Scott Gordon - President of Core IR John Rice - Interim CEO Nannette Toups - CFO

Good afternoon. And welcome to the Sigma Labs Earnings Conference Call for the Third Quarter ended September 30, 2017. [Operator Instructions] Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. A replay of the call will be available approximately one hour after the end of the call through December 14, 2017. I would now like to turn the conference over to Scott Gordon, President of Core IR the company's Investor Relations Firm. Please go ahead sir.

Thank you, Michael and thank you everyone for joining today's conference call to discuss Sigma Labs' corporate developments and financial results for the third quarter ended June 30, 2017. With us today are John Rice, the company's Interim CEO and Nannette Toups, the company's CFO. Mark Cola, the company's President and CTO and Ron Fisher, the company's Vice President of Business Development are unable to participate in today's call because they are representing Sigma Labs at the industrial important Formnext show now taking place in Europe. At 4:05 PM Eastern Time today, Sigma Labs' released financial results for the quarter ended September 30, 2017. If you have not received Sigma Labs' earnings release, please visit the investor's page at www.sigmalabsinc.com. During the course of this conference call, the company will be making forward-looking statements. The company cautions you that any statement that is not a statement of historical fact is a forward-looking statement. This includes any projections of earnings, revenues, cash or other statements relating to the company's future financial results, any statements about plans, strategies or objectives of management for future operations, any statements concerning proposed new products, any statements regarding anticipated new relationships or agreements, and any statements regarding expectations for the success of the company's products in the US and international markets, any statements regarding future economic conditions or performance, statements of belief and any statements of assumptions underlying any of the forgoing. These statements are based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Some of these risks are described in the section of today's press release titled cautionary note on forward-looking statements and in the public periodic reports the company files with the Securities and Exchange Commission. Investors or potential investors should read these risks. Sigma Labs assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. It is now my pleasure to turn the call over to John Rice, Interim CEO. John?

Thank you. Well, good afternoon and welcome to our shareholders and other participants joining us for today's call. I'm John Rice, the Chairman of your company's Board of Directors and Interim CEO. The purpose of this call is to report on the company's financial results and corporate development for the third quarter in specific and for the first nine months of the year in general. The central theme of this three quarter period is change, change in the market, change in our product, change in our culture, change in our management team and of course change in our operational strategies. So I'm going to walk you through some of these. First, the change in the market's capacity to manufacture Metal AM parts in dedicated production settings are very important in the current year. So although the principal use that it manufacturing metal machines continues to be prototyping and research. We are seen an increasing number of companies in the news that are executing strategies to enable them to enter production. GE in the past year has spent over $1 billion buying Arcam and Concept Laser to enable themselves to have sufficient captive resources that are the manufacturing machines to meet their own forecasts. Meanwhile in Europe, Wohlers has forecasted that AirBus will be purchasing 30 tons of AM Metal parts a month by December 2018. Here in the United States we are seeing service providers such as Linear Moog been acquired by companies wishing to secure production capacity and we're also seeing large independent service bureau such as [indiscernible] adding substantial new capacity to build their own. Now concurrent with these developments in the course of the past year, we are also seeing additive manufacturing equipment manufacturers coming to market with machines that are clearly targeting production rather than prototyping.…

Thank you, John. I'll now discuss the results and operations. During the three and nine months ended September 30, we recognized revenue of $78,046 dollars and $518,802 respectively that compares to $189,952 and $642,230 recognized during the same periods of 2016. The decrease in revenue for both periods was primarily due to reduced programatic cells. The revenues from those was partially replaced by sales associated with our new earlier adopter and original equipment manufacturer programs, but only partially due to the incentivized pricing associated with those two programs. Our general and administrative expenses for the three and nine months ended September 30, were $576,855 and $1,814,843 respectively this compares to $437,870 and $1,314,055 for the same period in 2016. Our G&A expenses principally includes internal operating in sales expenses and outside service fees. The largest component of those outside service fees are the services we incurred in connection with our obligations as an SEC reporting company. For this period, the increase in general and administrative expenses was principally the result of fees related to and as a consequence of our February 2017 public offering. That fee offering that resulted in net proceeds of approximately $5,225,000. We also have incurred fees in connection with investing in strategic partners. We've had an increase in interest and finance costs due to the $1 million note that originated in October of 2016. In addition to the continued development of our IPQA enabled PrintRite3D technologies and our latest efforts to expand our services. On the payroll front for the three and nine months ended September 30, our expenses were $298,890 and $973,172 respectively as compared to $259,011 and $727,494 for the same period in 2016. These increases in payroll expenses are principally the result of hiring additional software development staff to assist in acceleration of…

We're going to go to questions very shortly. I just want to wrap up from the management standpoint. We continue to be very confident of the outlook for Sigma. We are very confident of the capability and the dedication and the intensity of the management team that we have assembled. We believe that we continue to lead the market with our technology and our response to thinking that was to increase our commitment and speed of development to try to ensure that. So we are working into a market that is yet to reach its major tipping point. That is considered by many, many people to have enormous future potential and the question that they ask and the question that we ask is when does it take off? That said I'll take questions.

[Operator Instructions] Your first question comes from Aaron Tyron [ph], a private investor.

Just curious what other technology agreements that you have that are still ongoing. I know you have one which materialized but still in effect?

Yes it is.

Also I have a question about the Honeywell DARPA Phase III which is anticipated to end in mid-2018, is it still anticipated to end around that time?

The government contract is expected by all parties to end at that time except that all of us will believe it when we see it.

What are you trying to get out of that, what's going to be the benefit for Sigma Labs at the conclusion of that program? What do you see with that?

That actually is turning out to be very helpful. They have capabilities to look at many of the questions we're looking at internally. So we are able to use that as a test and confirmation facility for our own purposes even as we work with - to DARPA's needs too. It's been very helpful and the people in the program have really delighted us, they're darn good.

Are you anticipating increase of sales to coincide at the end of that program?

You had a little break up there; I think you asked, are we expecting an increase in sales as a result of that program?

Yes, sir.

I would say not directly, we don't know how to equate that program into a specific outcome. But it's one of so many things that we're working on that build market knowledge of our products with other companies, whether it's Honeywell or other high tech groups. So anytime we work a program like that the technology networking probably leads to significant sales opportunities, but I have no idea how to quantify that.

Just one last question, earlier in the year, [indiscernible] could you clarify what they meant by that statement.

I will look into what I can say and I can't say. We have been working with EOS - with and on EOS for some years to try to develop appropriate teaming techniques and so on and so forth. And that cooperation has continued to grow and improve to this day. I am pleased with our relationship with them and it has promise.

Your next question comes from David Robertson, a private investor.

So, you talked quite a bit about in your introduction about movement and change in the market, and changes relative to Sigma's technology. The thing that's a little hard to get hands around and maybe you could provide a little better color. And I'm not asking for any specifics that we would understand you're not able to provide. The question is a general question. I think all of us saw in business node that there are communications that we have with our customers that we lead to not a guaranteed senses anything in terms of sales. And again I'm not asking, can you share specifics or give us even a broad sort of guarantee. But folks have enough involvement with a variety of partners; a lot of other companies that you're working with, you ought to have a sense in fairness. I think it's only fair to say that you ought to have a pretty good sense already. If real progress is being made, meaning, are you hearing from these folks, your potential customers that you truly are close and that you truly are gaining traction and can you say - can you tell us in fairness not promise us, but tell us that you believe that with this variety of different companies that Sigma is now closely associated with, many of which there have been a long standing associations with that you believe things are closer to coming to real revenue fruition and that is something that you're hearing from these other folks.

A perceptive approach of the question and I did not put you up to the question. Thank you. So a way to look at this question for Sigma is to look into the types of customers and the individual customers with whom we have been working over the past three or four years and what you see that segues into today's conference call is you see that we really began in the marketplace as a company, 16 other companies to do research in anticipation of the day that they would manufacture stuff with additive manufacturing. Some of them like GE were absolutely targeted on a specific part already. Many others were simply examining the space. Those relationships are important in terms of the notion that we may very well be able to reel in most of those companies over time don't know. What has changed in the past 12 to 15 months is the fact that there are major companies who are already making some parts with additive manufacturing and are discovering that they have a quality yield and cost problem. The good news is that they are manufacturing many good parts, but the bad news is they're not enough and it's not predictable. And we are working increasingly with companies like that and we have changed the way we do business to support companies like that. And what that means is when we contract now with a company to put PrintRite 3D in and they are already making metal parts on additive machines in their operation, we contract to a specific protocol and program that identifies a process by which we will assess their parts and they will assess our software and it begins with a process where we lay out, on a calendar, everything we're going to do in this test and it's a 35 to 40 day period, which is far faster than they want to go sometimes. But what it does is it allows them to, for the first time actually, to calibrate their own equipment. And then it allows them to see how our equipment works and assures the quality of their parts and those tests in my opinion are great for the customer and great for Sigma. And that process addresses the heart of your question. The relationship between Sigma and a company in that setting is very close. That's a co-operative development.

And so what sort of feedback within that context from those various companies that you're referencing, what sort of specific feedback are you receiving.

We're really pleased. We are not discouraged by any of those relationships. It's exciting to them and to us to see what this enables them to do. Our product, remember, it's a new paradigm. So the normal beginning of this relationship is, you've got an engineer that's really excited about it and you've got a quality guy who doesn't want you messing with his system. But when a quality person sees Sigma finding a problem that they have no means to see, even if they have a CAT scan, suddenly, the game begins to change. So being able to apply our product to specific products to be made by these companies is a very, very different transaction from what we were doing a year ago at this time.

So without any, let me we acknowledge yet again, without any, could you on the spot and asking you for an answer that as we know you cannot give, is it fully your expectation that some of these relationships will materialize.

Right. I would be amazed if we were not to succeed at this.

That's a reassuring answer.

It's a pretty clear answer.

Can I ask one more? Okay. So there is a lot of talk amongst investors that it has been certainly for a long time, but amongst Sigma investors that there's kind of a new wave of discussion about and concern about much of the GE's publicity of its GE's development. Let me call it, just generically speaking, quality assurance software and development programs. There's a lot of concern of course that that relates to Sigma's earlier relationship with GE. And I'm not asking for any sort of status question about what if anything exists in the way of relationship between the companies now, but the concern is that GE had a look see at, what it is that, it's Sigma's technology in a very intimate context and way and for very long time and that whatever they would have considered to be of value, they are busy building upon and working to better. We all know of course that GE's development pocket and budgets and staff is enormously much greater than ours, than Sigma's. Can you speak to that concern from an IP protection standpoint or in any context?

Sure. So first, let's go into the background. One of the things that's fascinating to me about this space is that so much has changed fast and in the case of the Sigma GE relationship was really kind of Sigma's first adventure into the marketplace with a major company. And the product at Sigma fielded to do that is - was the absolute beginning of what we have now developed into several more iterations. But it was an alpha product in the sense that was in lab view as an architecture and so on and so forth. And Sigma and GE did none of the things together that I described to you, we now do what the customer when we install. Sigma had about three people at the time they did the deal and so both Sigma and GE were somewhat loose in how they defined what they were going to do and how they were going to do it. And as best we can tell that resulted in a program in which GE felt rewarded by the fact that they did get into the thinking of how we look at stuff as well as other companies and that sent them on a path of their own development. The program that we were in with GE in effect ran its course. The report that they wrote was from our point of view left stuff out and was probably unintentionally loose and not - and therefore not entirely, not accurate as it should have been and Mark Cola has had discussions with them about whether or not to amend it or whether to just keep moving.

So John, you all are of the thinking that even at this stage of Sigma's technology at the time, which we understand was to some extent at least behind the stage as we stand here today of the technology, you feel that GE's report was under appreciative of the technology, even if it stood at that and without suggesting that it was anything other than, whatever they reported what they reported, do you feel that they didn't give full credit to the technology as it existed on.

Yes. Our interpretation of the data that was gathered and what it meant was a stronger outcome than they chose to show. Then, so let's go - so where are we going with this is a major question from my point of view. That program ended and that team, now within the GE construct of additive manufacturing research and additive manufacturing production, is quite fragmented. And one of my goals as CEO is, we need to get back together with these folks and move forward on some other projects and that is the instruction that has gone to sales. So when the program that we were working on with them ended, the companies did not have - had failed to develop on both sides. The kind of interactive confidence that your first question probed for, have you developed relationships that lead to cooperations and lead to sales and because you know each other well and you've collaborated on the stuff and in our first effort, looking back, we didn't get that right and neither did they. And yet, they continued. We have friends in the company in a business sense and we will be driving to do more stuff with them and I'm confident that we will end up doing that. What we have is what they need.

[Operator Instructions] Your next question comes from Kevin May [ph] from Sigma Labs.

Well, I'm not from Sigma Labs. I'm an investor, but hi, John.

Kevin, we were searching our payroll records when I saw your name.

If you want to throw me on there, go right ahead. But my question is to the distribution deals. We have had many that have been for about a year, maybe longer now and some that just have been this previous quarter. Can you give any color on to when we might beat revenue or where those are at each individually, including the OE and distribution?

I'm processing on how to do that. I can't give you what you want, but I'll give you what I can. There are two types of deals you're identifying. One is essentially sales agreements, particularly what we've done in the Orient and setting up those structures and the other are OEM agreements. The issue with the OEM companies is one of time and movement. What they tend to want to do is to establish, okay, what are our rights and what have you got. And then the problem that we have and that they have is, is this going to be an exercise in push or pull marketing. So we are talking for example with one very large customer who was interested in what would happen if I had a lot of Sigma equipment and if we were buying a lot of new equipment, can we order it with your stuff in it. And if a company like that goes the full nine yards and places a large order for equipment with our stuff, particularly with folks with whom we are having OEMs discussions, that would be the kind of tipping point that's decisive there. What the OEM companies are not yet interested in doing is putting it in as an option without it having been requested. And the OEM companies, as I mentioned in my opening remarks, are sort of divided between two markets, almost all of the equipment that they have in the marketplace today is used for prototypes. And I will venture to say that they wish that almost all of the equipment that they're going to sell over the next coming years is going to be in production because that hugely changes their industry. And so in the same way that we think the product is essential to enable people to go into production, so the OEM people are hedging their best by saying, we want to have the right person in there, kind of wait until someone asks us for it.

Okay. With the latest 3DSIMS mentioning Flex and Sigma Labs technology directly correlating with their findings, from their software, how is that relationship going forward from a marketing standpoint with them, will they be offering our software with theirs or vice versa or how does that relationship play out.

Well, it's interesting, that's - the relationship isn't new, but the product is new, like this week. So the way that works is, this enables a user of 3DSIM to use data that we collect or can collect to model product and then it enables the customer to use PrintRite 3D to confirm it or to prove it out, which means that 3DSIM can sell their product with this module in it and that would not be a sale of PrintRite 3D Software, but if they wish to use the module, they couldn't confirm the results unless they had access to a service bureau or us or their own version of PrintRite 3D. So it's - I think it's an important development going forward, we're really happy about it.

And one of the recent PRs regarding version 3.0, I mentioned right now capable of single laser and they were working on both the laser technology, is there any timeframe on when that might be achieved?

I'm sorry. I didn't put that question together properly. Ask it again please.

In the latest PR regarding version 3.0, you said it was capable of single laser machine of measuring the quality of single laser machine, is there any timeframe would be available to multiple laser machine?

Oh, on multiples. There is no time frame that I can share with you, but obviously with the markets going and that's where we're going with.

Your next question comes from Paul Parkin [ph], a private investor.

Good afternoon. I'm most curious with the release of PrintRite 3L, have you already contacted GE about them getting the updated version, because there was quite a bit of focus with the America Makes reports how they were using an outdated version of PrintRite and I was just wondering if they were going to be getting the newest version despite the America Makes report.

Right. The America Makes report was the end of the program and so they do not have our original alpha/ beta version, doing anything and we won't be upgrading that until and unless we'd accomplish what I would love to accomplish, which is to re-partner with them on new goals going forward. But there's no existing relationship in which we would automatically upgrade.

And you've talked about these relationships with companies evaluating PrintRite 3D. In the feedback you get from them, is there any consistent pattern as to why it is they are not purchasing more copies of PrintRite 3D at this point in time, because obviously manufacturer is going on and they need a way of quality assuring those parts. So I'm wondering if the people who have acquired PrintRite 3D have given you feedback about why they're hesitant to buy these multiple units and if so, is there some sort of commonality that these different users are touching on.

There is absolute consistency in this group in terms of their outlook and behaviors. And the good news is that it's not adverse to Sigma. The bad news is that their idea of time and process is far more elongated than what we really think they need and so the bottom line is nobody in this recent targeted group of folks who are manufacturing things has decided not to buy Sigma based on tests. The work we are doing with them proceeds from our point of view with good cooperation, good results and surprises like what you want to give a customer. Wow, I don't know how else I would know about that flaw. Gee, you can see much more than we can using these alternative means and so what the feedback we're getting at this early stage is there's no negativity to it per se. It's - our issue is guys, how many tests you really want to run and that kind of thing.

With that in mind, are you looking to the future to play some sort of limitation on the test before they make a purchase kind of decision or are these EAP agreements kind of ongoing and open ended.

Heck yeah is the answer. In the past 60 days, we have changed how we do stuff on this question. And now it is very explicit and we're not imposing anything on the customer. What we're actually doing is selling and educating properly for a process that will work for them up front and when you do that, the resistance is dealt with upfront. So we don't - I don't expect going forward to have the six months programs that folks kind of want to have because if that's what they want, we really need to work with folks who have a greater appetite to get stuff done.

Given the current losses that Sigma has been sustaining on a regular basis, and this maybe for the CFO, unless companies start to buy PrintRite in some near term, how long do you anticipate it's going to be before Sigma Labs has to have some other fund raising maneuver, given the trend that we have seen in terms of income versus expenses over the past couple of years?

It's certainly the right question for an early stage company like that. You understand that there are limits on how optimistically I can answer that, but I'll do my best. Our current cash balances would carry the company up to - close up to next summer if we had no sales. And so the question is how much does your runway increase and the answer is with each dollar of sales. So things that we hope will happen could extend that runway indefinitely. That's answer with - that is the operational answer to your question. We are not discouraged on that front. Second, as you know, we haven't announced an active strategy to try to grow the breadth of our intellectual and operating assets, so because we really believe that we should be able to offer the market the full digital pathway from design through simulation through quality assurance to final post process digital design. In the event that we were to reel in companies like that, then of course we would have to go back to the market, both to acquire additional shares and additional capital to fuel them. So the two things that would cause us to be doing raising more funds would be either deals or a rapid ramp up due to a great customer success or failure to achieve enough orders fast enough to sustain ourselves indefinitely with cash. So those are the three variables that we're managing on.

In the annual meeting held a couple of - six weeks ago whatever that was, it was indicated that there was no longer a focus on contract printing and I do not have the financial results in front of me on a computer right now, but as I read them about an hour ago, it seemed to me there was a statement in there to the effect of contract printing. So I'm confused, is Sigma still going to be involved in contract printing or is there machine going to be used strictly for R&D at this point.

I apologize for the confusion because I'm sure I'm the person who created that. Contract manufacturing is no longer to be deemed a major initiative of Sigma. That said, our intent for that equipment are the following things. First of all, to continue to do contract manufacturing, so that we are current with the marketplace. We have a couple of national laboratories in our neighborhood virtually. And doing projects for them is really useful because it causes us to look at different questions of materials and design and to stay engaged in the marketplace in that way. So that's an important, it's a profit making laboratory activity, one. Two, one of the things that we need to change and are changing as we go away from being an R&D company and become an operating company is we have actually not provided our salespeople with tools that we could have given them based on stuff that we can prove down the hall. And so we are going to be using our machine to do more demonstrations which will allow us to qualify materials, which allow us to give example proofs of how our software detects flaws and show them and so on and so forth. So we will be using that machine to benefit our own research effort. Those efforts can take place while we are making other people's parts also. So we don't have to reject revenue in favor of research. They can go forward concurrently and that's the plan.

Thank you. We have reached our allotted time for questions. This concludes our question-and-answer session. I would now like to turn the conference back over to John Rice for closing remarks.

Well, I want to thank all of you for taking the time to join us, to listen in. I appreciate the interest you all have in Sigma. Sometimes, I hear frustration from our shareholders because they really want this company to be growing faster than its market will permit at the moment and I hear others saying, just hang in there because when this takes off, you'll be going with it. And so I hope you'll be patient. The team that we have in place is dedicated to the technology and dedicated to making this successful. So thank you and good night.

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