Good day and welcome to the Sigma Labs Earnings Conference Call for the Third Quarter Ended September 30, 2018. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 16, 2018. I would now like to turn the conference over to Scott Gordon, Co-Founder and President of CORE IR, and the Company’s Investor Relations firm. Please go ahead, sir.

Thank you, Andrew, and thank you all for joining today’s conference call to discuss Sigma Labs’ corporate developments and financial results for the third quarter ended September 30, 2018. With us today are John Rice, the Company’s CEO and Nannette Toups, the Company’s CFO. At 4:30 p.m. Eastern Time on Wednesday November 14, 2018, Sigma Labs released financial results for the third quarter of 2018. If you have not received Sigma Labs’ earnings release, please visit the Investors 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, any statements regarding expectations for the success of the Company’s products in the U.S. 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 yesterday’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, CEO of Sigma Labs. John?

Good afternoon. This is John Rice and welcome to shareholders, and other parties interested in Sigma Labs. The purpose of this call is to report on the Company’s results and developments for the third quarter and also the year-to-date for 2018. Today, I am reporting to you from Frankfurt, Germany, where the annual formnext conference is now wrapping up. formnext is the additive metal manufacturing industry’s largest and most important conference. And for us, it’s been a great marketplace. It permits companies to promote their products, to assess their competitors’ latest products, and that’s a very useful context for deal-making for most of the people who arrive here. I am happy to say that for Sigma, we’ve been well welcome here. Our product has received very gratifying interest to potential customers, the sales folks on our team who have been attending these conferences over the years, feel that the serious label of major OEM companies’ interest this year indicates additional maturity in the industry, and that’s a very good context for us. Along with a gratifying show, I think that we have met some of our competitors who’ve come in to see what we’ve got, and that has left us in a confident mode in our interchanges with them. For me individually, this is a very useful place to be working this week, on our announced goal of working on OEM licensing deals. This has been a place we’re in the same building; virtually anyone who you would be talking with on those topics is down the hall. My sense has therefore been that we are really in the right place at the right time with the right product and really pleased about this. You never know what is going to come out of the counters in a situation like…

Thank you, John, and welcome, everyone. I will now discuss the financial results for the third quarter of 2018. In the third quarter of 2018, we recognized revenue of $128,593, which compares to $78,046 during the same period of 2017. That’s an increase of $50,547. This 64% increase quarter-over-quarter resulted from an increase of $69,000 in commercial sales and $22,472 in contract AM service revenue. This was offset by a decrease in revenue from government programs between the two quarters of $37,903. Our cost of revenue for the third quarter of 2018 was $56,309 as compared to $81,214 during the same period of 2017, a decrease of $24,905. This 30% decrease in cost of revenue despite a 64% increase in revenue was primarily due to $53,319 of non-recurring costs associated with implementation of our early adopter program and original equipment manufacturer partner program in the third quarter of 2017. Those costs are non-recurring. Sigma’s total operating expenses for the third quarter of 2018 were $1,401,087, this compares to a $1,095,206 for the same period of 2017, a $305,881 increase. Our operating expenses are comprised of internal operating and sales expenses, outside service fees, research and development costs, and depreciation and amortization. Personnel costs, comprised of payroll and stock-based compensation expense, consistently account for slightly more than half of Sigma’s total operating costs. In the third quarter of 2018, payroll costs were $524,508 compared to $335,495 for the same period in 2017. The $189,013 increase resulted primarily from the strategic addition of six employees since the third quarter of 2017, three in the third quarter of 2017’s realignment and three in the second quarter of 2018, as we continue the concentrated acceleration of technology development and our expansion into the European 3D manufacturing market. Stock-based compensation for the third quarter of…

So, should I hold this so far I think so good, we have been intense engagement of accelerating our speed to market, one of the works that I’ve done in other companies in the past is in turnaround work. And there, you manage to success very often by making substantial cuts. In late-stage startup like Sigma, that is not a formula for success when you have to drive into a new market and try to do it with an advanced technology. So, we did an assessment over the past week of comparing what are the facts today that differ from what they were a year ago today, and what does that picture look like. And today, we are able to deliver an industrial product that compares with an R&D product that could not be placed in a manufacturing setting a year ago. Today, we are in a position to have a new channel to market available through our early adopter -- or no longer an early adopter program but rather a proof of concept program, where we can go in and in effect let a customer at a reasonable expense of time and money test drive the vehicle. So, the position we were in a year ago, had steeper obstacles to growth than what we perceive today. And that makes us confident about what’s coming next. With that, operator, let’s go to questions.

Good morning. I hope you’re enjoying your trip there, John. First question, and kind of a detail question is on the revenue composition, Nannette gave the amount of the changes, but what I’m looking for, if you can provide it, is the breakdown of the $128,593. I know contract was zero a year-ago, the increase is $22,472, so contract is $22,472, on a follow-up on contract. That’s a good way to cut your cash burn rate, if you can utilize your existing 3D printer more for contract work. I know that’s not the core of the business. And then, when we see that, what kind of margins should we expect on contract?

It’s interesting. We were doing an assessment last night as to whether we should be bringing another machine in, consigned signed by a prospective manufacturer, because so much of the capacity of our machine has been dedicated into internal R&D, proving what we’re testing, testing what we’re doing. And we’re trying to figure out how much revenue we could generate off our machine, given that pressure of schedule. The bottom line is that since the most revenue we can probably generate from our existing machine without infringing ongoing product proof development is a magnitude of about $0.25 million. We do not have a person -- we don’t yet have either the goal or the people on staff to actually sell into that space. And if we were to get a consigned piece of equipment, that would create enough revenue potentials to justify a person servicing and selling that market. So, that’s under consideration, and it is not done.

250 per year or per quarter?

Per year. That’s not the capacity of the machine, that’s the capacity remaining after we do -- after we continue to do the proof and R&D work that we’re using it for. Other questions?

The next question comes from Bill McElroy [ph] of Chardan Capital. Please go ahead. Mr. McElroy, your line is open please go ahead with your question.

John, earlier in the call you talked about a motivated versus non-motivated customer. And I was wondering if you can characterize what that difference is. And maybe more importantly, how do you -- when you’re out there trying to get a customer, how do you feel filter out the non-motivated ones? How do you identify the motivated customers?

So, essentially, we have two target markets. One is, the original equipment manufacturers and the other is end users, which for the sake of this conversation, in which I’ll include service bureaus. So, an end-user could be someone like Siemens who has their own factory and they’re making stuff or it could be a subcontractor like Incodema to someone like Pratt & Whitney. Essentially, going from the -- starting with the OEMs, the OEM market is in all cases, of people we have been working with, motivated in the sense that they have come under pressure to have their machines but behave at a higher level. Most of them concurrently are competition as well as are a market -- but all of them feel a pressure inside to try to develop their own solutions. But you heard me characterize them earlier in this conversation as saying most of them seem to be delivering data without meaning. In other words, they aren’t yet field in products that make their equipment better. They’re telling their customers you have in-process quality monitoring and the customer is learning that that doesn’t improve their quality. They are motivated this week in a way I haven’t seen before to move on to, we got to fix this quality problem, a quick anecdote on that. Two weeks ago, or I guess three weeks ago at the M2 conference in Munich. We heard presentations by a lot of the major European users on the equipment. And two of them were asked this more or less the same question as one after another spoke, which was essentially when are you going to be able to produce for production quantities and quality? And the answer from the person at BMW was we need better machines. And the answer from the…

The next question comes from Paul, [ph] a private investor. Please go ahead.

Good morning or afternoon, John. My question really goes to the threshold for serial production. It’s my impression that multi-laser machines are going to increase the speed of production, which is quite a problem as we sit today. What kind of progress has been made in adapting PrintRite towards multi laser machines? And venturing into the forward-looking statements, when might we see a beta version release for testing?

We are engaged with one of the first multi-laser -- one of the companies that first offered multi-lasers. And I expect that I’m not going to give you a beta date, but that’s an in-process activity that we expect to result on, in the course of the next several months.

So, in the next few quarters?

It could be, yes. We’re in it, we’re on it. And I’m not aware of anything yet. Murphy hasn’t spoken yet as to not aware of anything going wrong.

Okay. And what is the current headcount of employees at this point?

18.

Thank you very much.

You bet. Next question?

[Operator instructions] And this concludes our question-and-answer session. Excuse me. I see that we have a follow-up from Paul, [ph] a private investor. Please go ahead.

If there is no one else asking questions, I’d go more than the one. Why are the conditions that that you see that have not really been met that are going to lower the threshold for these companies to actually go ahead and pony up the money to buy? And what are we looking for happening that is not existent as of today?

There are two channels sort of to look at that question. The first is, obviously, what are the barriers to entry or to purchase of power products. Those barriers to entry, as I actually said earlier a year ago were that we had an R&D project -- product that people really felt uncomfortable putting in a production setting. So, I believe we have overcome that as a barrier to entry. The second barrier to entry is using the car metaphor. Before I buy an expensive car, I really want to drive this. And we have reduced that barrier to entry by now being able to deploy the product so cleanly and rapidly in a proof of concept program that customer resistance is dramatically reduced. Speed, for example with which the oil and gas company transaction was able to be structured was unprecedently quickly for the company. So, the bottom line is, we really have reduced those barriers materially. And which is why when I said, we really have a new channel available to market through the proof of concept program, it’s for those two reasons. So, I think the companies over the next year, the company is in a market in which resistance to our pricing and product I think are much lower than has been in the past up until very recently. So, we’re very pleased about that. The second channel is, the industry itself. One of the things that restricts the growth of additive metal manufacturing is it actually is such a disruptive technology that you can’t adopt it by just dropping it into a classic machine shop setting. It doesn’t work that way. You’re really looking at trying to set up a so called factory of the future. And so, the capital investment required for a company…

John, in the past, you seem to indicate that the R&D focus with the placement of machines as early adopter was sort of open ended in terms of timeframe and that you were wanting to tighten up that timeframe for people to evaluate and then either commit or one way or the other. How might that thinking apply to this recent contract that you received?

Thank you for keying the question up. The proof of concept program means that -- this customer announced this week that they have the -- we have the ability to provide them data within three weeks of having installed the machines that we’re done. We’ve exceeded in our demonstration of different things. And then as long as they commit to be sure that the laboratories return the samples, all cut up and measured as compared to the results we gave, to compare the CAT scan results to our results. Whatever amount of time that can take place in, whether it’s another 30 days or another 15 days or another 60, is to control. So, the bottom line is, if the program really goes well, they can know in a month; if it does go slowly, they can know in two months. We have never been in that position before.

And we have a question from David Robinson, [ph] a private investor. Please go ahead.

Hey John, how’re you doing?

Hi. I wondered if you were going to way in. I was surprised not to hear you before.

Better late than never, right? So, listening to -- in my time listening to others there, so looking at my notes here -- I’m not wanting to re-chat over material that’s already been discussed. But, you touched on -- the question was asked about timeline for multi-laser capability. And you introduced to the discussion and update about closed loop and helpful goal of late 2020 for Sigma, if I heard you correctly, regarding closed loop capability. And question is, when you’re sitting down as you have been there quite recently with potential customers, and there is an understanding that there are significant improvements in the pipeline, but that are sometime now. What is the model and what is your pitch as far as incorporating those changes, once they hopefully come to fruition, and to what customer would hopefully buy today, tomorrow, next week or next month? So, in order to answer the question for the customer, why shouldn’t we wait three months, six months next year, why should we make this commitment soon?

That’s well asked question, because you’ve identified the reality that there are number of factors coming to bear. But, I’m going to answer it in a very simple way. Our proposition talking with a customer today, you really ought to order our stuff and implement it right now. And because -- if it’s an average customer setting where they are doing some production but -- and they solved a lot of problems by having very low yield for a long time, which they slowly try to figure out how to adjust their machine, so, they’ve got their quality up to say 60% yield, which means they’re scrapping 40% of what they made. And our comments have been, look, you shouldn’t be waiting until every technical nuance has been accomplished. You should order our equipment today, because our ted metrics will allow you to set your machine up in a fashion that we recognize and we help you compensate for by resetting the controls on the machine, so that the machine behaves consistently across the whole bill play. When you do that, I mean that -- using our tool and adjusting their equipment based on what we can see and others cannot, that frankly immediately improves their quality significantly. And, so that even gets that now. And to be clear, it’s my opinion that for anybody but the most ultra-sophisticated long-term in the business, a company like someone GE where they did so much product rejection and what not that they actually have gotten themselves finally on the fuel nozzle, the higher yield rates. Everybody else, the greatest improvement they’re going to get in their quality as a percentage of improvement is probably our existing ted metric right now. The second thing they can get right now is the ability of…

But, in terms of incorporating what’s to come, say of the improvement to capability to be able to handle multi-laser capability that you’re indicating as I understand is quite a bit sooner in time than closed loop. So, not so much that quite you just addressed the question of why now rather than later, but how later is then incorporate -- if a company signs on for the product as it stands today, which has the same laser capability, and then in three months or six months you’ve got the multi-laser capability in play, they’re entitled to -- for some sort of -- presumably some sort of predetermined up-charge to the improved version, they’re not setting aside what they buy today and having to buy freshly tomorrow, in other words?

Remember, our product, I mean, we sell hardware because we’re more advanced in some elements of it than the market. But, we’re not hardware people and the OEMs will take over that. And we will continue as software folks. And the routine software packages, you get some level of free updates, upgrades and then there are new release charge -- when there is a major new release, you get charge for that. And so, our product with new features will grow out that way. You may recall, I haven’t talked about it for a long time, but the -- I think, the next major new feature that we come to market with will be the CONTOUR module which will determined, which will show whether or not a product as it is been made is in dimensional spec. In this technology, that’s a big deal, because one of the exciting things about this technology is your ability to have channels and pipelines running through the parts that once the parts made, you can’t see anyone and are very hard to measure it. And so, when that module comes out, anyone who has bought our stuff today will have the opportunity to have that grafted into their system. They will pay for that as a new module but there won’t be any technological -- that we won’t do to them what Apple has done to me several times, which is change all of the way things put together.

Okay. On another score here, you went over and made reference to the continuation of the status of OEMs as competitors as well as partners. And which is kind of an interesting circumstance. And as competitors -- the monitoring technology that they’re employing makes use of cameras you said, right. So, I heard you say in your opening remarks, make reference to being pleased and seeing kind of their latest efforts and finding the status of Sigma’s technology is clearly continuing to be over and above and beyond, as far as enabling, knowing what to do with the information rather than just data without knowing what to do with it. But, from a competitive standpoint, in addition to being pleased that Sigma appears to be that much -- continue to be that much further ahead, from an IP standpoint, if they are OEMs who really put going to override trying to better their technology and learn what to do with their data to make their data actionable, you continue to believe that your IP portfolio is broad and protective enough that it’s not just only a matter of they are being behind but also a matter of having -- should you be granted I understand some of these patents have been allowed, I think three of them now, others are still in prosecution, but should others of these patents that have been applied for, be allowed, do you feel that your protection is truly broad and adequate?

Yes. I mean, you always have to qualify your confidence in a patent portfolio by several factors. One is, who did the patent work? And in this case, the people who have done the patent work, Kilpatrick Townsend, I really think they’re one of the top five patent firms in the world. So, the quality of coverage and the analysis of how broad the claims can be and so on and so forth, all of the professionalism with which all of this is prepared I think is really at the highest level. That’s really terrific. So, that makes me very confident. The fact that Sigma began its work as early as it did, meant that if Sigma was patenting into the states, had of before many of the OEM people who are now active in it, work. So, even though they are larger companies they probably don’t have a larger development group than Sigma does. And they are a couple years more depending upon which company they are behind us. So, to the extent that the technology stays more or less the same, Sigma is going to be very hard to impeach with its patent portfolio. And the part of the discussion that we have with OEMs goes like this. We have 18 patents applied for, two or three have issued, meaning that our success rate so far is three to three. And we are confident that these patents which will -- was issued to run on in the future, will provide you as a licensee of our company, real protection against your other major folks who do not choose to license our technology. By the way, remember that if you do not elect to license our technology that you might find yourself in the position of violating our patents and having the competitor you load the most, enforce our patents against you because they are license. So, there will be a moat established by our partners in this market space. It’s probably a better risk reward computation for you as an OEM to be protected by our moat rather than blocked by it.

And due to time constraints, we have time for a final question, and that is a follow-up from Barry Sine of Dawson James. Please go ahead.

John, I want to continue on the same topic if I might, which the closed loop system. So, you talked about a late 2020 implementation for that. I wanted to understand what needs to happen between now and then, why is the process so long. Presumably, you need access to each 3D printer manufacturers’ operating software and you need some physical connection into their machines, cabling and so on, so that you can modify their software during a production run. So, could you talk about what we need to see? You’ve already talked about you believe that the product is sellable without that closed loop. But, what do we need to see in the interim, and why is that taking so long? And then, also upgradability, you talked about upgradability, but presumably this is going to require an additional physical aspect of the product, so you can plug in to the 3D printer and modify the software during a production run. So, presumably you need to buy some additional hardware if you’re an existing Sigma customer. Thank you.

Sure. That’s a useful question. Thanks a lot for that. So, here what I think, here’s the situation. What we have -- our proof of closed loop control was among other things what we learned is -- it’s not very hard to do. In other words, we had to create an interface to our control system in order to deliver the signal and to tell the machine what -- how long to do it and how much to do it. It isn’t really frankly very difficult to do. The key to this is understanding what you’re seeing and when to intervene and how to intervene given -- the additive machines behave in somewhat complex manners in a sense -- the lasers follow what is called the hatch pattern. And each manufacturer seems to be very -- each additive manufacturing machine manufacturer seems to be very proud of their hatch pattern, which means that the laser doesn’t just go back and forth, back and forth. It follows very specific pattern, so that you are building the metal, keep and think of it is like weaving. So, that you are building a metal and rose that -- or layers that cross each other and are not always beaten on top of each other, like making a pot. So, each manufacturer, when they get to the question of how to implement our simple closed loop control idea is going to have to have through their own complex, software analysis of okay, do we need to change our hatch pattern to focus on that problem area or can we leave it alone. So, there are interface questions factors that the manufacturers will have that I believe that they will take some real time to accomplish. So, our bottom line is, I think we can deliver the materials to the marketplace in 2019 to enable a company, a manufacturing company or a controlled company to do closed loop solution on their machine. But I think it’s going to take them a year to implement that and to bring it to market. So, what we can do by the end of I think 2019, it’s going to take the market another year or so to implement, I suspect.

And I understand we have time for a final question from David Robinson, a Private Investor. Please go ahead.

Hey, John, one more please. When there is a need for additional financing, if you find yourselves -- and we hope this isn’t the case, if you find yourselves not having made -- not having contracts for the first traditional commercial sales yet, in order to -- in order not to potentially bruise the stock price again with a significant follow-on offering, is consideration being given to some at the market offerings, smaller numbers of shares over time as opposed to the risks incurred with follow-on offerings to the stock price?

The simple answer is yes. And the broader answer is, I’m really -- I’m anxious to avoid the continuing dilution to the extent that that’s possible, which means trying to grow past discounted offerings heavily weighted with warrants and so forth. So, the Board is looking at sort of creating -- we’re looking at the à la carte menu of our options try to best protect our existing shareholder base, even while we might be trying to attract some additions to it. It’s a proper question about an issue that I am very sensitive to.

This concludes our question-and-answer session. I would like to turn the conference back over to John Rice for any closing comments.

Thank you. Thank you all for your patience with this call and thank you for your patience with Sigma as we drive to market. I look forward to talking with you next year.

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