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Edited Transcript of SGLB earnings conference call or presentation 14-Nov-19 9:30pm GMT

Q3 2019 Sigma Labs Inc Earnings Call

SANTA FE Dec 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Sigma Labs Inc earnings conference call or presentation Thursday, November 14, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank Donald Orzechowski

Sigma Labs, Inc. - CFO, Treasurer, Principal Accounting Officer, Principal Financial Officer & Corporate Secretary

* John Reynolds Rice

Sigma Labs, Inc. - Chairman, CEO & President

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Conference Call Participants

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* Han Jang

Aegis Capital Corporation, Research Division - Research Analyst

* Hunter Louis Diamond

Diamond Equity Research LLC - CEO & Founder

* Thomas R. Curtis

Dawson James Securities, Inc. - Managing Partner of Retail Sales

* Thomas Richard Fox

Dawson James Securities, Inc. - Managing Partner of Retail Sales

* Christopher Tyson

MZHCI, LLC - MD

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Presentation

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Operator [1]

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Good day, and welcome to the Sigma Labs Third Quarter 2019 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chris Tyson, Managing Director of MZ North America. Please go ahead, sir.

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Christopher Tyson, MZHCI, LLC - MD [2]

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Thank you, and good afternoon. I'd like to thank you all for taking time to join us for Sigma Lab's Third Quarter 2019 Business Update and Results Conference Call. Your hosts today are John Rice, Chief Executive Officer; and Frank Orzechowski, the company's Chief Financial Officer.

A press release detailing these results crossed the wires this afternoon at 4:01 p.m. Eastern today and is available on the company's website, sigmalabsinc.com.

Before we begin the formal presentation, I'd like to remind everyone that statements made on the call and webcast, including those regarding future financial results and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company's SEC filings for your list of associated risks, and we should also refer you to the company's website for more supporting industry information.

At this time, I would like to turn the call over to Sigma Lab's Chief Executive Officer, John Rice. John, the floor is yours.

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [3]

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Thank you, Chris, and good afternoon, and thank you, everyone, for joining us. And with me today here in Santa Fe is Frank Orzechowski, our new Chief Financial Officer.

The third quarter of 2019 was highlighted by continuing and growing success in engaging both OEMs and end users as PrintRite3D customers. And this is driving continued and heightened industry awareness and building some promising commercial opportunities with both the OEMs and the end users.

Before going directly into the current updates, today we are resuming quarterly earnings calls and asking forgiveness of those of you who do know Sigma well. I must take a moment to educate those on the call who are new to Sigma, which I see from the list is a lot of you, about what we really do and why it is really important. So I'm going to give you a 30,000-foot view of Sigma Labs' past, present and future.

Founded in 2010, we are an emerging provider of real-time quality assurance software to the commercial 3D metal printing industry. Our brand is PrintRite3D. We're confident in our belief that advanced computer aided software revolutionizes commercial additive manufacturing.

To provide real background on this, commercial 3D metal printing, which is also known interchangeably as additive manufacturing, is a rapidly expanding emerging industry, which will probably revolutionize the $12 trillion global manufacturing sector with clear applications across multiple industries: aerospace, defense, automotive, medical, many others.

From a high-level view, 3D metal printing has the potential to disrupt and simplify and replace many elements of supply chains of many industries.

On the micro level, the uses of this technology within organizations are beginning to encompass more and more functions, including proof of concept, rapidity of design, the development of customized and limited run products, reductions of development time and ultimately, improved production efficiencies and flexibility and reduce cost and among many other benefits. So while these tailwinds are real and emerging and, in some cases, continuing to blow harder, commercial additive metal manufacturing also has some headwinds, some inherent challenges, including, significantly, quality assurance issues from current technology. So clearly, as you can see, many of the early adopters of this technology for aerospace, for instance, have very high quality and integrity requirements of their printed part because failure can be catastrophic. So this is an important need and topic that we address at Sigma.

The current methods for ensuring quality in commercial additive manufacturing are generally either inaccurate due to use of proceeds that do not recognize and do not measure the primary quality issues of 3D metal manufacturer that need to be measured and -- or due to misuse of nonapplicable statistical adjustments. Additionally, these methods are often costly and wipe out the savings that 3D metal manufacturing creates.

After the 3D manufacturing process, today costs are normally incurred by using nondestructive quality assurance technologies, which are also very expensive. That's CT, CAT scan technology, ultrasound on many of these parts. Most ultra-high quality demanding companies have to inspect a 100% of 100% of the parts to meet their own criteria. And the old-fashioned visual inspection, of course, is always there along with sometimes tuning for usage. Destructive testing of 3D parts tends to be misapplied or carried over from current industry standards, subtractive CNC machine quality assurance practices, in which a great part of our consistency of traditional machining that permits quality inspectors to infer the quality of a production run by cutting up and analyzing a statistically relevant and yet very small number of parts. And the test results of those parts that are destroyed and analyzed from 3D manufacturing have too often, after great time and expense, statistically demonstrated nothing about the parts that were not cut up and destroyed. The underlying premise, therefore, quality assurance for subtractive manufacturing parts does not apply to 3D manufacturing.

The simple and effective accurate quality system of additive manufacturing turns out to be real-time inspection when you are making production units of 5 to 80 units, in which quality variance may occur from part to part, and within any part notwithstanding that the AM machines, the settings are the same. Therefore, unable to rely on traditional statistically based quality systems, 3D manufacturing's optimum quality assurance system evaluates the quality of each individual part. Our proprietary PrintRite3D suite of hardware, software, data analytics and proprietary algorithms inspects each part and allows the manufacturer to use additive manufacturing to form a single part, such as the hip replacement, for a spare aircraft part needed on an aircraft carrier or several lots of the same part or thousands of parts, all within the same quality spectrum of individual inspection of every single part of every moment.

We offer our customers the ability to use real-time sensors to track individual scans of each layer and our software continuously analyzes the part health, so that both during and after production, we can determine if it meets production parameters set by the customer. We believe our software could reduce inspection costs by as much as a factor of 10 for many people and development time by new parts by perhaps 50% for most as our software permits factories to make the part manufactured the constant and the machines manufacturing them to variable.

In short, there is little doubt that commercial additive manufacturing is gathering acceptance across multiple industries, and we believe the industry remains notably constrained by quality assurance issues that negatively offset some of the major advantages of 3D technology, including shorter production runs, lower cost and confidence in quality that Sigma uniquely addresses.

So thank you for flying with us at 30,000 feet, we go on to the Q3 update.

The third quarter of 2019 was highlighted by some continued success in engaging both OEMs and end users as PrintRite3D customers. We are nearing completion of some of our Phase 1 RTE programs, and this provides a clear line of sight to commercial revenue.

Before I go further, I need to remind our audience that some of our customers have asked that we respected their confidentiality due to competitive reasons. So I apologize for the wordy nature of some of our customers' descriptions, and we can't just tell you their names.

Notably, when we were recently selected for test and evaluation by a major Japanese OEM machine tool manufacturer entering the commercial 3D printing market.

Earlier, we announced that we were also selected for test and evaluation by an unnamed major international OEM machine manufacturer with a base in Europe.

We believe a partnership to integrate our technology at the OEM level for any major manufacturing machine OEMs such as these, that we are in evaluations with now, could drove -- drive notable license revenue in the short term and significant pass-through revenue from the OEMs customers in the mid and long term.

We're also pleased and we are encouraged by the robust interest we've continued to get from industry OEMs and look forward to telling you more as we update with these evaluations over the next several months.

On the end user front, we continue to attract intense interest in PrintRite3D as manufacturers seek ways to reduce quality risk, to cut material waste and to escape the uncertainty and expense of post-process inspection.

Baker Hughes, a leading energy industry company and our second major test and evaluation customer announced last winter, has now placed an order for Phase 2 deployment of our technology, which they then advised Sigma will enable them to determine if our equipment should be integrated into their serial production equipment. We do expect Phase 2 testing and evaluations to take substantially less time than Phase 1.

Our third major end-user and contract manufacturer is also having us deploy our technology on a second round of equipment.

In Airbus, an international aerospace company, the fourth major announcement we made on the end-user front for RTEs, is making substantial progress with us as PrintRite3D demonstrates its capability to identify thermal signatures of defects in both process and parts.

We believe that our two-pronged commercialization model, targeting both additive manufacturing machine OEMs as well as end users, will allow us to most rapidly aggregate market share while most efficiently monetizing our extraordinary quality assurance software.

On a new front, commencing with the release of PrintRite3D 5.0 in May 2019, Sigma opened a third channel to market. PrintRite3D 5.0 is the user-friendly version of our product to market that no longer requires substantial on-site customer support from Sigma. And therefore, the company commenced selling on research tanks, university, small users, they open a retail channel. As of today, the pipeline of signed purchase orders in the channel total $442,000 (sic) [$317,000], and we have verbal commitments for POs totaling approximately $895,000.

To grow further and broader industry awareness, we have been undertaking several initiatives to share the now numerous solid success stories from PrintRite3D in installations with the market. Ron Fisher, our Vice President of Business Development, hosted successful PrintRite3D demonstrations for a high level industry executive at the additive conference in Austin, Texas. Our Chief Technology Officer, Darren Beckett, has showcased our PrintRite technology at the recent ASTM conference, and we are working, by the way, on penetrating more deeply into the standards world through that mechanism. And at Formnext, Beckett will be speaking at the booth of Materialise, which is a strategic partner of Sigma and the leading printing solutions provider, and he will discuss the integration of our technology with their control system as well as presenting from our booth on the latest version of PrintRite3D.

We're very excited about Formnext, which is next week. Because of the immense awareness in commercial potential of that, that event has for the industry.

We continue to align ourselves with leaders in the additive manufacturing space and believe that our recently announced partnership with VTT Technical of Finland is another testament to this. Their recent order entered them into our PrintRite3D installation and testing network of third-party additive technology resources and influencers. Already in this network were the Fraunhofer Institute in Germany, the Manufacturing Technology Center in England and the National Institute of Standards and Technology, NIST, here in the U.S.

As part of the VTT contract win, we beat out a major global additive manufacturing machine OEM in a head-to-head technology comparison conducted by VTT, and it scored our competitor as unable to perform on the key features provided by PrintRite3D. VTT has been established innovation leader, supporting leading brands worldwide, and it's particularly exciting to us to open this door to their innovation-centric customer base.

I turn now to intellectual property. A very important asset that I believe separates us from the competition as we ramp up commercialization of our broad span of intellectual property comprised in numerous trade secrets, 9 patents granted, 25 pending in both the U.S. and around the globe.

Sigma began building, but became this wall of patent-protected IP 9 years ago, and we continue to this day to be aggressive in our patent portfolio strategy. We're confident of the strength and power of this portfolio for its protection of Sigma's freedom to operate PrintRite3D in the marketplace and also, for its reciprocal benefit of blocking infringement of our technology approach by third parties.

Additive manufacturing is, in our minds, undoubtedly the next industrial revolution. We are on the forefront of revolutionizing essential element where it's widely forecast lead to serial manufacturer. The flexibility adherent to additive manufacturing combined with the increased quality and decreased risks and loss of waste and costs accomplished by using our PrintRite3D technology creates a really powerful combination. Recent study by Ernst & Young found that a remarkable 78% of aerospace companies already leverage 3D technologies in plastic, ceramic and metal materials for high value applications. Continuing this aerospace industry trend, the opportunity for additive manufacturing in metal product serial production is immense and will continue to grow as cost for the technology continue to come down over time. And in part, due to the level of savings that our PrintRite3D quality assurance software and [IP can add into the format].

So to summarize my introduction before handing off to CFO, Frank. One, we continue to see broad-based interest from major industry players and believe as our initial rapid testing and evaluation programs begin to come to a close, that we will begin to secure noteworthy commercial orders as they roll out our technology in their organizations.

Two, I believe the elevated interest in Q3 with our Tier 1 partners and IP moat protecting the thermal signature technology, positions us extraordinarily well for significant revenue growth into 2020 and beyond.

And three, I look forward to executing upon the immense opportunity facing us today, creating sustainable value for our shareholders long term.

With that, thank you, and I will turn this over to Frank Orzechowski for a brief financial overview, and then we will have a few comments and go to questions.

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Frank Donald Orzechowski, Sigma Labs, Inc. - CFO, Treasurer, Principal Accounting Officer, Principal Financial Officer & Corporate Secretary [4]

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Thank you, John. Our detailed financial results are contained in our Form 10-Q filed with the SEC today and the press release we issued contains key highlights of our financial results for the quarter. So today, I will confine myself to a precise review of our financial results for the third quarter of 2019.

Revenue for the third quarter was $171,000 as compared to $129,000 in the third quarter of 2018. The increase is due to the commercial sale of a PrintRite3D unit in the third quarter, partially offset by the absence of any government program work in 2019 as well as a decline in additive manufacturing revenue due to the dedication of our in-house printer to internal R&D as we continue development of our PrintRite3D products.

Gross profit in the third quarter of 2019 decreased to a negative $8,000 as compared to positive $72,000 in the third quarter of 2018. The decrease in our gross margin is primarily due to the additional travel and labor costs associated with the on-site and remote collaboration involved in the growth of the company's test and evaluation programs.

Total operating expenses were $1.6 million in the third quarter of 2019 as compared to $1.4 million in the third quarter of 2018. Employee compensation and benefits is our largest expense. Including equity-based compensation, that comprises 50% of our total operating expenses.

To accommodate the growth in the various channels that John described earlier, the company added 2 application engineers, 2 software engineers and 1 business development professional during the first 9 months of the year. With that accomplished, we believe that our current employee headcount will be sufficient through, at least, the first half of 2020.

Net loss in the third quarter of 2019 totaled $1.6 million or $0.12 per share compared to a net loss of $1.3 million or $0.16 per share in the third quarter of 2018.

Cash totaled $1.1 million at September 30, 2019, as compared to $700,000 at June 30, 2019, and $1.3 million at December 31, 2018.

We completed a $2.3 million public offering of common stock on August 2 of this year.

Cash used in operating activities was $4.5 million for the 9 months ended September 30 compared to $2.7 million in the 9 months ended September 30, 2018.

And when looking at our cash, investors should note a few things. First, the company made a considerable investment in inventory through the first 3 quarters of 2019 due to increased new RTE programs, expansion of existing programs and PrintRite3D sales resulting from the new retail market channel. Total inventory has increased from $240,000 at the end of 2018 to $713,000 at September 30, 2019. Of our total inventory, $445,000 or 62% is either part of an active RTE program or earmarked for firm customer purchase orders.

Second, additional spending in internal research and development through September 30, was related to our continued acceleration of technology development of Version 5.0 of our PrintRite3D platform.

Third, the addition of 5 employees in 2019 related to our expanded RTE programs and sales to the newly opened retail channel, as mentioned above.

And fourth, we expect our cash usage to decrease during the fourth quarter of 2019 as major initiatives in these areas have now been completed.

The foundation building for our PrintRite3D commercial launch has largely been completed from a financial perspective in the third quarter of 2019. Notable improvements to our sales infrastructure and channels have been made that resulted in several new RTE programs, which can be seen in our previously mentioned growing inventory metrics.

Now I'd like to discuss our near-term revenue pipeline potential in 4 areas. First, our RTE programs. The revenue potential from the conversion of a single unit test run into a permanent license sales assumes $125,000 for a single unit and breaks down to $25,000 upon executing the RTE and $100,000 to purchase the equipment after the Phase 1 RTE is completed. We estimate that a successful follow-on Phase 2 RTE for 2 or 3 additional units may result in upwards of $250,000 to $375,000 in additional revenues.

The second is end users. The potential revenue realizable from a successful RTE that leads to deployment on production line equipment ranges between $2 million to $4 million for average major end user. We estimate that at least 3 RTE end-user companies will determine in the course of 2020 whether to launch deployment of PrintRite3D on their production equipment. While there is no certainty of any forecast outcome of potential revenues from these companies, they do constitute a pool of more than 110 AM metal production machines.

Third is our OEM engagements. As John mentioned earlier, we estimate that based upon current engagements, no less than 3 OEMs will determine whether to seek licenses for Sigma Labs PrintRite3D platform, with meaningful license revenue potential for 2020 and significant potential in 2021. I should mention these licenses all have annual maintenance recurring revenue options as well.

And fourth, on the newly retail -- newly opened retail channel, consisting primarily of research institutes and universities. As John mentioned earlier, as of today, the pipeline of signed and verbally committed purchase orders totals approximately $1.2 million.

Finally, I'm also happy to report that we are in active negotiations with OEM partners for strategic alternatives who currently see the immense value in our enterprise and look forward to providing an update on that front as they develop.

I will now turn the call back over to John for closing remarks.

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [5]

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Thank you, Frank. And with that, I'll just proceed with a few remarks. Over the last couple of months, I feel that many, many questions from our investor base regarding the volatility in our shares and specifically around key announcements. And while it is not a normal practice to comment on stock activity, it is important from time to time to weigh in when there is a serious disconnect or dislocation between operational progress and apparent market perception. I'm the first to own my own missteps made in the process of regarding investor relations and engaging perhaps with the wrong investment bankers as capital sources. As your CEO, it is my job to recognize and own mistakes and to aggressively attack in the right direction.

During the third quarter, we did a comprehensive view, which is why we are back on track here with you right now on quarterly calls and a regular cadence of investor communication. We retained MZ, a premier investor relations firm to advise us in all aspects of capital markets navigation and selecting strong partners going forward. And I'm happy to report that we will have a positive update on that front before year-end, which should position us nicely in terms of investor credibility. We believe all of these upgrades and agile adjustments will normalize somewhat our volatility and with MZs help, attract the right investors to our story.

Reinforcing our capital market strategy was very important as we made significant progress on key strategic goals in the third quarter. A year ago today, we had a high capability technology, but it was not yet manifested as a fully hardened and fully user-friendly commercial product to sell. Surging over the past 12 months, we now have a hardened commercial, industrial, user-friendly product with 19 beta customers who are some of the largest industrial companies in the planet and in the top echelon of additive manufacturing OEMs. Today, we are beginning the completion phase on some test and evaluations that a year ago we were just setting out to sell.

We believe that a partnership to integrate our technology at the OEM level for any major additive manufacturing machine OEMs, such as those we are talking with and of that being evaluated by now, could drive notable license revenue in 2020 with significant revenue for Sigma from OEMs end-user sales thereafter. So we're pleased with the robust interest we continue to see in the industry OEMs and look forward to providing you with updates as these evaluations progress over the next several months.

The momentum from major industry players going into the fourth quarter has never been stronger for Sigma. We believe that as our initial testing and evaluation programs move into Phase 2s and come closer to close, such as those of Airbus and Baker Hughes and our unnamed additive manufacturing and OEM partners, that we may be able to secure noteworthy commercial orders as aggressive -- as they aggressively roll out our technology.

We believe that the potential revenue realizable from a successful RTE that leads to deployment ranges from $2 million to $4 million per average major end user.

So in summary, we remain laser-focused on commercial execution, both with OEMs and end users, continuing to deploy our high-performance business development team to pursue our longer-term vision of being the market-leading additive manufacturing quality assurance provider.

So I look forward to sharing our story again at the investor conference at LD Micro on December 10. Thank you all for your time today and your support and interest in Sigma Labs. And at this time, I'd like to open the call for questions from our listeners. Operator, take it away.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Tom Fox of Dawson James Securities.

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Thomas Richard Fox, Dawson James Securities, Inc. - Managing Partner of Retail Sales [2]

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John, nice to hear from you and announcements as you go that you're entering into Phase 2 on rapid test and evaluation from a major company. What's the cycle now? Approximately, how long is that cycle between going through this Phase 2 to where it could actually come to an order?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [3]

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Naturally, they will not tell us that, but here's what it looks like. The second Phase 2 goes faster than Phase 1, we believe, because the players understand how to do all of the parts and so on and so forth. So my expectation is that the Phase 2 technical side of this can be wrapped up in 60 to 120 days. Why such a big span? Because it has -- the critical end of the process is a third-party lab coming in as comparing our results using CAT scans and destructive testing to a lot of parts, and they are sometimes a source of delay. But the customer will be able -- will be measuring our results against their first Phase 1 and will have advanced knowledge of the outcome, but even before the lab is fully -- has fully completed its work.

So we think it will probably take the research folks about half a month to put together their results and recommendations for a buy or no buy and the company is completely silent as to how fast that process will take in their system. Our experience from other companies and other lives that I have left is that the oil and gas industry is aggressive, decisive and moves quickly. So I'm hopeful that following on the 60 to 120-day maximum R&D period that they will be able to make a decision without a lot of wasted time.

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Thomas Richard Fox, Dawson James Securities, Inc. - Managing Partner of Retail Sales [4]

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Okay. And so if you were able to take your pipeline of contracts similar to this, and I know it's asking a lot, but if you could sort of convert that into what you think it means for 2020 potential revenues, can you talk about that or...

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [5]

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I can talk about it, but I can't give you the answer in the terms you'd really like to have it. Essentially, what we have just told you is that there are 3 OEM customers engaged with us now who we believe, in the course of 2020, will make a decision of whether or not to try to enter a license agreement for our technology. If they do, we would be looking for license revenues on the signing of those agreements. In the case of end users, we have said that we expect 3 of them, 3 folks who are in the end game of Phase 1s now and entering Phase 2s, we expect 3 of them in the course of 2020 to also be in a position to make a decision is to whether to employ us on their production equipment and how much of their production equipment to deploy us on. The pool of available machines is 105 to 120 or more, the rate among those 3. So the potential for each one of them is a $2 million to $4 million order in the course of 2020. How that order is scheduled for delivery and all of that is subject to the vagaries of each company. But it's very important to realize that a small number of positive events have a dramatically powerful impact on Sigma.

So you have 6 identified customers locked in our system today, 3 OEMs and 3 RTEs, which -- whose decisions could elevate Sigma substantially. The context in which those end user RTEs is embedded that there are 6 we are discussing now. The field -- the pipeline is 11 plus 1 in reserve because of a technology and compatibility. So there's nothing stopped. This is an ongoing process. We're reporting on the first people into the pipe as what their prospects are coming out of it. And the potential for each one of these customers is very significant to Sigma.

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Thomas Richard Fox, Dawson James Securities, Inc. - Managing Partner of Retail Sales [6]

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Wow, thanks for that. It's exciting times for you guys.

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [7]

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It's finally.

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Thomas Richard Fox, Dawson James Securities, Inc. - Managing Partner of Retail Sales [8]

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We've all been patient, but here we go. Good luck, and thank you very much for your answers. I appreciate it, John. All the best.

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Operator [9]

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Our next question comes from the line of Hunter Diamond of Diamond Equity.

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Hunter Louis Diamond, Diamond Equity Research LLC - CEO & Founder [10]

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Firstly, congratulations on the earnings and the recent progress. I would say your description before was very apt, that the market is not really grasping operationally what's going on. So I thought it was very good that you mentioned that during the call. So my question is, just can you walk me through sort of what a sample engagement process with the new client might look like for an end user and a machine OEMs, just in terms of testing, evaluation through a full commercial rollout of your technology? I'm just trying to understand sort of the process a little more.

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [11]

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Sure. So what we do is we approach end users based on 4 criteria: it's got to be a big and major brand, they have to be manufacturing or buying the products manufactured off 20 or more OEM metal machines, they have to be willing to enter an agreement with us that stipulates what our equipment would have to do for them to believe it solves their problem, and they have to be willing to stage forward with us. In the event, as we enter these agreements with -- we receive a $25,000 down payment, as Frank mentioned earlier, with the expectation that we will receive $100,000 upon a successful conclusion of a Phase 1. We did not actually create the Phase 2 expectation. That was these large companies saying, look, one of the problems that you address that nothing else addresses is that we have 3 or 4 different brands. So that has added machines on our floor. And we need a tool that helps us operate those machines towards manufacturer of the same part at the same quality levels. And so we need a tool that can look agnostically at these different machines and assist in quality assurance in each of them, so that no matter their differences, no matter how variable they are, the parts come out to be the constant. And so if we like what you do in Phase 1, we'll think you have a cool technology for that brand. We want to prove that it works on others because our operations require multiple brands. By the way, that's important because it means that OEMs who are creating their own iterations of melt pool monitoring, can't do that. Their equipment, by its nature, it's not going to be deployable on their competitor's equipment. So that's actually -- it's one of those little, oh by the way. So step 1, Phase 1 is 1 machine, $25,000, $100,000 upon completion, unless they want to move it to a different machine. Phase 2 is deployment on 1 to -- up to 3 other brands for the reasons I just explained to you with the same $125,000, very back-end loaded revenue attached to it.

At the end of Phase 2 where if they conclude that we can meet the need they've defined, which is this has to work on each one of my brands, and it has to assist us in raising the quality on each machine, and it has to assist us in coordinating better quality among the different brands, then we expect that they will roll us into all of their production equipment. We have a theory, but not yet proven by the PL, that they'll probably do that in something like lots of 10. And that's because of maintenance cycles. This is -- we're talking about deployment on production equipment. So the windows, and if you can do that, have some sophisticated thinking behind it.

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Hunter Louis Diamond, Diamond Equity Research LLC - CEO & Founder [12]

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Right. No, makes sense. Right. No, thank you very much. And again, congrats on the recent results.

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Operator [13]

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Our next question comes from the line of James Jang of Aegis Capital.

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Han Jang, Aegis Capital Corporation, Research Division - Research Analyst [14]

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So just a couple of quick questions here. In terms of your purchase orders, how do you see that flowing through over the next couple of quarters?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [15]

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Well, again, let me tiptoe through the public company problem here.

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Han Jang, Aegis Capital Corporation, Research Division - Research Analyst [16]

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Yes. Well, no. I mean, because of modeling, right? Because you did -- for the first 9 months, you've done, what was it, like, 2, 7 -- $270,000 in revenue, right. And the bulk of that came from this quarter. So -- and I know that you have been working diligently on getting additional investment to go and open new channels. And so I look at that $895,000 and that's -- that's looking like 2016 top line figure. So we -- in terms of how that hits, should we be assuming that there's going to be some seasonality and most of that won't hit in the fourth quarter? Would that be a reasonable assumption?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [17]

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Let me do it this way. I'm going to go by channel. The retail channel, which essentially has been created in the past 6 months, that went from 0 to about 75% or 80% of that $1.2 million in the pipeline now. We can't prove whether that's a sustainable rate, but it's reasonable to think it might be. So there's a new -- there's kind of -- there's a new sort of bed to rest all of this on, which are the smaller sales going through to universities, research centers and smaller research groups.

The second channel is -- it's actually RTE back end payments. As you know, it's $100,000 on 1 unit. It's up to -- for the collective of $375,000 or $0.5 million. $75,000 of that is received upfront and the balance over time. We are coming into a couple of quarters where those Phase 2 activities will be winding up. And so the RTE back end payments, which in the scale of Sigma are material are expected and hoped to occur.

The third channel is if and when an RTE converts from -- we've talked about the Baker Hughes earlier because they're now an identified -- the Tier 1 RTE. If they exercise the judgment to order us in, we don't know what they're going to offer or how many, but we've told you that the average of this group would be a $2 million to $4 million order.

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Han Jang, Aegis Capital Corporation, Research Division - Research Analyst [18]

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Yes. Okay. So if I could just jump in one second there. So on the Baker Hughes side, right. So of the conversations you've had and discussions, that was from their 2019 budget, right. Because right now, they're setting their 2020 budget, correct? So is that fair to assume?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [19]

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I actually don't have that knowledge. Generically, I would agree with you, that's what most companies do. But in an organization, in a given organization, all of these guys we're working with tend to be long-term thinkers and appear to have provided -- anticipated, if I need the money then, that's how I'm going to set things up now. So I'm not confident that this is a suspense moment on budget for them. I think they've got their act together.

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Han Jang, Aegis Capital Corporation, Research Division - Research Analyst [20]

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Okay. All right. And so with the Phase 2 customers, is it too preliminary to or have you had kind of discussions with them on what type of rollout that they would be anticipating?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [21]

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Yes. Only at a high level. There's a difference between if this really works out, we're going to want to put you on everything. That's the early stage. So when you get into the operating people and the implementation, that's another group. We do abide by the strategic selling perception that we got to be having a lot of conversations in different parts of an enterprise to keep things moving. And it's topics like that, that caused that.

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Han Jang, Aegis Capital Corporation, Research Division - Research Analyst [22]

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Okay. So how about -- I don't know if you could share this, but with the clients that you're speaking with, do you have like approximate number of total machines that could be utilized with the PrintRite3D if it goes to the commercialization phase?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [23]

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Absolutely. Right. Of the 3 companies we've said we'll be deciding go, no go, that's 110 to 120 machines.

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Han Jang, Aegis Capital Corporation, Research Division - Research Analyst [24]

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Okay. And we can assume that if they do decide to move forward, that they will probably implement it on all the machines, correct? It's a safe assumption?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [25]

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We can't imagine why they wouldn't. Because otherwise they -- this tool works well both on one machine and collectively. I think it's probably a timing question, but I don't think it's an either/or question.

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Han Jang, Aegis Capital Corporation, Research Division - Research Analyst [26]

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Yes, that's exactly what I meant. So I know they'd probably do a rollout throughout all the machines, not all at once, right?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [27]

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Yes, yes. I want to see if you guys can move 10 before I do 20 or something like that. By the way, we can install on most machines that we have so far installed on in an hour.

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Han Jang, Aegis Capital Corporation, Research Division - Research Analyst [28]

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All right. And if you were to think about these contracts, it would be on a, I guess rolling basis in terms of the number of machines implemented won't be like a flat, flat rate, right? It will be a fee per machine that utilizes it per calendar year or per machine hours worked, something like that?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [29]

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Yes. Yes, they'll get some attractive pricing on a bulk order, but it will be a per machine -- but the index will be per machine. There is -- we have to deploy people to do an installation. So if we could do a lot of 10 at once, so that would save us money that we would -- the savings of which we would share with them as opposed to having to deploy, go home for each machine. So there's a lot of -- there's room to make it attractive both ways in deployment there.

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Operator [30]

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Our next question comes from the line of Tom Curtis of Dawson James Securities.

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Thomas R. Curtis, Dawson James Securities, Inc. - Managing Partner of Retail Sales [31]

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John, congratulations on a great quarter. My question is, which is the larger near-term opportunity in the aerospace market, the OEM market or the end user market?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [32]

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Yes.

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Thomas R. Curtis, Dawson James Securities, Inc. - Managing Partner of Retail Sales [33]

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Yes, both?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [34]

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The -- well, because they're different. In terms of revenue over the next 12 months, the end-user market is much more substantial for us because you're deploying on a number of machines. In the case of the OEM market, which is the lynchpin of future sales rolling out years. The first thing, what we will be doing first with them is entering license agreement, which will have license fees attached to purchase them. But then there's the delay period while they integrate our technology into their technology and get us into their brochures and into their repair manuals and all of that. So there's a delay between writing a check for a license and then the flow of fees from their end-user sales to us as they deploy our equipment in theirs.

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Thomas R. Curtis, Dawson James Securities, Inc. - Managing Partner of Retail Sales [35]

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Okay, great. Sounds good.

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [36]

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So long term, we want the end users to be pulling us through OEMs who haven't yet decided, but will then decide to license our stuff.

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Operator [37]

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(Operator Instructions) Our next question is from the line of [George Kafkarkou].

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Unidentified Analyst, [38]

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Congratulations, John, on a very good quarter. A couple of questions, John. John, can you hear me?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [39]

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Yes, I can.

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Unidentified Analyst, [40]

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Yes. A couple of questions. It seems to me that our patents, our growing patent portfolio and indeed the growing number of third-party validations from DARPA, Fraunhofer and others, those 2 things in combination give me a lot of solids from my long-term investment. What do you hear from the ecosystem from your customers, from your prospects about the fact that you have such strong patents that essentially provide a moat around your solution versus competitors and the impact and influence of these third parties?

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [41]

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I'll answer it in reverse. The impact of the third-party validations to us, as a young company selling to very large people we wish to be early adopters, is tremendous. Third-party validation whether it's Fraunhofer, DARPA, Materialise, additive industries, ANSYS, all of those kinds of things tend to signal to folks it's safe to early adopt with these guys. The people with no interest in the company are taking a big interest in their technology. So that's important. And we see that increasing as we deploy more with VTT, as the folks in Birmingham, England spool up and so forth.

The answer to the second question is the patent -- perception of people's patent portfolios always varies by the chair people are sitting in, I find, mainly because people outside a patent portfolio don't really know what you have. In our case, the industry has become very aware that Sigma's pathway has long been different from the primary competing -- from the primary technology with which it competes. And what I mean by that is we are deep -- our people are swimming in that melt pool to determine from activities in the melt pool the precursors of things that are not yet quality problems. And the competing technology is called optical tomography, but -- and the iterations of it, which is essentially using a photographic capability to look at each part of each layer. And the limits of that are essentially, you can see the problem you can't solve more often than you can find a solvable problem. And so far, none of them, to our knowledge, can see a problem in real-time and alert somebody to do something about it.

The second limitation of that optical tomography is that a really interesting, intellectually interesting solution they came up with was to start doing simulations to try to figure out what was beneath what they cannot see. And that compares with Sigma, which is doing deep dive thermal analysis to see what they can't see and to see what they cannot simulate either. And so that people are aware that Sigma has been in its pathway of reeling up this wall of protection for over -- for starting 9 years ago. And so the anxiety of the industry is, if the optical tomography isn't competitive with Sigma, Sigma is going to be really formidable.

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Unidentified Analyst, [42]

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Yes. Yes. Yes. Okay. Super. And just a couple more questions. I mean, as it appears we're gathering more momentum, just can I ask you to elaborate a little bit about Materialise, and what we can expect next week at Formnext? And also, are you at liberty to talk about Airbus? Because that was a very visible release and that's of great interest. Can you talk to those 2 things? And those are my 2 final questions.

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [43]

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Sure. Materialise, it was our very first RTE. They were the alpha when we figured out how fast we could deploy and so on and so forth. And indeed, they began with a technology that preceded 4.0 and then now have worked all the way through to the point that they have 5.0. Darren Beckett, our CTO, will be -- has been invited by Materialise to speak in their booth next week at Formnext, describing the integration of PrintRite3D technology with their new control system. And -- so what you're learning from that is that the announcement we made last May that we were going to integrate the technologies has born -- has grown into a successful relationship between the 2 companies with capabilities that are mutually attractive as -- they're a terrific company, and their control system ability that I think will enable them when they choose to be able to introduce closed-loop control because they will have access to the data to do that from us.

So Darren is not going to be talking about closed-loop control. Materialise is large, diligent and thoughtful, and it's step at a time and the step we are at now is we've got something, and now we're going to go to the next steps. And the question that you're about to ask, I'll ask for you, which is when are we going to announce the commercial agreement? And the answer is when -- the answer to that is when it is done.

The other thing you asked about is Airbus. That's -- as you know, it is a giant company. I have a hunch that it's a real horse race as to whether Airbus or GE is making more use of 3D technologies. And even though GE owns its own sources of supply, Airbus is already making a great number of parts with additive in many materials and their metal output is substantial. Our importance to them is obvious. Their importance to us is obvious. And so far, so good.

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Operator [44]

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At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. John Rice for his closing remarks.

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John Reynolds Rice, Sigma Labs, Inc. - Chairman, CEO & President [45]

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Sorry, folks, I -- we got lost in my computer. Thank you. Thanks, all of you for joining us today. We have a really strong, dedicated hard-working staff throughout the company who push themselves to make this a better company every day. I have never had the privilege of working in such a high energy, high morale setting. So we all owe them thanks if you are following this company and investors.

And lastly, I wouldn't -- can't end this call without saying, if you need to follow this up, please do. Please feel free to contact us at our Investor Relations firm, which is MZ Group, they'll be happy to answer them. And as you know, you can always call me. So many thanks. Operator?

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Operator [46]

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This concludes today's conference. Thank you for your participation.