA assisted solution, if you will, because a couple of points you made are really interesting, and I really appreciate the in-depth knowledge you have about the technology. And so a couple of fine points there. You’re absolutely correct that that the IPQA PrintRite system has the ability to identify suspect product. And when I use the word suspect, the reason I say, because we don’t ever basically tell a customer whether something good - is good or bad. That’s for the finer arbiter or decision maker of whether it’s acceptable. That always comes down to the end user, the customer, whoever that is, the Pratt & Whitney, Honeywell, or GE Aviation, they make that decision. And what the tool, if you will, and the software modules allow them to do is make a decision on which product they suspect and should be set aside and either further interrogated or evaluated. But really what the tool allows them to do then is open up their product flow, such that the majority of the product over time they can gain confidence in the IPQA assisted quality assurance approach that they put in place. The majority of the product that they flow through is acceptable to their determination and basically allows them to move as much product along as possible without increased costs. I mean, if you think about it, at the end of the day, we’re seeing a lot of movement back in the new administration that there’s an increase in defense spending coming and there’s - but most people stop listening and they don’t hear the part about, yes, but it comes with efficiencies. And that efficiency gain is going to come…

Yes. I mean, everybody is talking about metal AM for critical parts can go around and around and around talking about the entire ecosystem at the bottom line is, y Sigma Labs investors and everybody who watches this industry close knows money is in Sigma Labs PrintRite3D being rolled out through the entire metal print industry with the big guys, and that hasn’t happened yet. So everybody is wondering, okay, why is it being held up? I mean, I think I have a pretty good idea of…

I don’t think it’s being held up, Mark, to your point. I think the way to view this is early adopter program, the vertical that we have set for ourselves with respect to working with end user customers that have an installed base of systems is basically to get them using our technology, establishing a quality infrastructure around that, such that as they add or expand their capacity then Sigma Labs is part of that. And so, it has a very methodical approach particularly in the aerospace industry about how they test and evaluate technologies and then incorporate them in. And so it’s kind of in that - the best analogy I can come up with the sort of clinical trials for biomedical companies, they go through these whole series of clinical trials. In the aerospace and defense communities, it’s test and evaluation periods. And that’s what we’re doing by adding to that customer base of ours. And then on the OEM side, as they begin to sell new enhanced products with our technology offering embedded inside, now we have reached a broader industry, and we’re ready for that inflection point in the curve to your point, which is being promoted by the likes of - or forecast that I should say by the like some wars as basically being driven by the metal AM, you’re absolutely right. But I wanted to finish one strong point. The technology that Sigma Labs has developed by the way was actually developed early on for other advanced manufacturing technologies. It was demonstrated, validated and accepted by Boeing Aircraft and some of the early work we did in 2010, 2011 and 2012. And so it’s broadly applicable beyond just mental AM.

Well, that’s good news.

Yes. No, it absolutely is. And so the underlying technology in physics is, yes, broadly applicable, I guess the best way to put it.

Okay.

We’re just focused on the metal AM side right now because of the large growth potential there. But when you step back and look at it, there is also tremendous opportunity in the installed base of other advanced manufacturing technologies. It’s just - we can’t go chase and all of these things that once we have to be very selective in…

Right.

What we do and how we utilize our resources.

Right. I have two other questions, and then I’ll get on.

Sure.

We have the named European OEM…

Yes.

…machine manufacturer. We have additive industries machine manufacture. But everybody is waiting for concept laser and EOS. Do you think that you guys have a good shot at getting PrintRite3D in on those machines with a deal with them, or is there in-house sensor-based system do you think is something that they’re going to stand behind?

So I think it’s a good question. And the motivation there, I think we all understand is that, a lot of these OEMs are looking at alternatives. But when you step back and you look at what they’ve got in terms of offering, it isn’t competitive to what Sigma Labs is doing, it’s complementary. And so a good example what I mean by that is, generally when we work with the OEMs, one of the things that that they like to do and that they do well and we’re happy to let them is worry about all the hardware and sensors that go into the machine tool, because that’s what they do and that’s what they can design. And quite honestly, that’s off-the-shelf technology that they can buy. And so the real intellectual horsepower is in the software. And that and what are you doing with the data you’re collecting to make it actionable intelligence.

Right.

And that’s why the two are complementary. And so do we have a good shot at it? Absolutely. We are either in discussions with or evaluation with other OEMs at the moment.

Okay. Final question, many moons back the PrintRite3D units that GE Aviation had, I forget whether it was one or two of them. But anyhow you had made mentioned that they were restricted for use only in your joint technology agreement for evaluations prototyping that kind of thing. Well, now with the America Makes project winding down, what’s the next shoe to drop? I mean, do you take those units back? Does GE step forward and expand this further? I mean, what do you expect to happen with those two units with GE and AM/GE in general?

So GE Aviation procured those systems, so Sigma Labs has not owned them. They had licensed the software from us like everybody else. And you’re right, they are in use on specific programs and continue to be in use on programs. What they - I think that’s all I can comment on right now.

Okay. That’s all I have. Thank you.

Thank you, Mark.

[Operator Instructions]

Right.

Okay, this concludes our question-and-answer session. I would like to turn the conference back over to Mark Cola for any closing remarks.

Well, thank you again, ladies and gentlemen. We were delighted to be able to share this morning with you and the outlook for Sigma Labs and its - and what 2017 looks like for us. We appreciate the opportunity and look forward to speaking to you again on the next earnings call. Thank you very much. Have a great day.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.