UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 001-38015
SIGMA LABS, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
27-1865814
(I.R.S. Employer
Identification Number)
3900 Paseo del Sol
Santa Fe, New Mexico 87507
(Address of principal executive offices)
(505) 438-2576
(Registrant’s telephone number, including area code):
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Warrants to Purchase Common Stock,
par value $0.001 per share
Securities registered pursuant to Section 12(g) of the Act: None.
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ].No [X].
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X].
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports) and, (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [X].No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein and, will not be contained, to
the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-
K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Accelerated filer [ ]
Smaller reporting company [X]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] . No [X].
Based on the closing price of the registrant’s common stock as reported on The NASDAQ Capital Market, the aggregate market value of the Registrant’s common stock held by
non-affiliates on June 30, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $7,856,465. Shares of common stock
held by directors and executive officers and any ten percent or greater stockholders and their respective affiliates have been excluded from this calculation, because such
stockholders may be deemed to be “affiliates” of the registrant. This is not necessarily determinative of affiliate status for other purposes. The number of outstanding shares of
the registrant’s common stock as of March 27, 2019 was 10,537,590.
SIGMA LABS, INC.
FORM 10-K — FISCAL YEAR ENDED DECEMBER 31, 2018
INDEX
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF
EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 6.
ITEM 7.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16. FORM 10-K SUMMARY
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PART I
PART II
PART III
PART IV
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report, including any documents which may be incorporated by reference into this Report, contains “Forward-Looking Statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical
fact are “Forward-Looking Statements” for purposes of these provisions, including any projections of revenues or other financial items, any statements of the plans and
objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or
performance, and any statements of assumptions underlying any of the foregoing. All Forward-Looking Statements included in this document are made as of the date hereof and
are based on information available to us as of such date. We assume no obligation to update any Forward-Looking Statement. In some cases, Forward-Looking Statements can
be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negative
thereof or other comparable terminology. Although we believe that the expectations reflected in the Forward-Looking Statements contained herein are reasonable, there can be
no assurance that such expectations or any of the Forward-Looking Statements will prove to be correct, and actual results could differ materially from those projected or
assumed in the Forward-Looking Statements. Future financial condition and results of operations, as well as any Forward-Looking Statements are subject to inherent risks and
uncertainties, including any other factors referred to in our press releases and reports filed with the Securities and Exchange Commission (“SEC”). All subsequent Forward-
Looking Statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Additional factors that
may have a direct bearing on our operating results are described under “Risk Factors” and elsewhere in this report.
Introductory Comment
Throughout this Annual Report on Form 10-K, unless otherwise indicated or the context otherwise requires, the term “B6 Sigma” refers to B6 Sigma, Inc., a Delaware
corporation, which, until the short-form merger referenced below, was our wholly-owned, operating company acquired in September 2010; the terms the “Company,” “Sigma,”
“we,” “us” and “our” refer to Sigma Labs, Inc., together with B6 Sigma, Inc. Prior to December 29, 2015, we conducted substantially all of our operations through B6 Sigma.
On December 29, 2015, we completed a short-form merger of B6 Sigma into Sigma. As a result, B6 Sigma became part of Sigma and no longer exists as a subsidiary.
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ITEM 1. BUSINESS.
Summary
PART I
Sigma is a software company that has developed In-Process-Quality-Assurance (“IPQA”) software known as PrintRite3D®. This technology is also sometimes
referred to as Real-Time-Computer-Aided Inspection (“CAI”). Sigma believes that its PrintRite3D® solves the major problem that has prevented large-scale metal part
production using 3D printers for cost efficient production runs.
3D metal manufacturing, also known as Additive Manufacturing, is a technology that uses lasers to sculpt parts by welding powdered metals into 3-dimensional (3D)
objects and, to date, the quality of these parts can vary from part to part in a single production run, as well as from machine to machine in a production line. Traditional quality
assurance methods relying on statistically based post-process inspection methods so well proven by “Subtractive Manufacturing” cannot be used effectively to improve and
assure quality of parts manufactured using 3D metal printers. The aforementioned traditional quality assurance methods are based on a manufacturing process that is the
opposite of 3D Additive Manufacturing; Subtractive Manufacturing begins with quality-assured already formed pieces of metal as a raw material (not powdered metal as is used
as raw material in 3D) and machines it with equipment such as lathes, milling machines, and CNC machines to subtract metal and thus form finished metal parts, or by casting
molten metal into molded parts usually to then be further machined. Since the metal used in Subtractive Manufacturing is already of proven quality, the quality of the metal for
all parts in a production run is known to be uniform, subject to post process inspection of a statistically determined valid sample size focused primarily on metrology to
determine dimensional accuracy rather than metallurgy to determine metal quality.
The lynchpin reality of 3D Additive Manufacturing quality assurance is illustrated by the fact that if a 3D metal manufacturing machine fabricates 10 parts, and quality
inspectors then rigorously inspect three of them, the inspectors will have learned about the quality of only the three parts they destroyed or CT-scanned and nothing that is
sufficient to confirm or reject the quality of the remaining seven. Quality assurance of 3D Additive metal parts requires high quality sensitive manufacturers to institute
procedures to inspect 100% of the parts being made. Sigma believes that the best, indeed, the only known way to attain high yields for both manufacturing quality and cost
efficiency is an In-Process-Quality-Assurance (IPQA®) approach that examines each part in real time as it is being manufactured, determines in real time whether it meets
quality specifications and permits machine operators to act on the information if a part is beginning to deviate from its design specifications.
GE Aviation stated in 2016 that it planned to commit $3.5 billion by 2020 to, among other things, build a metal 3D production facility to produce 3D printed metal
parts for its Leap engine and other engines. Starting in September 2016 and continuing into 2017 GE Additive spent over $1 billion buying controlling interests in AM
equipment manufacturers, Concept Laser and Arcam AB, and later announced that it had invested over $300 million creating AM manufacturing capability in both the United
States and India, and was an investor in a $115 million series D investment round of Desktop Metal, a metal 3D printing company. In the course of 2017, GE Additive
continued with lateral growth into additive manufacturing, announcing collaborations with Oerlikon and Stryker, and then a partnership with GKN. Sigma Labs has learned
from its interactions in the marketplace that the pent-up demand apparent from GE and others, such as Airbus, to press forward into advanced 3D manufacturing production are
taking place with the assumption that highly reliable in-process quality assurance capability will no doubt emerge either from their own internal efforts or be attained through
licensing, or possibly acquisition. In the meantime, CT scans and other costly post-process inspection appear to be an accepted cost as initially sustainable in the startup phases
of production. However, until companies that utilize 3D production facilities like GE Aviation are able to effectively verify that each part conforms to design specifications of
attributes of shape, density, strength and consistency in real-time during the manufacturing process, we believe that such companies will be at risk of letting some substandard
parts through and, also, be unable to improve the workflow to high quality cost-optimum yields of 3D printed metal parts. No matter how much acuity and at what cost a suite
of post process inspection tools might provide 3D manufactured metal parts, it currently can only assure quality yield by rejecting fully formed parts, and, over time, applying
comprehensive ‘reverse engineering’ forensic analyses of each rejected part to identify repeating quality flaws attributable to constants such as location, design, or scan strategy.
Once the locations of these repeating flaws are identified, process engineers can act to make the AM equipment deliver better quality by adjusting the computer-based
manufacturing instructions of AM equipment to offset the repeating flaws discovered by that deep analyses of individual rejected parts in many manufacturing runs. This
prolonged post-process methodology is very costly due to the loss of material and rejected parts as well as post-process analysis labor cost and inspection cost such as CT
scanning. Additionally, there still lingers the question of whether or not the post-process inspections were sufficiently granular to assure that flawed parts were not accepted and
shipped.
We believe that our principal product, PrintRite3D®, which can be installed on 3D metal printers, solves these problems by determining if each part is being made to
the metallurgical quality specifications of the Design/Specification file as each part is being made. Our software enables 3D prototyping to evolve forward into serial or
production 3D manufacturing by providing a software suite with algorithm-based tools that address and overcome quality issues that are specific to 3D Metal Additive
Manufacturing and that are not solved using the post-production quality methods derived for Subtractive manufacturing along with and newly dependent upon CT scanning. The
PrintRite3D® suite has substantially lower operating costs and can attain higher yields by inspecting parts as they are made and providing machines and their operators
actionable information that includes the options of stopping manufacture of given part(s) while operations continue to complete parts that are in specification, thus saving time
and money while raising yields. PrintRite3D® also gives operators information from run to run that enables them to ‘learn up’ quality for a given machine by using
PrintRite3D® data about machine behaviors that can then be offset by making adjustments to power settings directed at a given sector. PrintRite3D®’s Thermal Energy
Density™ (“TED”) feature supersedes and truncates the “reverse engineering” process of post process inspection described above by providing process engineers the data
required to optimize individual machines as well as machines in series in days or weeks and before serial production is launched rather than months after production and
rejection rates have accrued in costly quantities. PrintRite3D®’s Thermal Energy Planck (“TEP”) feature provides machine operators and engineers with in process real-time
identification of signatures of quality anomalies as they begin to develop and permits terminating or curing a part in process.
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We have filed 24 patents/patent applications pending on our In-Process Quality Assurance™ (“IPQA®”) processes and procedures for advanced manufacturing. In
addition, we anticipate that our core PrintRite3D® software will enable our customers to combine their digital manufacturing technologies with our 3D manufacturing QA to
achieve both cost savings and more reliable parts. We believe that certain vertical markets would benefit from our technology and software, including aerospace, defense, bio-
medical, power generation, and oil & gas industries because: (1) they each stand to benefit by taking advantage of the weight/strength/performance ratios that can often be
optimized by taking advantage of 3D design; (2) they each stand to benefit by taking maximum advantage of 3D manufacturing’s material cost savings resulting from designing
parts to needed tolerances while requiring less metal; and (3) there are severe consequences for quality failures in some of their products. We provide our software products to
customers in the form of Software as a Service (“SaaS”), as well as in custom arrangements.
About 3D Printing
3D printing (“3DP”) or additive manufacturing (“AM”) is changing the manufacturing world by producing complex metal parts from a computerized input. 3D
printing has been applied to the manufacture of plastic parts for decades. 3D manufacturing of metal parts involves directing a laser or other energy source at a layer of
powdered metal and melting it. These layers become melted together from the bottom up. Worldwide revenues attributable to 3D manufacturing for metal products were
reported at $88.1 million in 2015 (Wohlers Report 2016, 3D Printing and Additive Manufacturing State of the Industry – Annual Worldwide Progress Report). By 2017,
Wohlers Report stopped estimating annual 3D metal parts revenue, stating that too much of the revenue is proprietary information and unavailable from aerospace and similar
high-tech sectors. Large powdered metal suppliers surveyed by Wohlers about their growth forecasts for 2017 averaged expectations of a 59% increase for 2017. According to
Sigma’s experience in costing and pricing the manufacturing of AM metal parts, as confirmed by consultation with other service providers, the total powdered metal sales
forecast for 2017 is enough raw material to produce a “retail value” of the metal parts of ~$800 million. On another vector, according to Wohlers, an estimated 1,768 metal AM
machines were sold in 2017, an increase of 79% over 2016. As large established companies including Toshiba, HP, Lenovo, Canon and Ricoh in the course of 2016-2017
announced products or intents of entry in AM manufacturing, Electro Optical Systems (“EOS”), a well-established vendor of AM manufacturing equipment opened a new plant
in January 2018 that, according to EOS, doubled its 2017 capacity to 1,000 units per year. SLM Solutions AG also reportedly expanded into a new factory during this period.
About Quality Assurance in 3D Printing
Sigma believes that the largest future growth for the 3D printing industry will be in metal parts, given the interest and investment being made by Fortune 100
companies, Federal government laboratories and agencies as well as university-based institutions. These high-end manufacturers and technology leaders are strongly focused on
helping transform analog manufacturing of precision, high-tolerance parts in the U.S. to digital manufacturing encompassing automation, robotics and closed-loop process
control. We believe that the future growth and success of 3D printing for metal parts will be highly dependent upon the availability of in-process and real-time digital quality
assurance tools, such as our PrintRite3D®.
Current methods for providing quality in 3DP are generally either (i) inaccurate due to use of procedures that do not recognize and measure the primary quality issues
of 3D metal manufacturing or due to the misuse of non-applicable statistically based assessments, or (ii) are cost prohibitive due to the expense of labor and equipment required
to examine the interior of complex dense parts that 3D manufacturing can create after the parts are manufactured. After 3D-manufacture, costs are normally incurred for using
non-destructive technologies such as ultrasound and non-traditional CT technology on these parts, and old-fashioned visual inspection. Destructive testing of 3D parts is a mis-
applied carryover from current Subtractive Manufacturing quality assurance practice, in which the great part to part consistency of traditional metal machining equipment
permits quality inspectors to infer the quality of a production run by cutting up and analyzing a statistically relevant number of parts. The test result of the parts that are
destroyed and analyzed have too often been, after great time and expense, statistically demonstrated to be insufficiently representative of the rest of the parts in the production
lot. The underlying premise of quality assurance for Subtractive Manufactured parts is that if a machine is set up properly, then all parts it produces will be repeatedly the same.
This simple, effective and accurate quality system does not apply to Additive Manufacturing, in which each part is built in an average production lot of 5-80, and in which
quality variance may occur from part to part and within any part notwithstanding that the AM machine settings are the same. Therefore, unable to rely on a traditional
statistically based quality system, 3D Manufacturing’s optimum quality assurance system would evaluate the quality of each individual part. PrintRite3D®’s in-process quality
inspection approach of each part individually allows a manufacturer to use AM to form a single part, such as a hip replacement or one spare aircraft part needed on an aircraft
carrier, or several lots of the same part, in large quality – each approved or rejected in real time and based upon complete inspection during fabrication. 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 it is finished, we
can determine if it meets the production parameters of quality standard set by the customer. We believe our PrintRite3D® software could reduce inspection costs by as much as
a factor of 10 and development time for new parts by 50% or more because IPQA permits factories to make the part manufactured the constant and the machines manufacturing
them the variable. Consequently, the lower cost statistical based post-process inspection methods that work well with Subtractive Manufacturing could be successfully and
economically applied to parts made with 3D Metal machines, and because utilizing PrintRite3D® for design reduces the number and iterations of development parts required to
lead to a final design. Also important is the ability of our software to reduce risk associated with the qualification and certification of printed parts.
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By using PrintRite3D® software, a high-precision manufacturer would have the ability to offer its customers product warranties and assurances that its printed parts
were produced in compliance with stringent quality requirements. Orders for our software have been received from, among others, Honeywell Aerospace, Aerojet Rocketdyne,
Woodward, Siemens Turbomachinery, Pratt and Whitney, Baker Hughes, and Solar Turbines.
We believe there is potential for our PrintRite3D® software to be incorporated into a majority of 3D metal printing devices made by companies like Electro-Optical
Systems (“EOS”), Additive Industries, ARCAM, Concept Lasers, Farsoon, Desktop Metal, DMG Mori, Renishaw, Sentrol, SLM, Trumpf Lasers, and others.
Sigma’s Cloud-Based IIoT Solutions
The process of making a 3D printed part could start with our customers loading a computer aided design (“CAD”) model of the part into the Cloud as shown in “A” in
Figure 1. Next, computer aided engineering (“CAE”) and/or computer aided manufacturing (“CAM”) instructions are sent to the 3D printer (see “B”, as shown in Figure 1).
Metal powder in the machine is then deposited onto the build platform where a laser beam, or other energy source, focused onto the build platform melts each successive layer
of powder in 20-60 micron increments. Our PrintRite3D SENSORPAK® (see “C” in Figure 1) detects, records, analyzes and compares the part as it is being made layer-by-
layer against the CAD/CAM specifications and physical reference points for quality assurance during manufacturing. Our PrintRite3D INSPECT®, Version 3.02 software
utilizes our patent applied for TED tool to determine compliance of each part for its metallurgical quality. Our alpha version of PrintRite3D CONTOUR® software determines
the shape and conformity of a part in real-time manufacture with its geometric design specification.
Our PrintRite3D® CAI web-based software suite (see “D” in Figure 1) resides in situ and/or in the Cloud (see “A” in Figure 1) of the Industrial Internet of Things
(“IIoT”). We enable manufacturing engineers to confirm the part quality layer-by-layer, provide for manufacturing statistical process control and harvest, aggregate, and analyze
big data from the real-time manufacturing data collected from our PrintRite3D SENSORPAK® (see “C” in Figure 1), as well as post-process manufacturing data collected by
our customers (see “E” in Figure 1).
Our specialized sensor suite (see “C” in Figure 1), known as PrintRite3D SENSORPAK®, is an edge computing device, which means that it can be operated outside of
a customer’s primary computer hardware and software systems while delivering actionable information to these systems. Thus, PrintRite3D SENSORPAK® contains the
modular hardware and software necessary to connect to “cyber-physical” objects (see “B” in Figure 1) living on the manufacturing floor. It allows for bi-directional information
flow between the manufacturing floor and the Cloud (see “A” in Figure 1). It starts with a million-fold data reduction required to manage and analyze the very large quantities
of data garnered that layer by layer monitoring +/- 30 Micron thicknesses create. It finishes with our PrintRite3D® Digital Quality Record (“DQR”) and report, which provides
customers with product guarantees and assurances that parts were produced in compliance with stringent quality standards. It can collect, analyze, aggregate, filter, and then
further communicate data from the manufacturing floor to the Cloud (see “A” in Figure 1) and enable links to other areas (see “F” in Figure 1) of the IIoT.
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Business Activities and Industry Applications
Figure 1. Sigma’s Industrial IoT / PrintRite 3D® Cloud Architecture
Our business is currently focused on the continued development and commercialization of our PrintRite3D® suite of software applications. We are specifically
focusing on the 3D Metal Printing and AM industries and further developing our contract additive manufacturing business for metal 3DP to be a customer prototype center
available for cutting edge 3D challenges and a concurrent means of demonstrating and proving the merit of PrintRite3D® for customers’ parts or application. Our strategy is to
continue to leverage our advanced manufacturing knowledge, experience and capabilities through the following means:
●
●
●
Identify, develop and commercialize our quality assurance software applications for advanced manufacturing technologies. The applications are designed to
assure part quality in real time, and improve process control practices for a variety of industries;
Provide materials and process engineering consulting services with our PrintRite3D® CAI quality assurance software applications for advanced manufacturing
to customers that need:
●
●
●
●
to learn and characterize the individual performance parameters of each machine intended to produce 3CD metal parts;
to determine and characterize the traits, signatures, and in-process behaviors of the materials designated for a given part’s production;
to improve manufacturing quality yields by utilizing IPQA;
to improve, perhaps for the first time, documentable third-party part-by-part quality certification.
Build and run a prototype and small lot contract manufacturing and demonstration division for metal 3DP beginning with our EOSM290 state-of-the-art metal
printer.
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We are presently engaged with and focused primarily on the following industry sectors:
● Aerospace and defense manufacturing;
● Auto industry (niches)
●
Energy and power generation;
● Bio-medical manufacturing;
● Oil and gas exploration, extraction, and distribution.
We generate revenues through PrintRite3D® hardware and CAI software licensing of our PrintRite3D® technology to customers that seek to improve their
manufacturing production processes, and through ongoing annual software upgrades and maintenance fees. Additionally, we generate modest revenues from our contract
manufacturing activities in metal AM. By running a small-scale contract AM services operation, we are able to understand and keep pace with the current needs and technology
trends of our customers and where they are going with their next-generation product development efforts. Contract AM further allows us a means for material on-going partial
self-funding of our IPQA®-enabled R&D and product development activities for CAI software. We provide our AM contract manufacturing services to customers in the form of
Quality as a Service (“QaaS”). Starting with our PrintRite3D® cloud-based SaaS model, customers will contract with us for CAE, CAM and CAI services to generate and
establish a Digital Quality Record (DQR) for AM built parts. Each DQR is cloud-based and allows for archiving and storage of quality data, access to our big data
ANALYTICS™ software App for continuous quality monitoring and improvement, and automatic industry benchmarking while maintaining firewalls between company-
specific data.
In late November 2018 at the Formnext tradeshow, we released a new version of our hardware along Version 4.0 of PrintRite3D and we also launched a Rapid Test
and Evaluation(RTE) program for the market. The RTE targets high technology quality sensitive companies that are already manufacturing or buying parts manufactured in
production runs on AM metal machines. The program is a “try before you buy” agreement under the terms of which customers enter into an agreement under which they agree
to pay Sigma a fee, equivalent to a down payment, and to with test protocol mutually defined to demonstrate both Sigma’s technology capability in general and the measurable
impact it can have on the customer’s’ processes, parts and yields. The Company’s goal is that successes in the RTE program will lead to increased revenues in 2019.
In October 2018, Mark Cola, our former President and Chief Technology Officer and a co-founder of the Company, retired with the title CTO Emeritus and an on-
going consulting arrangement with the Company. In November 2018, Darren Beckett was named Chief Technology Officer of Sigma.
PrintRite3D® Quality Assurance Software for Computer-Aided Inspection of Metal Additive Manufacturing
We believe that AM will significantly impact the manufacturing landscape. AM results in very efficient metal utilization for parts made on-demand, and utilizes a wide
variety of rapid prototyping methods. As a result of AM, parts can go straight from computer-aided designs (CAD) and 3D computer models to actual, physical parts through
the use of computer-aided engineering (CAE) and computer-aided manufacturing (CAM) steps. However, there are severe challenges in connection with 3D printing of metal
parts. Current manufacturing processes are not capable of making every part right the first time. Also, process consistency and repeatability require further development for
metal parts and this is a typical case for emerging technologies. Although many industry experts have lamented that 3D Printing for metal parts is limited in current
applications, we are developing our IPQA®-enabled technology into a hardware and software suite of products for CAI of AM known as PrintRite3D®, which we expect will
address some of these shortcomings and enable mass production metals AM technology to be realized sooner than would otherwise be possible given its current state of
maturity. PrintRite3D® comprises a suite of CAI software apps that address the three fundamental problems facing metal AM today, namely: assuring the metal integrity or
quality of the product; assuring the as-built geometry of the product; and, increasing the productivity or speed of the AM process.
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Contract Manufacturing for Metal Additive Manufacturing
According to the Wohlers 2018 Annual Report, industry growth in the independent service provider segment including the secondary market of dies and molds
produced for and by AM machines for AM manufacturing in 2017 was an estimated $4.2 billion, up from $3.6 billion in 2015. Large end-users such as Airbus, GE Aviation
(“GEA”), Honeywell Aerospace, Pratt & Whitney, and Siemens Turbomachinery have substantial investment and floor space dedicated to AM systems that supply production
parts. Since 2016, the market has seen manufactures including EOS, Concept Laser, SLM, Trumpf, Additive Industries, DMG Mori, and Renishaw introduce and/or announce
multi-laser equipment aimed specifically at enabling and furthering more cost-efficient and high-speed serial metal parts production.
We believe that this service provider market segment represents an opportunity for us to capture significant future portions of the demand for metal production parts by
enhancing service bureaus quality through the licensing of PrintRite3D®.
A detailed description of our technologies and business follows.
PrintRite3D® Quality Assurance Software for Additive Manufacturing
The Market
The sale of AM products and services in 2017 composed of all AM products and services, but not including either internal investments of many of the major companies
in aerospace AM or revenues from many companies in the aerospace, medical, and dental industries, grew 21% to $7.3 billion according to Wohler’s Annual 2018 report.
Notwithstanding the exclusions just cited from its 2017 Industry Revenue estimate, Wohlers did attribute $721 million in 2017 revenues to sales of AM metal manufacturing
machines. In 2018, Wohlers Associates forecasted 2019 AM Industry sales of $11.7 billion, growing to $27.3 billion in 2023. The fact that raw material revenues are growing at
roughly double the percentage rate of machine sales suggests a significant increase in parts production.
A report in a series by Deloitte University Press on additive manufacturing published in Fall 2015 titled, “3D Opportunity For Quality Assurance and Parts
Qualification,” states that, “[o]ne of the most important barriers is the qualification of AM-produced parts. So crucial is this issue, in fact, that many characterize quality
assurance (QA) as the single biggest hurdle to widespread adoption of AM technology, particularly for metal.” We believe that the aforementioned article is as true today as it
was four years ago. OEM end user companies as well as first-tier suppliers are still unable to achieve their long-term AM production goals without advanced quality assurance
and control technologies for metal AM parts because current quality control methods are still not sufficient to reliably allow cost-effective manufacturing of safety- and
performance-critical metal parts. We believe that our 2018 PrintRite3D® technology directly addresses this “important barrier” for metal parts and allow such AM applications
to move forward. In response to this need, we have experienced an increase in our installed base of PrintRite3D® systems and we are beginning to provide material and process
engineering services and support for our PrintRite3D® software through our recently established Rapid Test and Evaluation Program, mentioned above under “Business
Activities and Industry Applications.”
Technology and Competitive Advantage
The evolution of AM from prototyping to volume manufacturing in production runs is occurring in, and led by, aerospace while also appearing in niche products such
as medical appliances and replacement parts of diverse applications, including unavailable parts required by still deployed but aging technologies. A major problem for 3D
metal products production-run manufacturing today is that traditional quality systems that rely heavily on other industries’ experiences with high precision CNC machines in
Subtractive Manufacturing that lathe, mill, or drill with high precision consistency and can successfully rely on after-manufacture statistically based part sample destruction and
inspection procedures simply do not export and apply to Additive manufacturing machines. Further, post-production non-destructive test instruments from ultrasound to CT
Scans are either not effective or not cost efficient on many complex part configurations that take advantage of 3D capability, and in the case of CT scans, are prohibitively
expensive for production cost efficiency. The most important feature of our PrintRite3D® is that it develops actionable quality and process data in real-time and, when no flaws
are detected, can provide manufacturers and their end-users with a part-by-part quality certification backed up by a file of supporting data.
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Our PrintRite3D® suite, as described below, is composed of hardware, software, data analytics, and proprietary algorithms. The hardware is an array of photodiodes,
non-contact pyrometer, and a data processing unit that can be either sold with an AM manufacturing machine unit by an OEM manufacturer or retrofitted on customers’ sites.
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PrintRite3D® SENSORPAK™ – the auxiliary sensor and hardware kit that sits on every AM machine to collect the data to drive the software.
PrintRite3D® INSPECT™ – software which verifies quality layer by layer.
The following software modules are currently in development:
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PrintRite3D® CONTOUR™ – software which assures the as-built geometry.
PrintRite3D® ANALYTICS™ – software that harvests, aggregates, and analyzes big data from in-process manufacturing data and post-process manufacturing data.
PrintRite3D® THERMAL™ – software which predicts the residual stress and distortion in the part.
PrintRite3D® CLOSED LOOP CONTROL- software that signals for laser adjustments required to correct a developing deviance from design specification detected
by other PrintRite3D® modules.
The proprietary software and its embedded algorithms process the substantial amount of layer by layer data gathered and then inform operators of the Quality
Compliance status of each part in a build. We have been active in patent protecting our in-depth data analysis and quality algorithms to link our analysis to root cause metallurgy
for determining the granular quantification of the part conformance to metallurgical requirements such as tensile strength. Concurrent with assessing the internal quality features
of all parts in a build, PrintRite3D® deploys its CONTOUR™ module that measures each part’s adherence to the configuration specification of both internal channels and
external form. OEM machine manufacturers as well as control system manufacturers may use the Sigma data stream to direct machine performance adjustments.
We have developed a tool that enables companies using Additive Manufacturing equipment for metal parts to move from prototyping on into production runs by
assuring quality in a uniquely reliable and cost-effective fashion. Not only does PrintRite3D® enable a single AM machine to operate at high quality yields, by measuring the
product of the manufacturing equipment rather than just the equipment settings, it also is a reliable method to assure and document uniform quality assurance of a single part’s
specification being manufactured by factories utilizing a number of different AM machines.
We believe that the broad domain coverage of our PrintRite3D® patents and metallurgical know-how make the licensing of our product suite to be the best means by
which Additive Manufacturing OEM equipment manufacturers can offer in-process-quality-monitoring that certifies and documents the quality of all parts that pass continuous
inspection. PrintRite3D® provides 3D metal manufacturing equipment makers with a patent protected data configuration of information that the manufacturers may use to
adjust controls of their equipment in response to real-time quality information by, for example, precisely adjusting laser power to sustain manufacturing to design and
specification.
Our IPQA®-enabled PrintRite3D® software Apps appear well suited to meet the needs of metal AM at this critical juncture in its development. Our technology will
allow metal AM to be used during manufacturing of safety-critical or performance-critical metal parts, such as used in aerospace, defense and biomedical. Currently, these
applications are difficult because the part quality cannot be completely guaranteed using today’s conventional nondestructive inspection technologies and because using
inspection after manufacture is difficult, costly and does not find all defects of concern. Therefore, we believe that PrintRite3D® could be an enabler for metal AM to realize its
full potential. We have unique and patent protected offerings in this field. Furthermore, as a greater number of these AM applications could be cloud-based, the PrintRite3D®
technology is fully compatible with highly networked, cloud- or web-based implementation – subject to the data and intellectual property restrictions which may be imposed by
some companies for competitive reasons.
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Our proprietary PrintRite3D® software Apps have been demonstrated and tested at many manufacturing sites around the world. We believe these demonstrations have
served to validate the underlying technology of PrintRite3D® INSPECT™ and SENSORPAK™ software and hardware modules, respectively. In addition, we have developed
relationships with experienced aerospace companies in North America that have assisted in the validation of the underlying technology for our PrintRite3D® software App
known as CONTOUR™.
We are continuing to work on the separate development of our PrintRite3D® CONTOUR™ software App for metal-based AM under our Trial Evaluation Agreement
with Honeywell Aerospace, which sets forth the parties’ intent to use Honeywell’s Advanced Manufacturing Engineering Center as a beta test site for our PrintRite3D®
CONTOUR™ software module. In further support of this effort, in 2015 Honeywell Aerospace installed its second PrintRite3D® system on one of its Concept Laser M2
machines at their Advanced Manufacturing Engineering Center in Phoenix, Arizona.
We have expanded our market presence and associated installed base of PrintRite3D® systems through our Early Adopter Program (“EAP”) and our Original
Equipment Manufacturer (“OEM”) Partner Program to include European companies in France, Germany and The Netherlands. These European partners’ installations are key to
our long-term strategy to broaden its installed base through our EAP as well as gain market presence though embedded OEM offerings of our PrintRite3D® technology. Our
PrintRite3D® product commercialization efforts reflect the strategic nature of our selective alliance partnerships.
We believe PrintRite3D® is uniquely positioned to grow into this market as its technology is platform independent and deployable with all currently known metal AM
manufacturing units.
Business Model
Our commercialization strategy for PrintRite3D® products is:
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Enter into early adopter license agreements with high potential future AM equipment manufacturers and complex part AM manufacturing service bureaus;
Enter into OEM license agreements for PrintRite3D® to be integrated directly into the printers of major AM equipment manufacturers;
Effective September 1, 2017, target and install units only at companies that are already manufacturing 3D metal parts and need to solve a quality yield problem; and
Provide manufacturing engineering consulting services to third parties that have needs in developing quality assurance tactical methods for manufacturing.
PrintRite3D® is designed to run on different machine platforms which allow us to maximize our product offering to the entire AM metal market. The target markets
include OEMs both on the AM software side as well as OEM machine producers and end users.
We believe another much-needed area for AM metal parts manufacturing is in software Apps for reducing design and development cycle times, saving the end
customer time and money. In support of that, in 2016, we entered into a Technology Development Agreement with 3DSIM, LLC of Park City, Utah, to pursue commercial metal
AM software opportunities for rapid qualification and part certification. These software Apps could form the underpinnings and backbone of a conceptual software App known
as THERMAL™. We expect in the future to attempt to develop and offer a PrintRite3D® suite of Apps which would be specifically developed to improve part designs and
reduce traditional trial and error design approaches for features such as distortion control.
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To summarize, we have formed an operating division focused on real-time, advanced quality assurance solutions for additive manufacturing thereby increasing the
value of the AM part. Although in the past our revenues have been generated mainly through engineering consulting services we provided to third parties, we have generated
revenues from December 2013 through the first quarter of 2019 through sales and licensing of our PrintRite3D® systems and software.
Technology and Competitive Advantage Demonstrated On-site
We currently have an AM 3D metal printing facility that employs state-of-the-art technology from the leading provider of metal AM systems, Electro-Optical Systems.
While our current printing capacity is limited, we believe that a unique selling point or competitive advantage both for system sales of PrintRite3D® as well as local service
bureau part sales is our demonstrable on-site PrintRite3D® technology. Our EOS M290 printer is outfitted with our latest PrintRite3D®-enabled technology allowing us to
provide customers with the necessary documented objective evidence that a part is being built (and has been completed) in precise accord with the design specification, or
Quality-as-a- Service (QaaS) data package, to ensure they can meet compliance with their design intent and ultimately end-user performance requirements for their highly-
critical and demanding components. Our QaaS starts with our PrintRite3D® cloud-based SaaS model. Customers contract with us to generate and establish a digital quality
record for AM built parts based on Design for Additive Manufacturing (“DFAM”) principles. Each DQR is cloud-based and allows for archiving and storage of quality data.
The Reports both provide data to and have retrieval access from our big data ANALYTICS™ software App. The cloud-based system provides capability and resources for
continuous quality monitoring and improvement. Concurrently, it will automatically compare build-data to industry benchmarking. Sigma has built in firewalls to shield
company-specific data. Our QaaS service benefits our customers by providing independent quality assurance and increased process intelligence and access to our latest
proprietary big data ANALYTICS™ software Apps for trending and additional manufacturing intelligence.
In the third quarter of fiscal 2018, Sigma accomplished important internal product development milestones that led to the Company announcing on October 25, 2018 the
rollout of a combination of new products at the Formnext additive manufacturing (AM) trade show in Frankfurt, Germany the week of November 12, 2018. Sigma believes that
this combination of advanced new hardware and Sigma’s new PrintRite3D® Version 4.0 software completes the evolution of Sigma’s PrintRite3D® technology from its well-
stressed and tested roots in research and development, into a compact and hardened commercial-industrial product that is deployable into demanding serial production settings.
Our competition is delivering In-Process-Quality-“Monitoring” tools that we believe generally deliver un-analyzed data to their customers to utilize as they see fit. Sigma
is commercializing its PrintRite3D® hardware and software package that emerged from the third quarter of 2018 and is emphasizing to prospective customers Sigma’s
dedication to delivering a product which provides In-Process-Quality-“Assurance” that gathers and analyzes in-process manufacturing data and delivers actionable conclusions
that improve quality. We believe that such a product is made possible because of both: (1) PrintRite3D®’s ability to detect and notify users of process and machine
discontinuities that require adjustments of the computers’ lasers in order to reduce AM machine-induced quality deficiencies, and (2) PrintRite3D®’s ability, in real-time in-
process manufacturing runs, to detect a growing library of randomly recurring quality deficiencies, identify the signature traits of these deficiencies, and provide warnings and
options to operators to adjust input and machine control parameters to mitigate those deficiencies early enough in their development to avoid rejection of the part.
On May 30, 2018, Sigma announced its successful demonstration of proof of concept of closed-loop feedback control. As a result of Sigma’s root cause analyses of
various AM quality discrepancies, we have come to believe that the future of AM manufacturing machines is that the machines must and will be “self-driving”, i.e., controlled
by a closed loop control system that adjusts and directs AM machine operating controls to maintain the optimum standard of melt pool qualities for the part designs and metals in
question. We believe that the hardware and software package of our PrintRite3D® Version 4 is a significant advancement in the realization of this vison of the future.
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Concurrent with the above-mentioned product development milestones that were realized in the third quarter of 2018, Sigma has been testing a new proof of concept
sales program that was made possible and practicable by the attainment of such product development milestones. Beta test results have demonstrated that Sigma can now install
and commence manufacturing test-runs on many AM machines in a 24-hour period and that a proof of concept and value analysis can be accomplished in a matter of weeks
subject to how promptly customers and third-party laboratories commit resources and deliver their feedback on the results.
Business Purpose
Our AM 3D metal printing facility serves three business purposes. First, it is a demonstration facility that allows us a means of demonstrating our IPQA products for a
prospective customer without them having to first install it on their equipment. Second, the printing facility allows us to stay current with the market’s needs by manufacturing
high technology prototypes and then evaluating the challenges that each new configuration poses. Third, the in-house printing facility enables us to conduct research that
deepens our own IPQA products.
Recent Developments
On March 26, 2019, we announced the appointment of the Company’s new Business Development Manager, Americas, who will be responsible for developing key
accounts through the Company’s Rapid Test and Evaluation Program and for bringing PrintRite3D INSPECT® into deployment across serial production operations in North and
South America.
On March 15, 2019, we closed a public offering of equity securities resulting in net proceeds of approximately $1,679,230, after deducting placement agent commissions
and other offering expenses payable by us.
On February 26, 2019, we announced that we were named a member of the Manufacturing Technology Centre (“MTC”) located at Ansty Park, Coventry, UK. Being a
member of the MTC enables us to share and provide expertise and solutions for a number of MTC’s projects and also network with MTC’s existing members, including some of
the UK’s leading aerospace companies.
On February 12, 2019, we announced that we were named a member of the Additive Alliance of Fraunhofer IAPT, a leading network for AM. As the first US company
to be granted a membership in the Alliance, Sigma became part of the global research consortium to advance the development and implementation of AM. The membership
enables us to demonstrate our PrintRite3D technology to key players in the market of metal AM.
On February 5, 2019, we announced that the U.S. Patent and Trademark Office has issued a Notice of Allowance for U.S. Patent Application No. 15/276,452, “Optical
Manufacturing Process Sensing and Status Indication System.” The patent application covers a system of sensors configured to measure optical emissions generated by a
scanning heat source during an additive manufacturing (AM) process and to analyze the data collected.
On January 17, 2019, we announced we were awarded a Test and Evaluation Program contract with a leading global materials and service provider in AM. The program
is designed to demonstrate the value of Sigma’s PrintRite3D ® product capabilities and performance and to validate and quantify the repeatability and variability of AM
production processes.
On December 3, 2018, we announced a collaborative research and development agreement with Fraunhofer IAPT, focusing on the industrialization of additive
manufacturing.
On November 13, 2018, we announced that we were awarded a Test and Evaluation program contract with a leading provider of integrated oilfield products, services and
digital solutions for our PrintRite3D® version 4.0 hardware and software. Under the Test and Evaluation program, we provided comprehensive system and services support for
its PrintRite3D INSPECT® 4.0 In-Process Quality Assurance (IPQA®) platform—including hardware, software, training, engineering and metallurgical consulting—to
demonstrate the ability of the platform to monitor and characterize material and machine processes and to ensure the production consistency and repeatability of additive
manufacturing (AM) operations. Successful completion of the Test and Evaluation program may lead to Sigma’s first commercial production order from a large industry that
Sigma Labs has not previously entered.
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On October 25, 2018, we announced the planned launch of our newest configuration of our PrintRite3D® quality control solution—incorporating PrintRite3D®
SENSORPAK® 4.0 hardware and PrintRite3D® INSPECT® 4.0 software—at Formnext 2018, the leading trade fair for Additive Manufacturing, in Frankfurt, Germany in
November 2018.
On August 29, 2018, we announced that we were awarded a contract in connection with our PrintRite3D® hardware, software and engineering services by a federally
funded organization involved in the space industry. Under the contract, our sensor arrays will determine and communicate the quality of manufactured parts in real time to the
end-user.
On June 26, 2018 the Company closed a public offering of shares of its common and preferred stock and warrants to purchase common stock resulting in net proceeds of
approximately $2,068,900.
On June 19, 2018, Sigma received notice that its U.S. Patent No. 9999924 entitled “Method and System for Monitoring Additive Manufacturing Processes” had been
issued. The patent provides protection for methods of assuring part quality using real time data from multiple sensor types. The patent enables serial production applications
through real time tracking and reporting of process consistency and part repeatability. The patent being issued is for the first application filed in a series of 24 patent applications
submitted by Sigma over these past 5 years in the general domain of in process quality assurance.
Competition
We believe our technologies will be beneficial to several industries, including aerospace, defense, oil and gas, bio-medical, and power generation. However,
developments by others may render our current and proposed technologies noncompetitive or obsolete, or we may be unable to keep pace with technological developments or
other market factors. Additionally, our competitive position may be materially affected by our ability to develop or successfully commercialize certain technologies that we
have identified for commercialization. Other general external factors may also impact the ability of our products to meet expectations or effectively compete, including pricing
pressures.
We anticipate some of our principal competitors in the United States will include AM End Users, such as GE Aviation, Honeywell Aerospace, Rolls-Royce PLC, Pratt
& Whitney; AM OEM equipment manufacturers, such as EOS, Concept Lasers, 3D Systems, Renishaw, Arcam and SLM; third party solution providers like Stratonics Inc., and
Vibrant Corporation that specialize in designing and manufacturing quality control monitoring devices used in industrial applications. Some of these competitors may have
significantly greater research and development capabilities than we do, and all have substantially more sales, marketing and financial and managerial resources. These OEM
entities represent significant opportunity AND competition for us. Within the AM Metal industry, we are often hearing the term “Frenemies” used to describe relationships in
which companies like Sigma are striving to sell OEM’s products that the OEMs would prefer to design in-house, even while exploring licensing from these outside ‘strivers.’
Intellectual Property
We regard our patents, trademarks, domain names, trade secrets, know-how, and other intellectual property as critical to our success. We rely on a combination of patent,
trademark, trade secret, other intellectual property law, confidentiality procedures, and contractual provisions with employees, partners, and others to protect the technology and
other proprietary rights, information and know-how that comprise the core of our business. The chart below summarizes our issued patents. We are currently prosecuting twenty
one foreign and U.S. patent applications related to our IPQA® technology and rapid qualification of additive manufacturing for metal parts. Eleven of these twenty one patent
applications published between November 2015 and February 2019. There is no guarantee that the patent applications we have submitted will issue or that if issued, they will
offer adequate protection under applicable law.
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Title
Controlled Weld Pool Volume Control of Welding Processes
Structurally Sound Reactive Materials
Composite Projectile
Methods and Systems for Monitoring Additive Manufacturing Processes
Systems and Methods for Additive Manufacturing Operations
Material Qualification System and Methodology
Government Regulation
Type
US Utility
US Utility
US Utility
US Utility
US Utility
US Utility
Patent No.
8,354,608
8,372,224
8,359,979
9,999,924
10,207,489
10,226,817
Any contracts that we enter into with governmental agencies will be subject to a variety of federal, state and local laws and regulations. These regulations are aimed at
preventing the inadvertent disclosure of munitions related data or the export of technical knowledge to foreign countries. The work we do with governmental units may also be
subject to laws respecting the confidentiality of any classified or national security information we receive during the course of our activities under any government contract.
Additionally, with respect to our work with government agencies, our sales are driven by pricing based on costs incurred to produce products or perform services under
contracts with the U.S. government. U.S. government contracts generally are subject to Federal Acquisition Regulations (“FAR”), agency-specific regulations that implement or
supplement FAR, such as the DoD’s Defense Federal Acquisition Regulations and other applicable laws and regulations. These regulations impose a broad range of
requirements, many of which are unique to government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination
and adjustment, and audit requirements. A contractor’s failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract
modifications or termination, and the assessment of penalties and fines and could lead to suspension or debarment from government contracting or subcontracting for a period of
time. In addition, government contractors are also subject to routine audits and investigations by U.S. government agencies such as the Defense Contract Audit Agency
(“DCAA”). These agencies review a contractor’s performance, cost structure, and compliance with applicable laws, regulations, and standards. The DCAA also reviews the
adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation, and
information systems.
Employees
As of December 31, 2018, we had 16 full-time employees. We continue to search for additional, qualified personnel, to support our expanding operations in the area of
IPQA® for AM.
Properties
We lease approximately 3,700 square feet of space at 3900 Paseo del Sol, Santa Fe, New Mexico 87507, including 1,773 square feet of office space at units C-13, C-
14, C-15, C-16, C-17, C-20 and C-21 for a total monthly rent expense of approximately $3,815 under the lease, and 1,927 square feet of warehouse / production space at units
E-38, E-40 and E-42, for a total monthly rent expense of approximately $2,275 under the lease, which expires on July 31, 2019.
We believe that our facilities are suitable for our current needs but we are evaluating the need for a larger space as we grow.
Corporate Information
Our principal executive offices are located at 3900 Paseo del Sol, Santa Fe, New Mexico 87507, and our current telephone number at that address is (505) 438-2576.
Our website address is www.sigmalabsinc.com. The Company’s annual reports, quarterly reports, current reports on Form 8-K and amendments to such reports filed or
furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other information related to the Company, are
available, free of charge, on that website as soon as we electronically file those documents with, or otherwise furnish them to, the SEC. The Company’s website and the
information contained therein, or connected thereto, are not and are not intended to be incorporated into this Annual Report on Form 10-K.
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We incorporated as Messidor Limited in Nevada on December 23, 1985 and changed our name to Framewaves Inc. in 2001. On September 27, 2010, we changed our
name from Framewaves Inc. to Sigma Labs, Inc.
ITEM 1A. RISK FACTORS.
Investing in our securities involves a high degree of risk. Our business is subject to numerous risks. We caution you that the following important factors, among others,
could cause our actual results to differ materially from those expressed in statements made by us or on our behalf in filings with the SEC, press releases or communications with
investors and others. Any or all of our statements in this annual report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate
assumptions or by known or unknown risks and uncertainties. The factors mentioned in the discussion below will be important in determining future results. Consequently,
actual future results may vary materially from those anticipated in this annual report or our other public statements. You should carefully consider the risks described below, as
well as the other information in this annual report, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” before deciding whether to invest in our securities. The occurrence of any of the events or developments described below could harm our financial
condition, results of operations, business and prospects. In such an event, the market price of our securities could decline, and you could lose all or part of your investment.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may have similar adverse effects on us.
Risks Related to Our Business
We have a limited operating history, are not currently profitable and may never become profitable.
We have incurred losses in every reporting period since we commenced business operations in 2010 and expect to continue to incur significant losses for the
foreseeable future. Our net loss for the years ended December 31, 2018 and 2017 were $5,574,163, and $4,424,503, respectively. As of December 31, 2018, our accumulated
deficit was $19,774,745. There is no assurance that any revenues we generate will be sufficient for us to become profitable or to maintain profitability. Our revenues for the
years ended December 31, 2018 and December 31, 2017 were $388,574 and $641,049, respectively, and our operating expenses for those periods were $5,687,271 and
$4,267,654, respectively. Our current revenues are not sufficient to fund our operations. We cannot predict when, if ever, we might achieve profitability and we are not certain
that we will be able to sustain profitability, if achieved. If we fail to achieve or maintain profitability, the market price of our securities is likely to be adversely affected.
We may require additional financing to continue our operations, and there is no assurance that we will be able to obtain such financing on acceptable terms, or at all.
As of December 31, 2018, we had cash in the amount of $1,279,782. We believe that the approximately $1,679,230 of net proceeds from our March 15, 2019 sale of
securities and receipt of $100,000 on a note receivable, together with our existing cash and anticipated revenues, will be sufficient to fund our operations until at least through
the end of 2019. There is no assurance that any future financing that we require to fund our operations will be available on acceptable terms, or at all. Such financing, if in the
form of equity, may be highly dilutive to our existing stockholders and may otherwise include onerous terms. Such financing, if in the form of debt, may include debt covenants
and repayment obligations that are onerous and that adversely affect our business operations. If adequate funds are not available to us, we may be required to delay, limit or
terminate our business operations.
Our limited operating history makes evaluation of our business difficult.
We commenced business operations in 2010 and are continuing to develop our technologies and to implement our business plan. Our ability to implement a successful
business plan remains unproven, and there is no assurance that we will ever generate sufficient revenues to sustain our business. Our relatively short operating history, together
with the other risks discussed in this “Risk Factors” section, may make it difficult for you to evaluate our business in connection with making a decision about whether to invest
in our securities.
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We face the risks normally associated with a new business.
We face all of the risks inherent in a new business, including the expenses, difficulties, complications and delays frequently encountered in connection with conducting
new operations and efforts to develop and commercialize technologies. These uncertainties include developing our technologies and our brand name, raising capital to meet our
working capital requirements and developing a customer base, among others. If we are not effective in addressing these risks, we will not be able to operate profitably in the
future, and we may not have adequate working capital to meet our obligations as they become due.
Our business may be adversely affected by a global economic downturn.
Any economic downturn generally could cause a drop in government spending and business investment, which could have a material adverse effect on our business.
Further, as a result of the current global economic situation, there may be a disruption or delay in performance by our third-party contractors and suppliers. If such third parties
are unable to adequately satisfy their contractual commitments to us in a timely manner, our business could be adversely affected.
We could incur significant damages if we are unable to adequately discharge our contractual obligations.
Our failure to comply with contract requirements or to meet our clients’ performance expectations on a contract could materially and adversely affect our financial
performance and our reputation. This, in turn, would impact our ability to compete for new clients and contracts. Our failure to meet contractual obligations could also result in
substantial actual and consequential damages under the terms of such contracts. In addition, some of our contracts require us to indemnify clients for our failure to meet
performance standards and/or contain liquidated damages provisions and financial penalties related to performance failures. Although we do have liability insurance, the policy
limits may not be adequate to provide protection against all such potential liabilities.
Some of our clients may terminate our contracts prior to completion, which could result in revenue shortfalls and reduce profitability or cause losses on contracts.
Our small number of our contracts with clients contain initial or base periods of one or more years, as well as option periods typically covering more than one-half of
the contract’s initial duration. However, such clients are under no obligation to exercise the option to extend the contract term. The profitability of some of our contracts could
be adversely impacted if such options are not exercised and the contract term is not extended accordingly. Additionally, our contracts contain provisions permitting a client to
terminate the contract on short notice, with or without cause. The unexpected termination of significant contracts could result in significant revenue shortfalls. If revenue
shortfalls occur and are not offset by corresponding reductions in expenses, our business could be adversely affected. We cannot anticipate if, when or to what extent a client
might terminate its contracts with us.
We are subject to government audits, and our failure to comply with applicable laws, regulations and standards could subject us to civil and criminal penalties and
administrative sanctions.
The government agencies we contract with have the authority to audit and investigate our contracts with them. As part of that process, a government agency may
review our performance on a contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. If the agency determines that
we have improperly allocated costs to a specific contract, we will not be reimbursed for those costs and we will be required to refund the amount of any such costs that have
been previously reimbursed. If a government audit identifies improper activities by us or we otherwise determine that these activities have occurred, we could be subject to civil
and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification
from doing business with the government. Any adverse determination could adversely impact our ability to bid for Request for Proposals (“RFPs”) in one or more jurisdictions.
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We may not be able to effectively control and manage our growth, which would negatively impact our operations.
We have operated our current line of business for approximately eight years, and we expect to grow in the near future as our business develops and becomes
established. If our business grows as we anticipate, it will be necessary for us to manage our expansion in an orderly fashion. Any significant growth in our activities or in the
market for our services will require extension of our managerial, operational, marketing and other resources. Future growth will also impose significant additional
responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees. Our failure to manage growth effectively may lead to
operational inefficiencies that will have a negative effect on our profitability. Additionally, if our growth comes at the expense of providing quality service and generating
reasonable profits, our ability to successfully bid for contracts and our profitability will be adversely affected. We cannot assure investors that we will be able to effectively
manage any future growth we may experience.
Failure to obtain adequate insurance coverage could put us at risk for uninsured losses.
Some or all of our customers may require insurance as a requirement to conduct business with us. Although we currently have liability insurance, we may be unable to
obtain or maintain adequate liability insurance on acceptable terms, if at all, and there is a risk that our insurance will not provide adequate coverage against our potential losses.
Additionally, there are certain types of losses that may not be insurable at a cost that we can afford, and insurance may not be available at any cost with respect to certain losses.
Claims or losses in excess of any insurance coverage we may obtain, or the lack of insurance coverage, could put us at risk of loss for any uninsured loss, which would have a
material adverse effect on our business and financial condition.
We are dependent on our President and Chief Executive Officer and other key personnel, and the loss of any of these individuals could harm our business.
We depend on John Rice, our President and Chief Executive Officer, as well as key scientific and other personnel. The loss of any of these individuals could harm our
business and significantly delay or prevent the achievement of our business objectives. In addition, our delivery of services will be labor-intensive: when we are awarded a
contract, we may need to quickly hire project leaders and project management personnel. The additional staff may also create a concurrent demand for increased administrative
personnel. The success of our business will require that we attract, develop, motivate and retain:
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experienced and innovative executive officers;
senior managers who have successfully managed or designed programs in the public sector; and
information technology professionals who have designed or implemented complex information technology projects.
Innovative, experienced and technically proficient individuals are in great demand and are likely to remain a limited resource. We may be unable to continue to attract
and retain desirable executive officers, senior managers, and technology professionals. Our inability to hire sufficient personnel on a timely basis or the loss of significant
numbers of executive officers and senior managers could adversely affect our business.
We may be dependent on cash flow and payments from customers in order to meet our expense obligations.
A number of factors may cause our revenues, cash flow and operating results to vary from quarter to quarter, including the following:
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the progression of contracts;
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the levels of revenues earned on fixed-price and performance-based contracts (including any adjustments in expectations for revenue recognition on fixed-price
contracts);
the commencement, completion or termination of contracts during any particular quarter;
the schedules of government agencies and large multinational corporations for awarding contracts;
the failure of our customers to fulfill their obligations under contracts with us; and
the term of awarded contracts and potential acquisitions.
Changes in the volume of activity and the number of contracts commenced, completed or terminated during any quarter may cause significant variations in our cash
flow from operations because a significant portion of our expenses are fixed. Fixed expenses include, rent, payroll, insurance, employee benefits, taxes and other administrative
costs and overhead. Moreover, we expect to incur significant operating expenses during the start-up and early stages of large contracts and typically do not receive
corresponding payments in that same quarter.
We may make acquisitions in the future that we are unable to effectively manage given our limited resources.
We may choose to grow our business by acquiring other entities. We may be unable to manage businesses that we have acquired or to integrate them successfully
without incurring substantial expenses, delays or other problems that could negatively impact our results of operations. Moreover, business combinations involve additional
risks, including:
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diversion of management’s attention;
loss of key personnel;
our becoming significantly leveraged as a result of the incurrence of debt to finance an acquisition;
assumption of unanticipated legal or financial liabilities;
unanticipated operating, accounting or management difficulties in connection with the acquired entities;
amortization of acquired intangible assets, including goodwill; and
dilution to existing stockholders and our earnings per share.
Also, client dissatisfaction or performance problems with an acquired firm could materially and adversely affect our reputation as a whole. Further, the acquired
businesses may not achieve the revenues and earnings that we anticipated.
We may be unable to develop or commercialize new and rapidly evolving technologies.
Many of our activities involve developing products or processes that are based upon new, rapidly evolving technologies. The ability to commercialize or further
develop these technologies could fail for a variety of reasons, both within and outside of our control.
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We may be unable to protect our intellectual property rights.
Our success in part depends on the ability to protect our intellectual property and proprietary technology. To do so, we will be required to prosecute patent applications
and maintain patents, obtain new patents and pursue trade secret and other intellectual property protection. We were awarded two U.S. patents with respect to our munitions
technology. We were also awarded a U.S. patent with respect to our IPQA® technology. In addition, we filed twenty four foreign and U.S. patent applications pertaining to our
IPQA® technology and rapid qualification of additive manufacturing for metal parts. Also, we filed a PCT patent application pertaining to the advanced dental implant
technology. However, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. There can be no assurance that our program for protection of
intellectual property and proprietary technology will be sufficient to protect our intellectual property and proprietary technology from competitors. Our business is also subject
to the risk that our issued patents will not provide us with significant competitive advantages if, for example, a competitor were to independently develop or obtain similar or
superior technologies. In addition, our issued patents may be challenged or infringed upon by third parties. The enforcement of intellectual property rights is subject to
considerable uncertainty and can be expensive and time-consuming. Patent reform laws and court decisions interpreting such laws, may create additional uncertainty around our
ability to obtain and enforce patent protection. Any significant impairment of our intellectual property rights could harm our business and our ability to compete. The
unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results. Proprietary trade secrets and unpatented know-how
are also very important to our business, however, trade secrets are difficult to protect. Our employees, consultants, contractors, outside scientific collaborators and other
advisors may unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event
of unauthorized disclosure of confidential or proprietary information.
We may be sued by third parties who claim that we have infringed their intellectual property rights.
We may be exposed to future litigation by third parties based on claims that our research, development and commercialization activities infringe the intellectual
property rights of third parties to which we do not hold licenses or other rights, or that we have misappropriated the trade secrets of others. Any litigation or claims against us,
whether or not valid, could result in substantial costs, and could place a significant strain on our financial and human resources. In addition, if successful, such claims could
cause us to pay substantial damages. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that
some of our confidential information could be compromised by disclosure during this type of litigation.
Our services are subject to government regulation, changes in which may have an adverse effect on us.
Our business activities subject us to a variety of federal, state and local laws and regulations. For example, we could be required to comply with applicable provisions
of the International Traffic in Arms Regulations (“ITAR”), as well as other export controls and laws governing the manufacture and distribution of munitions technology.
Despite the fact that we have applied for and received ITAR compliance, changes in the laws and regulations applicable to our business activities may have an adverse effect on
our operations and profitability by making it more expensive and less profitable for us to do business. Additionally, the market for our services depends largely on federal and
state legislative programs. These programs can be modified or amended at any time by acts of federal and state governments. Further, if additional programs are not proposed or
enacted, or if previously enacted programs are challenged, repealed or invalidated, our growth strategy could be adversely impacted.
Our bylaws contain provisions indemnifying our officers and directors against all costs, charges, and expenses incurred by them.
Our Bylaws contain provisions with respect to the indemnification of our officers and directors against all costs, charges and expenses actually and reasonably incurred
by an officer or director paid to settle an action or satisfy a judgment in a civil, criminal or administrative action or proceeding to which he is made a party by reason of being or
having been one of our directors or officers. To the extent that our directors’ and officers’ insurance policy does not provide reimbursement for such costs, charges, expenses
and other amounts, we may incur substantial expenses in satisfying our indemnification obligations.
Our operating costs could be significantly higher than we expect, and this could reduce our future profitability.
In addition to general economic conditions, market fluctuations and international risks, significant increases in operating, development and implementation costs could
adversely affect us due to numerous factors, many of which are beyond our control.
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A cyber incident could result in information theft, data corruption, operational disruption and/or financial loss.
Businesses have become increasingly dependent on digital technologies to conduct day-to-day operations. At the same time, cyber incidents, including deliberate
attacks or unintentional events, have increased. A cyber-attack could include gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive
information, corrupting data, or causing operational disruption or result in denial of service on websites. We depend on digital technology, including information systems and
related infrastructure, to process and record financial and operating data, and communicate with our employees and business partners. Our technologies, systems, networks, and
those of our business partners may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring,
misuse, loss or destruction of proprietary and other information, or other disruption of our business operations. Although to date we have not experienced any losses relating to
cyber-attacks, there is no assurance that we will not suffer such losses in the future. As cyber threats continue to evolve, we may be required to expend significant additional
resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
Risks Related to Our Securities
The price of our securities could be subject to volatility related or unrelated to our operations, which could result in substantial losses for our stockholders.
Between January 1, 2018 and December 31, 2018, the trading price of our common stock has ranged from a low of $0.725 to a high of $3.00 and could be subject to
wide fluctuations in the future in response to various factors, some of which are beyond our control. The trading price of the warrants that we issued in our recent public
offering could be subject to similar fluctuations as a result of such factors. These factors include those discussed previously in this “Risk Factors” section and others, such as:
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delays or failures in the commercialization of our current or future products and services;
quarterly variations in our results of operations or those of our competitors;
changes in our earnings estimates or recommendations by securities analysts or adverse publicity about us or our products or services;
announcements by us or our competitors of new products and services, significant contracts, commercial relationships, acquisitions or capital commitments;
adverse developments with respect to our intellectual property rights;
commencement of litigation involving us or our competitors;
any major changes in our board of directors or management;
● market conditions in our industry; and
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general economic conditions in the United States and abroad.
In addition, the stock market, in general, may experience broad market fluctuations, which may adversely affect the market price or liquidity of our securities.
We could be subject to securities class action litigation.
Any sudden decline in the market price of our securities could trigger securities class action lawsuits against us. If any of our stockholders were to bring such a lawsuit
against us, we could incur substantial costs defending the lawsuit and the time and attention of our management would be diverted from our business and operations. We also
could be subject to damages claims if we are found to be at fault in connection with a decline in our market price of our securities.
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An active trading market in our securities may not develop, and you may therefore have difficulty selling your securities at a price that you determine is satisfactory.
Although our common stock and the 2017 warrants are listed on The NASDAQ Capital Market, our common stock and warrants trade infrequently and in low
volumes. There is no assurance that such securities will trade in the public market at or above a price that you consider acceptable. Furthermore, there is no assurance that an
active trading market for any of our securities will develop or be sustained. If an active market for our securities does not develop or is not maintained, it may be difficult for
you to sell your securities when you wish to sell them or at a price that you consider satisfactory. An inactive trading market may also impair our ability to raise capital to
continue to fund operations by selling securities and may impair our ability to acquire other companies or technologies by using our securities as consideration.
There is no assurance that we will satisfy the continued listing requirements of The NASDAQ Capital Market.
We cannot assure you that we will be able to satisfy the continued listing requirements of The Nasdaq Capital Market. For example, there is no assurance that our
common stock will continue to have a bid price of at least $1.00 per share, which is the minimum bid price under such continued listing requirements, or that we will be able to
satisfy other quantitative continued listing requirements, including the minimum stockholders’ equity requirement of at least $2,500,000 for continued listing on The Nasdaq
Capital Market. If we fail to satisfy one or more Nasdaq requirements for continued listing, Nasdaq could provide notice that our common stock will become subject to
delisting. In such event, Nasdaq rules would permit us to appeal the decision to reject our proposed compliance plan or any delisting determination to a Nasdaq Hearings Panel.
If our securities are de-listed from The Nasdaq Capital Market, our stockholders could incur material adverse consequences such as reduced liquidity for their securities and
reduced market prices for their securities. Following such de-listing, we could encounter increased difficulty in issuing additional securities at an attractive price, or at all, in
order to fund our operations.
You may experience additional dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our
common stock. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions
may be lower than the price per share that you paid for our common stock.
We have broad discretion in the use of the net proceeds of our recent public and private offerings and may not use them effectively.
We intend to use our cash for the development of our products and service and to repay our outstanding promissory note (if and to the extent the holder thereof
demands repayment). We may also use a portion of the net proceeds from our June 2018 and March 2019 offerings to acquire other products or businesses, although we are not
currently a party to an agreement regarding any such acquisition. However, our management has broad discretion in the use of cash and will have the right to use our cash in
ways that differ substantially from our current plans. Management may spend our cash in ways that do not improve our results of operations or enhance the value of our
securities. The failure by management to apply funds effectively could result in financial losses that could have a material and adverse effect on our business and cause the
market price of our securities to decline.
We do not intend to pay dividends on our common stock, and your ability to achieve a return on your investment will depend on appreciation in the market price of
our securities.
We currently intend to invest our future earnings, if any, to fund our growth and not to pay any cash dividends on our common stock. Since we do not intend to pay
dividends, your ability to receive a return on your investment will depend on any future appreciation in the market price of our securities. There is no assurance that our
securities will appreciate in price.
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If securities or industry analysts do not publish research or reports about us, or if they issue adverse or misleading opinions regarding us or our securities, the
market price of our securities and their trading volume could decline.
If we do not obtain and maintain research coverage by securities and industry analysts, the market price for our securities may be adversely affected. The market price
of our securities also may decline if any analyst who covers us issues an adverse or erroneous opinion regarding us, our business model, our intellectual property or our
performance. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the
market price of our securities and their trading volume to decline and possibly adversely affect our ability to engage in future financings.
Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders
of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of December 31, 2018, we have 8,776,629 outstanding shares of
common stock. Sales of a large number of the shares described in the preceding sentence or upon exercise of our outstanding warrants and stock options, or the perception that a
large number of shares may be sold, could have a material adverse effect on the trading price of our common stock.
We will incur significant costs to ensure compliance with U.S. and NASDAQ reporting and corporate governance requirements.
We incur significant costs associated with our public company reporting requirements and with applicable U.S. and NASDAQ corporate governance requirements,
including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC and NASDAQ. These applicable rules and regulations also make it more
difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. As a result, it may be difficult for us to attract and retain qualified individuals to serve on our board of directors or as
executive officers.
If we fail to maintain effective internal control over financial reporting, the market price of our securities may be adversely affected.
As a public reporting company, we are required to establish and maintain effective internal control over financial reporting. Failure to establish such internal control, or
any failure of such internal control once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any
failure of our internal control over financial reporting could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial
frauds.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting. The
standards that must be met for management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing and
possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over
financial reporting. If we cannot assess our internal control over financial reporting as effective, investor confidence and share value may be negatively impacted. In addition,
management’s assessment of internal control over financial reporting may identify weaknesses and conditions that need to be addressed in our internal control over financial
reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over
financial reporting (including those weaknesses identified in our periodic reports), or disclosure of management’s assessment of our internal control over financial reporting
may have an adverse impact on the price of our securities.
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Provisions in our articles of incorporation and bylaws could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of
management.
Our articles of incorporation and bylaws contain provisions that could delay or prevent changes in control or changes in our management without the consent of our
board of directors. These provisions include the following:
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a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of
directors;
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a
director, which prevents stockholders from being able to fill vacancies on our board of directors;
the ability of our board of directors to authorize the issuance of additional shares of preferred stock and to determine the terms of those shares, including preferences and
voting rights, without stockholder approval, which could adversely affect the rights of our common stockholders or be used to deter a possible acquisition of our
company;
the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the
provisions of our articles of incorporation and bylaws regarding the election and removal of directors;
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer, the president or the board
of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a
stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or
otherwise attempting to obtain control of us.
These provisions could inhibit or prevent possible transactions that some stockholders may consider attractive.
We recently issued Series B and Series C Preferred Stock and could issue one or more additional series of shares of preferred stock with the effect of diluting existing
stockholders and impairing their voting and other rights.
Our articles of incorporation authorize the issuance of up to 10,000,000 shares of “blank check” preferred stock with designations, rights and preferences as may be
determined from time to time by our board of directors. In our April 6, 2018 private placement of equity securities, we issued 1,000 shares of Series B Preferred Stock, which
were initially convertible into 1,000,000 shares of common stock. In our June 26, 2018 Public Offering of equity securities, we issued 350 shares of Series C Preferred Stock
which were initially convertible into 350,000 shares of common stock. As of the date of this Annual Report on Form 10-K, all shares of Preferred Stock that we have issued
have been fully converted. Our board is empowered, without stockholder approval, to issue one or more additional series of preferred stock with dividend, liquidation,
conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. The issuance of such additional series of preferred
stock could be used as a method of discouraging, delaying or preventing a change in control. For example, it would be possible for our board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success of any attempt to effect a change in control of our Company.
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
We lease approximately 3,700 square feet of space at 3900 Paseo del Sol, Santa Fe, New Mexico 87507, including 1,773 square feet of office space at units C-13, C-
14, C-15, C-16, C-17, C-20 and C-21 for a total monthly rent expense of approximately $3,815 under the lease, and 1,927 square feet of warehouse / production space at units
E-38, E-40 and E-42, for a total monthly rent expense of approximately $2,275 under the lease, which expires on July 31, 2019. We believe that our facilities are suitable for
our current needs, but we are evaluating the need for a larger space as we grow.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently a party to any legal proceedings. However, we may occasionally become subject to legal proceedings and claims that arise in the ordinary course
of our business. It is impossible for us to predict with any certainty the outcome of pending disputes, and we cannot predict whether any liability arising from pending claims
and litigation will be material in relation to our financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Market Information
Our common stock was quoted for trading on the OTCQB under the symbol “SGLB” prior to February 15, 2017, when our common stock began trading on The
NASDAQ Capital Market under the symbol “SGLB.”
Shareholders
As of March 27, 2019, there were approximately 531 holders of record of our common stock based on information provided by our transfer agent.
Dividends
We have not paid any dividends on our common stock to date and do not anticipate that we will pay dividends in the foreseeable future. Any payment of cash
dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our anticipated capital
requirements and other factors that the board of directors may think are relevant. However, we currently intend for the foreseeable future to follow a policy of retaining all of
our earnings, if any, to finance the development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.
However, we have paid dividends on our preferred stock pursuant to an agreement with investors and may do so in the future pursuant to future financing agreements, if any.
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Recent Sales of Unregistered Securities
Not applicable.
Repurchase of Shares
We did not repurchase any of our securities during the fiscal year ended December 31, 2018.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported assets, liabilities, sales and expenses in the accompanying financial statements. Critical accounting policies are those that require the most
subjective and complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. Such critical accounting policies, including the
assumptions and judgments underlying them, are disclosed in Note 1 to the Financial Statements included in this Annual Report. However, we do not believe that there are any
alternative methods of accounting for our operations that would have a material effect on our financial statements.
Results of Operations
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017.
We expect to generate revenue primarily by selling and licensing our IPQA technologies, selling technical support services, contract manufacturing and selling
specialty parts and studies to businesses that seek to improve their manufacturing production processes and production-run quality yields. Our ability to generate revenues in the
future will depend on our ability to further commercialize and increase market presence of our PrintRite3D® technologies, and it will depend on if key prospective customers
continue to move from AM metal prototyping to production.
During the fiscal year ended December 31, 2018 (“fiscal 2018”), we generated an aggregate of $388,574 in revenues, as compared to an aggregate of $641,049 in
revenues generated by us in the fiscal year ended December 31, 2017 (“fiscal 2017”). The primary contributors to the $252,475 reduction were revenue decreases of $149,929
from government program work and $198,289 in new system sales, partially offset by increased contract AM service sales in 2018 of $101,712. Our cost of revenue for the fiscal
year ended, 2018 was $270,107 compared to $272,372 during the same period in 2017, a decrease of $2,265. The lack of a reduction in cost of revenue corresponding to the
revenue reduction is attributable to the different product mix between the fiscal years.
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Sigma’s total operating expenses for fiscal 2018 were $5,687,271 as compared to $4,267,654 for fiscal 2017, a $1,419,617 increase.
In fiscal 2018, salaries and benefits costs were $2,056,584 as compared to $1,509,672 for the same period in 2017. The $546,912 increase resulted primarily from the
addition of six employees between the third quarter of 2017 and July of 2018 and the accrual of $224,818 of severance costs in accordance with the severance and other benefits
provided under the employment agreement of Mark Cola, our former CTO and President in fiscal 2018.
Stock-based compensation for fiscal 2018 was $1,145,530 compared to $719,796 for the same period in 2017. This $425,734 increase resulted primarily from $231,666
in vesting recognized on stock options granted to our Chief Executive Officer in the latter three quarters of 2018, a $110,727 acceleration of options vesting expense related to
Mr. Cola’s October 2018 retirement from the Company and the amortization of $68,215 in stock compensation cost related to stock granted to non-employee directors in fiscal,
2018.
During the fiscal year 2018, Sigma incurred research and development expenditures of $493,410 compared to $302,043 in the same period of 2017. The $191,367
increase resulted from a $153,269 increase in purchases of component parts, upgraded servers and specialized equipment plus a $38,098 increase in software and algorithm
consultant costs as part of our continued concentrated acceleration of technology development and enhancements to PrintRite3D® 4.0 product suite accompanied.
Sigma’s public company and investor relation fees incurred in fiscal 2018 were $633,035 compared to $554,990 incurred in fiscal 2017, an increase of $78,045. This
increase is primarily from a $47,717 aggregate increase in cash fees paid to our non-employee directors and an additional $41,371 of expenses related to the special shareholder
meeting held in February of 2018.
Legal and professional service fees paid in fiscal 2018 were $564,854 compared to $563,300 paid in fiscal 2017.
During the fiscal year 2018, Sigma’s office expenses were $466,657 compared to $324,920 in the same period of 2017. The $141,737 increase in these expenditures
resulted primarily from $35,265 in additional office space rent and supplies costs related to the aforementioned addition of six employees, and from $106,472 of additional
travel expenses in 2018 related to both a more aggressive outreach to prospective OEM, service bureau and end user customers and our expansion into the European market.
In fiscal 2018, our net other income & expense was a net expense of $5,359 compared to net expense of $525,526 in 2017. The 2018 net expense was comprised of net
interest income of $31,213 offset by a $36,733 write off of patents. The 2017 expense was comprised of non-cash adjustments required for the revaluations of derivatives and
amortization of debt discounts required as a result of our February 2017 public offering, the restructuring of debt in October 2017, and the December 2017 conversions by two
holders of promissory notes totaling $545,188 and interest paid on the two promissory notes totaling $161,852. Offsetting such expenses were $154,568 of cash incentives
received from the State of New Mexico and $40,107 of interest earned on loans we made.
Sigma’s net loss for fiscal 2018 increased $1,149,660 overall and totaled $5,574,163, as compared to a net loss of $4,424,503 for fiscal 2017. The 2018 net operating
loss component of the overall loss being $1,669,827 higher than in 2017 and the other income and expenses component being a $520,167 lower loss.
Liquidity and Capital Resources
As of December 31, 2018, we had $1,279,782 in cash and a working capital surplus of $1,052,015, as compared to $1,515,674 in cash and a working capital surplus of
$2,273,801 as of December 31, 2017. On March 15, 2019, the Company closed a public offering of equity securities resulting in net proceeds of approximately $1,679,230 after
deducting commissions and other offering expenses payable by the Company.
Our major sources of funding have been proceeds from public and private offerings of our equity securities (both common stock and preferred stock), and from warrant
exercises. On April 6, 2018, the Company closed a private placement of equity securities resulting in net proceeds of approximately $920,000, after deducting commissions and
other offering expenses payable by the Company. On June 26, 2018, the Company closed a public offering of equity securities resulting in net proceeds of approximately
$2,139,000, after deducting commissions and other offering expenses payable by the Company. On March 15, 2019, the Company closed a public offering of equity securities
resulting in net proceeds of approximately $1,679,230 after deducting commissions and other offering expenses payable by the Company. The principal balance in the amount of
$50,000 and any accrued and unpaid interest on the convertible promissory note that is payable by us is due in April 2019.
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During the 2019, we expect to sustain our operations and our commercialization and marketing efforts without material increase in our cash burn rate. We expect that
enhancements of our IPQA®-enabled PrintRite3D® technology that were developed substantially in fiscal 2018 and brought to market commencing largely in November 2018
will enable us to further commercialize this technology for the AM metal market in 2019. However, until commercialization of our full suite of PrintRite3D® technologies, we
plan to continue funding our development activities and operating expenses by licensing our PrintRite3D® systems and supporting field services, as applicable, and providing
PrintRite3D®-enabled engineering consulting services concerning our areas of expertise (materials and manufacturing quality assurance and process control technologies) and
contract manufacturing for metal AM, and through the use of proceeds from sales of our securities.
Net Cash Used in Operating Activities
Net cash used in operating activities in 2018 increased to $3,762,971 from $2,638,393 in 2017 which is an increase in cash used of $1,124,578. Sigma’s higher net loss in
fiscal 2018 contributed $1,343,928 to this increase while more favorable payment terms with our vendors offset $219,350 of that increase.
Net Cash Used/Provided by Investing Activities
Net cash provided by investing activities during fiscal 2018 was $403,672, which compares to cash used in investing activities during the same period of 2017 totaling
$928,960. $1,400,000 of this $1,332,632 positive change is the result of $750,000 of loans we made in fiscal 2017 and the receipt of payment of $650,000 on those loans in
fiscal 2018. The additional expenditure of $78,412 related to patents in 2018 was the only significant offsetting investing activity.
Net Cash Used/Provided by Financing Activities
Cash provided by financing activities during fiscal 2018 decreased to $3,123,407 from $4,684,636 during the same period in 2017, a reduction of $1,561,229. $2,126,236
of this reduction is due to our receipt of total net proceeds of $2,946,400 from our April 2018 private placement and June 2018 public offering compared to our receipt of total
net proceeds of $5,072,636 from our February 2017 public offering. Offsetting such activity were $80,132 of higher proceeds from warrant exercises in fiscal 2018 than in fiscal
2017 and the absence, in fiscal 2018, of the $500,000 payment on the note made in fiscal 2017.
We have no credit lines as of March 27, 2019, nor have we ever had a credit line since our inception.
Based on the funds we have as of March 27, 2019, and the proceeds we expect to receive from rapid test and evaluation engagements for our updated PrintRite3D®
hardware and software technology, and sales of contract AM manufacturing for metal AM parts, we believe that we will have sufficient funds to pay our administrative and
other operating expenses through at least the fourth quarter of 2019. Our ability to continue to fund our liquidity and working capital needs will be dependent upon the success
of and revenues from existing and future PrintRite3D®-proof of concept contracts, follow-on contracts resulting from successful proof of concept engagements, possible
strategic partnerships, contract manufacturing orders in connection with our EOS M290, and possibly by obtaining additional capital from the sale of securities or by borrowing
funds from lenders to fulfill our business plans. If we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may
have rights, preferences or privileges senior to those of existing holders of our common stock. There is no assurance that we will be successful in obtaining additional funding.
If we fail to obtain sufficient funding when needed, we may be forced to delay, scale back or eliminate all or a portion of our commercialization efforts and operations.
28
Inflation and changing prices have had no effect on our continuing operations over our two most recent fiscal years.
We have no off-balance sheet arrangements as defined in Item 303(a) of Regulation S-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to a “smaller reporting company.”
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements are referred to in Item 15, listed in the Index to Financial Statements and filed and included elsewhere herein as a part of this Annual Report on
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Rule 13a-15(e) under the Exchange Act defines the term “disclosure controls and procedures” as those controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC rules and forms and that such information is accumulated and communicated to the company’s management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based upon an evaluation of the effectiveness of our disclosure controls and procedures performed by our management, with the participation of our Chief Executive
Officer, and Chief Financial Officer (Principal Financial and Accounting Officer), as of the end of the period covered by this annual report, our management concluded that our
disclosure controls and procedures are effective at a reasonable assurance level in ensuring that information required to be disclosed by us in our reports is recorded, processed,
summarized and reported within the required time periods. The foregoing conclusion is based, in part, on the fact that we are a small public company in the early stage of our
business, with limited revenues and employees.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f)
under the Exchange Act. Our management, with the participation of our Chief Executive Officer, and Chief Financial Officer, conducted an evaluation of the effectiveness of
our control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on management’s evaluation under the framework, management has concluded that our internal control over financial reporting was effective as of
December 31, 2018.
We continuously seek to improve and strengthen our control processes to ensure that all of our controls and procedures are adequate and effective. Any failure to
implement and maintain improvements in the controls over our financial reporting could cause us to fail to meet our reporting obligations under the SEC’s rules and
regulations. Any failure to improve our internal controls to address the weakness we have identified could also cause investors to lose confidence in our reported financial
information, which could have a negative impact on the trading price of our common stock.
29
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public accounting firm pursuant to SEC rules that permit us to provide only management’s report in this
annual report.
There have been no changes in our internal controls over financial reporting during the fourth quarter of the year ended December 31, 2018 that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
MANAGEMENT
Executive Officers
PART III
The following table sets forth the name, age and position of each of our executive officers as of March 31, 2019:
Name
John Rice
Nannette Toups
Ronald Fisher
Darren Beckett
Age
72
62
49
45
Position
Chairman of the Board, President and Chief Executive Officer
Chief Financial Officer, Treasurer and Corporate Secretary
Vice President of Business Development
Chief Technology Officer
John Rice was appointed as a director on February 15, 2017, as Chairman of our Board on April 19, 2017, he was appointed as our interim Chief Executive Officer on
July 24, 2017, became our Chief Executive Officer on June 21, 2018 and was appointed as our President on October 10, 2018.. Additional information regarding Mr. Rice is set
forth below under “Board of Directors and Corporate Governance.”
Nannette Toups has served as our Chief Financial Officer, Treasurer, principal accounting officer, principal financial officer and Corporate Secretary since September
14, 2017. Since December 2013, Ms. Toups has served as a contract CFO and provided accounting services to a variety of clients in different industries ranging from non-
profits to medical device development. From May 2008 to October 2013, Ms. Toups served in various positions at Qforma, Inc., a privately-held custom software development
company, including as Controller and most recently as Senior Vice-President of Finance and Administration. Prior to joining Qforma, she served as an independent consultant
from October 2005 to May 2008, providing a variety of financial, accounting and management services to individuals, entrepreneurs and a non-profit organization. From May
2004 to September 2005, Ms. Toups served as the Controller of KSL Joint Venture, where she was responsible for all accounting and financial reporting activities for the Site
Support Services Group at Los Alamos National Laboratory. From January 2002 to April 2003, she served as the Controller and Treasurer of BiosGroup, Inc., a closely-held
complexity science consulting company. Prior thereto, Ms. Toups served in various positions at Louisiana Intrastate Gas Company, LLC, including Controller and Transition
Projects Manager. Ms. Toups received her CPA certification in 1984 and holds a bachelor’s degree in business administration and accounting from Louisiana State University,
and a master’s of liberal arts degree from St. John’s College.
30
Darren Beckett served as our Engineering Manager beginning on September 25, 2017, was appointed as our Vice President of Engineering on June 29, 2018, and had
his title changed to Chief Technology Officer of the Company on October 18, 2018. Mr. Beckett has over 20 years of experience in the semiconductor industry, including since
1997 with Intel Corporation at which he held various technical and managerial positions, including process engineer of ion implant charged particle systems, chemical vapor
deposition systems, and, since 2008, engineering manager of multiple engineering groups such as rapid thermal anneal, defect metrology equipment and fab environment micro
contamination. Mr. Beckett’s expertise is in process engineering for advanced manufacturing technology, including statistical process control for fabrication of semiconductor
devices. Mr. Beckett serves as an independent director and board member of M&T Foundation, San Diego, California. Mr. Beckett earned a B. Eng. in Mechanical Engineering
from University of Limerick, Ireland.
Ronald Fisher was appointed as Vice President of Business Development of Sigma on August 10, 2015, and leads the PrintRite3D® Operating Division. Mr. Fisher is
a Mechanical Engineer with hands-on experience in quality, manufacturing, and product development. He has an MBA and has distinguished himself as a lead sales and
marketing officer as well as a Chief Operating Officer. He was a Program Manager at Swagelok from 1988-2004, and Vice President and General Manager, Aftermarket and
Geometry Systems, at Micropoise Measurement Systems from 2004 until 2013, and a Partner and COO of Laszeray Technology, LLC from 2013 until 2014. Mr. Fisher holds a
Bachelor’s Degree in Mechanical Engineering Technology from the University of Akron as well as an MBA from Kent State University.
The following table sets forth the names, ages as of March 31, 2019, and certain other information regarding our directors:
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Directors
John Rice
Class Age
72
I
Position
President and Chief Executive Officer, Director and
Chairman of the Board
Salvatore Battinelli(1)(2)(3)
Frank J. Garofalo
Dennis Duitch(1)(2)(3)
Kent Summers(1)(2)(3)
II
II
III
III
77
68
74
60
Director
Director
Director
Director
(1) Member of our Audit Committee
(2) Member of our Compensation Committee
(3) Member of our Nominating and Corporate Governance Committee
Directors
Director
Since
2017
2017
2017
2017
2018
Current Term Expires
2021
2019
2019
2020
2020
John Rice was appointed to our Board of Directors on February 15, 2017, was appointed as Chairman of our Board on April 19, 2017, he was appointed as our interim
Chief Executive Officer on July 24, 2017, became our Chief Executive Officer on June 21, 2018 and was appointed as our President on October 10, 2018. Mr. Rice has
extensive experience in business operations. In 1990, Mr. Rice founded ASiQ, LLC, a firm specializing in operations management services ranging from launching successful
startups and executing business turnarounds to financings, crisis management and the repositioning of enterprises for sale at optimum market prices. Mr. Rice presently serves
as ASiQ’s CEO and President. He also served as CEO of Coca-Cola Bottling Company of Santa Fe, a client of ASiQ’s, from 2009 to 2015. From 2010 to 2012, Mr. Rice served
as Director and Contracts Officer of Detector Networks International. Mr. Rice frequently lectures on breakout growth strategies, crisis management, corporate turnarounds,
venture capital, and financial structuring and strategies. He has also served on a number of boards. Since 2005, Mr. Rice has served as Director of New Mexico Angels, Inc., a
New Mexico based group of accredited individual angel investors. Since 2016, Mr. Rice has served as Director of Akal Security, Inc. He was also a Director of Detector
Networks International from 2010-2012, where he successfully negotiated the principal component of a business turnaround for the company. Mr. Rice is an honors graduate of
Harvard College.
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Our Board of Directors believes that Mr. Rice is qualified to serve as a member of the board because of his broad and deep experience in improving business
operations, engineering financial structures that support ongoing needs of operating companies, and building investor and shareholder values.
Salvatore Battinelli was appointed to our Board of Directors on August 16, 2017. Mr. Battinelli is currently the President and Chief Executive Officer of Bello e
Preciso Co., a manufacturer and wholesaler of Italian-made fashion watches, and has served in those roles since early 2017. Prior to joining Bello e Preciso Co., from 2011 to
2013, Mr. Battinelli served as Vice-President of Development and Long Term Strategy of North American Management Corporation, a wealth management firm based in
Boston, Massachusetts with over $2 billion in assets under management. From 1987 to 2011, Mr. Battinelli served as Executive Vice-President and acting Chief Executive
Officer and Chief Operating Officer of Faneuil Hall Associates, Inc., a concierge boutique family office devoted to five interrelated ultra-high net-worth families. Mr.
Battinelli’s primary responsibilities while at Faneuil Hall Associates included providing planning and investment advice, the management of approximately 30 asset portfolios
and more than 65 individual business entities; and assisting the families in their various business ventures worldwide while working closely with law, accounting and banking
functions. During his tenure at Faneuil Hall Associates, Mr. Battinelli served as an executive officer or director for certain of the family owned entities and successfully
managed several portfolio company IPOs, as well as serving as CEO and COO for Designhouse International, a Scandinavian furniture company operating out of Atlanta,
Georgia, which was previously listed on NASDAQ in 1983.
From 1970 to 1974, Mr. Battinelli served as Audit Manager for Deloitte & Touche (formally Touche Ross), where he specialized in management information systems.
From 2002 to 2011, Mr. Battinelli also served as the Chairman of the Board of Directors of HealthLink Europe, BV, a logistics and services company that serves the healthcare
industry. Mr. Battinelli is a Certified Public Accountant and received a BS in accounting and an MBA with an emphasis in international economics and accounting, both from
Babson College.
Our board of directors believes that Mr. Battinelli is qualified to serve as a member of the board on the basis of his deep understanding of business acquisitions and
sales, as well as his background and extensive company management and integration experience.
Frank J. Garofalo was appointed to our Board of Directors on January 10, 2017. For more than three decades, Mr. Garofalo has been a management consultant and
corporate finance advisor working on “special assignments” for chief executive officers and boards of directors, primarily in technology driven markets, assisting companies
ranging from $10 million to over $10 billion in size. His career in professional services includes his serving as Vice President in the Investment Banking division of
PaineWebber (now UBS) and as Director and Senior Consultant in Arthur D. Little’s Technology consulting practice.
While at Arthur D. Little, Mr. Garofalo was the lead manager on a number of major studies for Fortune 500 client organizations in product/market forecasting,
technology trends assessments, market research, strategic business planning and evaluations of diversification and acquisition opportunities. He also assisted in the launch of
CAD/CAM, CAE and Advance Manufacturing practice within the Technology group at Arthur D. Little. While at PaineWebber Corporate Finance Group, his assignments
included dozens of business development, corporate development and corporate finance projects including private placements of equity financing, mergers, acquisition,
divestitures and establishing joint ventures / strategic alliances.
Mr. Garofalo is an expert in strategic, competitive, and market analysis with an emphasis on business and corporate development and the maximization of shareholder
value. He has served on a number of boards. He was a Director of J.M. Lafferty Associates, Inc. in Chicago, a financial analytics and portfolio research firm, when he acted as
advisor in the sale of the business to Corporate Development Board. From 2000 until 2011, he was a Director of Dynagraf, Inc., one of the top Marketing Communications
companies in New England, where he acted as advisor in the sale of the business to Universal Millennium.
Mr. Garofalo earned a Bachelor of Science degree in Electrical Engineering from the Massachusetts Institute of Technology, a Master of Science degree in Computer
Systems Engineering from the University of Michigan, and a Master of Business Administration from Harvard University.
32
Our Board of Directors believes that Mr. Garofalo is qualified to serve as a member of the board because of his extensive experience in rendering a wide variety of
management and financial advisory services.
Dennis Duitch was appointed to our Board of Directors on August 8, 2017. Mr. Duitch has served as Managing Director of Duitch Consulting Group, a private
consulting company, since 2003. Prior to that time, he practiced public accounting, business management, mediation and consultancy nationally, with expertise in strategic and
operations management, finance, accounting, strategic planning and business operations for a wide spectrum of companies, including technology, manufacturing and
distribution, marketing, real estate, entertainment, and professional practices. He has served in executive officer roles and as a director of public and private companies, not-for-
profit organizations, including as Vice-Chairman for Accountants Global Network, and as a top-level advisor for public companies, closely-held businesses, families and high-
wealth individuals for over thirty years.
Mr. Duitch began his career with the international CPA firm Grant Thornton in its Chicago, San Francisco and Beverly Hills offices before founding Duitch &
Franklin LLP, which evolved to become one of Southern California’s largest independent CPA/Business Management/Consultancy practices, and which was acquired by a
public company in 1998. He subsequently served as President for a consumer products company with direct response marketing, retail, and fulfillment operations, until forming
Duitch Consulting Group in 2003 to serve clients in advisory, C-level, and board of director roles.
Mr. Duitch is a Certified Family Business and Estate Advisor, and mediator for matters including partner/shareholder agreements and disputes, business and marital
property dissolution, and dysfunctional executive teams and boards of directors. He has lectured extensively in management, financial and accounting areas for the California
CPA Foundation, business and professional groups, has instructed at several colleges and universities, and has authored technical articles in management and taxation for
regional and national publications.
Mr. Duitch earned a B.B.A degree in Accounting from the University of Iowa and a Master of Business Administration in Finance from Northwestern University.
Our Board of Directors believes that Mr. Duitch is qualified to serve as a member of the board because of his extensive public accounting experience, which will assist
the Board and the Audit Committee in addressing the numerous accounting-related issues, regulations and SEC reporting requirements to which we are subject, as well as his
expertise in business management, finance and strategic planning.
Kent Summers was appointed to our Board of Directors on January 18, 2018. Mr. Summers was also appointed to serve as a member of the Company’s Audit
Committee, Compensation Committee, and Nominating and Corporate Governance Committee.
Mr. Summers currently divides his time among a number of independent activities which focus on early-stage technology company formation and development
strategies, and sales planning and execution needs for emerging- and mid-market technology companies located primarily in the Boston metropolitan area, including:
management consultant to private and family-owned businesses; volunteer Mentor and Instructor with the Massachusetts Institute of Technology Venture Mentoring Services
program; regular lectures on enterprise, business-to-business sales to company founders and students enrolled at the Massachusetts Institute of Technology Sloan School of
Management, the Harvard MBA Program, the Wharton School at the University of Pennsylvania, and a number of domestic and international entrepreneurship support
organizations; and consultant to Fellows enrolled in the Harvard Advanced Leadership Initiative. Mr. Summers has served in those roles at various times from 2003 to the
present. From 2009 to the present, Mr. Summers has served as the non-executive Chairman of CADNexus, Inc., and from 2017 to the present, director and Chairman of the
Compensation Committee with iQ3 Connect, Inc.
From 2005 to 2017, Mr. Summers served as Managing Partner at Practical Computer Applications, Inc., a Boston-based database consulting and engineering services
firm, where he was responsible for sales planning and execution activities. Prior to Practical Computer Applications, from 2001 to 2005, Mr. Summers provided independent
merger & acquisition advisory services to support the sale of privately-owned companies. Over a prior 14-year period, Mr. Summers served in leadership roles at several
software and internet start-ups, including: Chairman and CEO of Collego Corporation (acquired by MRO Software), founder and CEO of MyHelpDesk, Inc. (acquired by
Support.com), founder of PCMovingVan.com (acquired by a PE firm), and Vice President of Marketing at Electronic Book Technologies, Inc. (acquired by INSO Corporation,
formerly listed on Nasdaq).
33
Prior to the software industry, Mr. Summers served as Technology Analyst at Electronic Joint Venture Partners LLC and Associate Program Trader on the Options
Trading Desk at Bear Stearns & Co. In 1986, Mr. Summers received a BA in English from the University of Houston.
Our Board of Directors believes that Mr. Summers is qualified to serve as a member of our Board on the basis of his deep understanding of early-stage business growth
strategies, enterprise sales, business acquisitions, as well as his background and extensive company management and leadership experience.
Director Independence
Our Board of Directors currently consists of five members. As a result of his appointment as Chief Executive Officer, Mr. Rice is no longer considered an independent
director, and Mr. Garofalo is no longer considered an independent director because on August 8, 2017 we engaged Garofalo & Associates, LLC, a limited liability company
owned and controlled by Mr. Garofalo, to provide services to the Company as corporate development consultant and financial advisor. Our Board of Directors has determined
that our other directors, Salvatore Battinelli, Dennis Duitch and Kent Summers, constituting a majority of our directors, are “independent” as that term is defined under Rule
5605(a)(2) of the NASDAQ marketplace rules. Pursuant to NASDAQ rules, our board must consist of a majority of independent directors.
The NASDAQ independence definition includes a series of objective tests, including that the director is not, and has not been for at least three years, one of our
employees and that neither the director nor any of his family members has engaged in various types of business dealings with us. In addition, as required by NASDAQ rules,
our Board of Directors has made a subjective determination as to Messrs. Battinelli, Duitch and Summers, our independent directors, that no relationships exists, which, in the
opinion of our Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations,
our Board of Directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as
they may relate to us and our management. There are no family relationships among any of our directors or executive officers.
Classified Board of Directors
In accordance with our amended and restated bylaws, our Board of Directors is divided into three classes with staggered, three-year terms. At each annual meeting of
stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following
election. Our directors are classified as follows:
●
●
●
the Class I director is John Rice, with a term expiring at our 2021 annual meeting of stockholders;
the Class II directors are Frank J. Garofalo and Salvatore Battinelli, with terms expiring at our 2019 annual meeting of stockholders; and
the Class III directors are Dennis Duitch and Kent Summers, with terms expiring at our 2020 annual meeting of stockholders.
Our Board of Directors appointed John Rice as Chairman of the Board on April 19, 2017. Our amended and restated bylaws provide that the authorized number of
directors may be changed by resolution of the Board of Directors. Any additional directorships resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our Board of Directors into three classes with staggered three-
year terms may delay or prevent a change of our management or a change in control of our company.
34
Leadership Structure of the Board
Our directors may be removed with or without cause at any meeting of stockholders by the affirmative vote of the holders of at least two-thirds of our outstanding
voting stock entitled to vote in the election of directors. Our amended and restated bylaws provide our Board of Directors with flexibility in its discretion to combine or separate
the positions of Chairman of the Board and Chief Executive Officer, if we elect to appoint a Chairman of the Board.
On April 19, 2017, our Board of Directors appointed Mr. Rice as Chairman of the Board. The Chairman of the Board presides at all meetings of our Board of
Directors (but not at its executive sessions) and exercises and performs such other powers and duties as may be assigned to him from time to time by the Board or prescribed by
our amended and restated bylaws. The Chairman of the Board is appointed by our Board of Directors on an annual basis.
Our Board of Directors has no established policy on whether it should be led by a Chairman who is also the Chief Executive Officer, but periodically considers
whether combining, or separating, the role of Chairman and Chief Executive Officer is appropriate. At this time, our Board is committed to the combined role given the
circumstances of our company, including Mr. Rice’s knowledge of our company’s strategy. Our Board believes that having a Chairman who also serves as the Chief Executive
Officer allows timely communication with our board on company strategy and critical business issues, facilitates bringing key strategic and business issues and risks to the
Board’s attention, avoids ambiguity in leadership within the Company, provides a unified leadership voice externally and clarifies accountability for Company business
decisions and initiatives. However, our Board of Directors continually evaluates our leadership structure and could, in the future, decide to separate the Chairman and Chief
Executive Officer positions if it believes that doing so would serve the best interests of our Company and our stockholders.
Board Meetings and Committees
During our fiscal year ended December 31, 2018, the Board of Directors held six meetings, and each director attended at least 75% of the aggregate of (i) the total
number of meetings of our Board of Directors held during the period for which he has been a director and (ii) the total number of meetings held by all committees of our Board
of Directors on which he served during the periods that he served.
Although we do not have a formal policy regarding attendance by members of our Board of Directors at annual meetings of stockholders, we encourage, but do not
require, our directors to attend. Each of our then current directors attended our 2018 Annual Meeting of Stockholders.
Our board has established three standing committees-audit, compensation, and nominating and corporate governance-each of which operates under a written charter
that has been approved by our board. Until February 15, 2017, when our common stock became listed on The NASDAQ Capital Market, we were not required to establish or
maintain an audit, nominating or compensation committee. Each committee charter has been posted on the Investors section of our website at www.sigmalabsinc.com. The
reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it
to be a part of this Annual Report.
Audit Committee
The Audit Committee’s responsibilities include:
●
●
●
appointing, approving the compensation of, and assessing the independence of our registered public accounting firm;
overseeing the work of our registered public accounting firm, including through the receipt and consideration of reports from such firm;
reviewing and discussing with management and the registered public accounting firm our annual and quarterly financial statements and related disclosures;
● monitoring our internal control over financial reporting, disclosure controls and procedures;
35
●
establishing procedures for the receipt, retention and treatment of accounting related complaints and concerns;
● meeting independently with our registered public accounting firm and management;
●
●
reviewing and approving or ratifying any related person transactions; and
preparing the Audit Committee report required by SEC rules.
The members of our Audit Committee are Messrs. Duitch, Battinelli and Summers, and Mr. Duitch serves as the chairperson of the committee. Our Board of Directors
has determined that each of Messrs. Duitch, Battinelli and Summers is an independent director under NASDAQ rules and under SEC Rule 10A-3. All members of our Audit
Committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and NASDAQ. Our Board of Directors has determined that each
member of our Audit Committee is an “audit committee financial expert” as defined by applicable SEC rules and has the requisite financial sophistication as defined under the
applicable NASDAQ rules and regulations. The Audit Committee met four times during 2018.
Compensation Committee
The Compensation Committee’s responsibilities include:
●
●
●
●
●
●
●
annually reviewing and approving corporate goals and objectives applicable to CEO compensation;
determining our CEO’s compensation;
reviewing and approving, or making recommendations to our board with respect to, the compensation of our other executive officers;
overseeing an evaluation of our senior executives;
overseeing and administering our equity incentive plans;
reviewing and making recommendations to our board with respect to director compensation; and
reviewing and discussing annually with management our “Compensation Discussion and Analysis” when it is required by SEC rules to be included in our Proxy
Statements.
The members of our Compensation Committee are Messrs. Duitch, Battinelli and Summers, and Mr. Battinelli serves as the chairperson of the committee. Our board
has determined that each of Messrs. Duitch, Battinelli and Summers is independent under the applicable NASDAQ rules and regulations and is a “non-employee director” as
defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Compensation Committee was established effective
February 15, 2017 (i.e., when our common stock became listed on The NASDAQ Capital Market).
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee’s responsibilities include:
●
●
●
identifying individuals qualified to become board members;
recommending to our board the persons to be nominated for election as directors and to each of the board’s committees; and
overseeing an annual evaluation of the board.
The members of our Nominating and Corporate Governance Committee are Messrs. Duitch, Battinelli and Summers, and Mr. Duitch serves as the interim chairperson
of the committee. Our board has determined that each of Messrs. Duitch, Battinelli and Summers is independent under the applicable NASDAQ rules and regulations. The
Nominating and Corporate Governance Committee was established effective February 15, 2017 (i.e., when our common stock became listed on The NASDAQ Capital Market).
36
Code of Ethics and Business Conduct
The Company has a code of ethics that applies to all employees, including the Company’s principal executive officer, principal financial officer, and principal
accounting officer, as well as to the members of the Board of Directors. The code is available at www.sigmalabsinc.com. The Company intends to disclose any changes in, or
waivers from, this code by posting such information on the same website or by filing a Form 8-K, in each case to the extent such disclosure is required by rules of the SEC or
NASDAQ. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should
not consider it to be a part of this Annual Report.
Considerations in Evaluating Director Nominees
Our Nominating and Corporate Governance Committee uses a variety of methods for identifying and evaluating director nominees. In its evaluation of director
candidates, our Nominating and Corporate Governance Committee will consider the current size and composition of our Board of Directors and the needs of our Board of
Directors and the respective committees of our Board of Directors. Some of the qualifications that our Nominating and Corporate Governance Committee considers include,
without limitation, issues of character, integrity, judgment, diversity of experience, independence, area of expertise, corporate experience, length of service, potential conflicts
of interest and other commitments. Nominees must also have the ability to offer advice and guidance to our Chief Executive Officer based on past experience in positions with a
high degree of responsibility and be leaders in the companies or institutions with which they are affiliated. Director candidates must have sufficient time available in the
judgment of our Nominating and Corporate Governance Committee to perform all board of director and committee responsibilities. Members of our Board of Directors are
expected to prepare for, attend, and participate in all board of director and applicable committee meetings. Other than the foregoing, there are no stated minimum criteria for
director nominees, although our Nominating and Corporate Governance Committee may also consider such other factors as it may deem, from time to time, are in our and our
stockholders’ best interests.
Although our Board of Directors does not maintain a specific policy with respect to board diversity, our Board of Directors believes that our Board of Directors should
be a diverse body, and our Nominating and Corporate Governance Committee considers a broad range of backgrounds and experiences. In making determinations regarding
nominations of directors, our Nominating and Corporate Governance Committee may take into account the benefits of diverse viewpoints. Our Nominating and Corporate
Governance Committee also will consider these and other factors as it oversees the annual board of director and committee evaluations. After completing its review and
evaluation of director candidates, our Nominating and Corporate Governance Committee recommends to our full Board of Directors the director nominees for selection.
Stockholder Recommendations for Nominations to the Board of Directors
Our Nominating and Corporate Governance Committee will consider candidates for director recommended by stockholders so long as such recommending stockholder
was a stockholder of record both at the time of giving notice and at the time of the annual meeting, and such recommendations comply with our amended and restated articles of
incorporation and amended and restated bylaws and applicable laws, rules and regulations, including those promulgated by the SEC. The Nominating and Corporate
Governance Committee will evaluate such recommendations in accordance with its charter, our amended and restated bylaws, our policies and procedures for director
candidates, as well as the regular director nominee criteria described above. This process is designed to ensure that our Board of Directors includes members with diverse
backgrounds, skills and experience, including appropriate financial and other expertise relevant to our business. Eligible stockholders wishing to recommend a candidate for
nomination should contact the Secretary in writing. Our Nominating and Corporate Governance Committee has discretion to decide which individuals to recommend for
nomination as directors.
37
Role of Board in Risk Oversight Process
Risk assessment and oversight are an integral part of our governance and management processes. Our Board of Directors encourages management to promote a culture
that incorporates risk management into our corporate strategy and day-to-day business operations. Management discusses strategic and operational risks at regular management
meetings and conducts specific strategic planning and review sessions during the year that include a focused discussion and analysis of the risks we face. Throughout the year,
senior management reviews these risks with the Board of Directors at regular board meetings as part of management presentations that focus on particular business functions,
operations or strategies, and presents the steps taken by management to mitigate or eliminate such risks. Our Board of Directors does not have a standing risk management
committee, but rather administers this oversight function directly through the Board of Directors as a whole, as well as through standing committees of the Board of Directors
that will address risks inherent in their respective areas of oversight. In particular, our Audit Committee is responsible for overseeing our major financial risk exposures and the
steps our management has taken to monitor and control these exposures. The Audit Committee also monitors compliance with legal and regulatory requirements and considers
and approves or disapproves any related-person transactions. Our Nominating and Governance Committee monitors the effectiveness of our corporate governance guidelines
that we may adopt or amend from time to time. Our Compensation Committee assesses and monitors whether any of our compensation policies and programs has the potential
to encourage excessive risk-taking by our management.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers and directors, and persons who own more than 10% of a registered
class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Executive officers,
directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
The Company believes that during its most recent fiscal year ended December 31, 2018, its executive officers, directors and greater than 10% stockholders complied
with the filing requirements under Section 16(a).
ITEM 11. EXECUTIVE COMPENSATION
Processes and Procedures for Compensation Decisions
Our Compensation Committee is responsible for the executive compensation programs for our executive officers and reports to our board of directors on its
discussions, decisions and other actions. Typically, our Chief Executive Officer makes recommendations to our Compensation Committee and is involved in the determination
of compensation for the respective executive officers that report to him. Our Chief Executive Officer does not determine his own compensation. Our Chief Executive Officer
makes recommendations to our Compensation Committee regarding short- and long-term compensation for all executive officers based on our results, an individual executive
officer’s contribution toward these results and performance toward individual goal achievement. Our Compensation Committee then reviews the recommendations and other
data and makes decisions (or makes recommendations to the Board) as to total compensation for each executive officer as well as each individual compensation component.
The following table sets forth compensation for services rendered in all capacities to the Company: (i) for each person who served as the Company’s Chief Executive
Officer at any time during the past fiscal year, and (ii) for our two most highly compensated executive officers, other than our Chief Executive Officer, who were employed
with the Company on December 31, 2018 (the foregoing executives are herein collectively referred to as the “named executive officers”).
38
Summary Compensation Table
Name and Principal Position
John Rice - President, Chief Executive Officer (Principal
Executive Officer) and Director
(Chairman of the Board)(2)
Ronald Fisher - Vice President
of Business Development
Darren Beckett – Chief Technology
Officer
Mark J. Cola – Former President and
Chief Technology Officer
Year
2018
2017
2018
2017
2018
2017
2018
2017
Salary
($)(1)
Bonus
($)
Stock Awards
($)
Option
Awards
($)
All Other
Compensation
($)
Total
($)
125,625
40,500
180,000
180,000
142,500
25,312
—
—
—
—
—
—
147,273
204,863
32,727(9)
17,644(9)
—
—
—
—
—
—
—
17,001(4)
280,617(3)
—
—
10,925(5)
35,075(6)
—
47,520(7)
28,800(8)
—
—
—
—
184,015(10)
445,352(12)
224,818(11)
—
588,833
667,859
406,242
68,426
215,075
180,000
190,020
54,112
John Rice was appointed as our interim Chief Executive Officer on July 24, 2017. Prior to such appointment, Mark Cola served as our Chief Executive Officer.
(1) Actual amounts paid or accrued.
(2)
(3) On April 19, 2018, we granted Mr. Rice three options (the “Options”) to purchase up to 20,000 shares of our common stock under our 2013 Equity Incentive Plan in
connection with his employment arrangement. The Options have an exercise price per share equal to $1.88, $1.54 and $1.48, respectively, and each is fully vested. The
options had an aggregate grant date fair value of $31,010, $25,402 and $24,412, respectively, calculated in accordance with FASB ASC Topic 718. The amount recognized
for this award was calculated using the Black Scholes option-pricing model. The Company also granted Mr. Rice an option to purchase up to 20,000 shares on each of April
30, 2018, May 31, 2018, June 30, 2018 and July 31, 2018. Such options have an exercise price per share equal to $1.10, $1.47, $1.19 and $0.87, respectively, and each is
fully vested. The options had an aggregate grant date fair value of $18,184, $24,248, $19,460 and $13,975, respectively, calculated in accordance with FASB ASC Topic
718. On November 1, 2018 the Company granted Mr. Rice a fully vested option to purchase up to 68,758 shares at an exercise price of $1.79. The option had an aggregate
grant day fair value of $95,888 calculated in accordance with FASB ASC Topic 718. On December 1, 2018 the Company granted Mr. Rice a fully vested option to purchase
up to 22,916 shares at an exercise price of $1.57. The option had an aggregate grant day fair value of $28, calculated in accordance with FASB ASC Topic 718.
(4) On February 15, 2017, in connection with his appointment to our Board of Directors, we granted Mr. Rice 5,231 shares of common stock of the Company, under the 2013
Equity Incentive Plan, with such shares to vest in four equal, successive quarterly installments.
39
(5) Of the amount shown, a total of $10,925 was paid to Mr. Rice prior to his appointment as interim Chief Executive Officer in connection with the additional services as a
director that Mr. Rice provided the Company with respect to the Company’s operations.
(6) O n April 19, 2018, we granted Mr. Fisher an option to purchase 28,750 shares of our common stock under our 2013 Equity Incentive Plan in connection with his
employment arrangement. The option has an exercise price per share equal to $1.22, and is vested as to 1,438 shares, and the balance of the shares under the stock option
will vest in four annual installments over four years from the date of grant (the Grant Date), as follows: 1,366 shares will vest and become exercisable on the one-year
anniversary of the Grant Date; 4,097 shares will vest and become exercisable on the second-year anniversary of the Grant Date; 6,828 shares will vest and become
exercisable on the third-year anniversary of the Grant Date; and 15,021 shares will vest and become exercisable on the four-year anniversary of the Grant Date. The options
had a grant date fair value of $28,927 calculated in accordance with FASB ASC Topic 718. The amount recognized for this award was calculated using the Black Scholes
option-pricing model.
(7) On February 26, 2018 and October 18, 2018, we granted Mr. Beckett an option to purchase up to 15,000 and 20,000 shares of our common stock, respectively, under our
2013 Equity Incentive Plan in connection with his employment arrangement. The options have an exercise price per share equal to $1.56 and $1.206, respectively. The
February 2018 option vests as follows: 750 shares vested and became exercisable on October 13, 2018; 2,250 shares will vest and become exercisable on October 13, 2019;
3,750 shares will vest and become exercisable on October 13, 2020; and 8,250 shares will vest and become exercisable on October 13, 2021. The October 2018 option vests
in equal annual installment over four years from the date of grant. The options have an aggregate grant date fair value of $22,790 and $18,784, respectively, calculated in
accordance with FASB ASC Topic 718. The amount recognized for this award was calculated using the Black Scholes option-pricing model.
(8) On October 13, 2017, we granted Mr. Beckett an option to purchase up to 15,000 shares of our common stock under our 2013 Equity Incentive Plan in connection with his
employment arrangement. The option has an exercise price per share equal to $1.92. The option vests as follows: 750 shares vested and became exercisable on October 13,
2018; 2,250 shares will vest and become exercisable on October 13, 2019; 3,750 shares will vest and become exercisable on October 13, 2020; and 8,250 shares will vest
and become exercisable on October 13, 2021. The option has an aggregate grant date fair value of $23,453, calculated in accordance with FASB ASC Topic 718. The
amount recognized for this award was calculated using the Black Scholes option-pricing model.
(9) Under Mr. Cola’s employment agreement, effective as of July 24, 2017, during each 12-month period during the term of Mr. Cola’s employment, he was entitled to a
nondiscretionary annual founder’s bonus in the total amount of $40,000, payable and earned in 24 equal bi-monthly installments. The amounts shown represent such bonuses
earned by Mr. Cola in 2018 and 2017.
(10) Pursuant to Mr. Cola’s employment agreement, on February 21, 2018, the Company granted Mr. Cola under the Company’s 2013 equity incentive plan (i) an option to
purchase 61,750 shares of the Company’s common stock (“Option A”), and (ii) an option to purchase 61,750 shares of the Company’s common stock (“Option B”, and
together with Option A, the “Options”), with the Options each (a) having an exercise price equal to $1.49, and Option A is fully vested and Option B vests and becomes
exercisable in 17 equal (as closely as possible) monthly installments on the 15th day of each month commencing on March 15, 2018. The options have an aggregate grant
date fair value of $179,272, calculated in accordance with FASB ASC Topic 718. The amount recognized for these awards were calculated using the Black Scholes option-
pricing model.
(11) On October 10, 2018, upon Mr. Cola’s retirement from the Company recognized the obligation for $220,000 of payroll severance and $4,818 of benefit reimbursement to be
paid out in equal installments over the following 12 months ,
(12) On February 21, 2017, an option to purchase up to 123,750 shares of the Company’s common stock at an exercise price per share equal to $3.48, was granted to Mr. Cola
under his then employment agreement. Such option is fully vested. The option had an aggregate grant date fair value of $445,352, calculated in accordance with FASB ASC
Topic 718. The amount recognized for this award was calculated using the Black Scholes option-pricing model.
40
Executive Officer Employment Agreements
John Rice
On August 8, 2017, we entered into an “at will” unwritten employment arrangement with Mr. John Rice, pursuant to which Mr. Rice served as our interim Chief
Executive Officer and interim principal executive officer, will receive a monthly salary of $9,000, and is eligible to receive medical and dental benefits, life insurance, and long
term and short term disability coverage. Further, Mr. Rice is eligible under his employment arrangement to participate in the Company’s 2013 Equity Incentive Plan, with equity
compensation to Mr. Rice to be determined by our Compensation Committee at a later date. Effective as of Mr. Rice’s appointment as interim Chief Executive Officer, Mr. Rice
is no longer entitled to receive compensation for his service as a director of the Company during his service as our interim Chief Executive Officer. On April 19, 2018, we
granted Mr. Rice three options (the “Options”) to purchase up to 20,000 shares of our common stock under our 2013 Equity Incentive Plan. The Options have an exercise price
per share equal to $1.88, $1.54 and $1.48, respectively, which is greater than the closing price of our common stock on the date of grant (the “Grant Date”), and each is fully
vested as of the Grant Date.
The Company also granted Mr. Rice an option to purchase up to 20,000 shares on each of April 30, 2018, May 31, 2018, June 30, 2018 and July 31, 2018 (each, a
“Monthly Option”), and agreed that that Mr. Rice is entitled to a bonus of ( x) 100,000 shares of common stock under our 2013 Equity Incentive Plan if the average closing
price of our common stock is $6.00, $7.00, $8.00 or $9.00 for three consecutive months (for a total possible bonus of up to 400,000 shares if each of the foregoing performance
milestones is satisfied), and (y) the balance of any portion of the foregoing 400,000 shares if the Company is sold for a price equivalent to at least $8.00 per outstanding share of
common stock while Mr. Rice serves as our Chief Executive Officer (or during the 12-month period thereafter), and that in the event that our Board of Directors determines that
Mr. Rice is unable to perform his duties as our Chief Executive Officer due to an accident, illness or other event or condition which physically or mentally incapacitates Mr.
Rice for a period of 45 consecutive days (“Disability”), (x) if Mr. Rice ceases to be employed by the Company as a result of a Disability, the Options will remain exercisable for
the 5-year term of such Options, unless the Options are terminated pursuant to a “Corporate Transaction” (as defined in the 2013 Equity Incentive Plan); and (y) if Mr. Rice
ceases to be employed by the Company as a result of a Disability, the Monthly Options will remain exercisable for the 5-year term of such Monthly Options, unless the Monthly
Options are terminated pursuant to a Corporate Transaction.
On June 21, 2018, Mr. Rice’s title was changed to Chief Executive Officer of the Company. On August 1, 2018, the Company increased the annual base salary of Mr.
Rice from $108,000 to $155,000. On November 1, 2018, the Company granted Mr. Rice an option to purchase 68,750 shares of the Company’s common stock under the 2013
Plan at an exercise price of $1.79 per share, with such option having a term of five years and being fully vested on the grant date. The Company also agreed to grant Mr. Rice an
option under the 2013 Plan to purchase up to (i) 22,916 shares on the first day of each month commencing on December 1, 2018 and ending on July 1, 2019, and (ii) 22,922
shares on August 1, 2019 on each of November 1, 2018, February 1, 2019, May 1, 2019 and August 1, 2019 (collectively, the “Monthly Options”), so long as Mr. Rice remains
an employee of the Company as of the applicable grant date (except that if Mr. Rice ceases to be employed by the Company as a result of an accident, illness or other event or
condition which physically or mentally incapacitates Mr. Rice for a period of 45 consecutive days, any Monthly Option that has not been granted as of such date will still be
granted on the applicable grant date), with each Monthly Option to have a 5-year term, an exercise price equal to the closing price of the Company’s common stock on the date
of grant, to be vested in full on the date of grant and otherwise to be on such other terms set forth in the Company’s standard form of non-qualified stock option agreement.
Darren P. Beckett
On October 18, 2018, Darren Beckett’s title was changed from Vice President of Engineering to Chief Technology Officer of the Company. On October 18, 2018, the
Company also increased the annual base salary of Mr. Beckett from $135,000 to $180,000, effective retroactive to September 16, 2018, and granted Mr. Beckett an option to
purchase 20,000 shares of common stock under the 2013 Plan at an exercise price of $1.206 per share. The option has a term of five years and vests in equal annual installment
over four years from the date of grant subject, in each case, to Mr. Beckett being in the continuous employ of the Company on the applicable vesting date. Mr. Beckett has
served as an employee of the Company since September 25, 2017, pursuant to an “at will” employment agreement with the Company, under which he was engaged to serve as
our Engineering Manager. Under the agreement, Mr. Beckett was entitled to receive an annual base salary of $135,000 prior to the foregoing increase, and is eligible to receive
medical and dental benefits, life insurance, short and long-term disability coverage, and to participate in the Company’s Section 125 cafeteria plan, vision plan and 401K plan.
On January 1, 2019 the Company granted Mr. Beckett an option to purchase up to 3,750 shares of common stock under the 2013 Plan at an exercise price of $1.50. The option
has a term of five years and vests in equal annual installments over four years form the date of grant.
41
Ronald Fisher
We have entered into an “at will” employment agreement, effective as of August 10, 2015, with Mr. Fisher under which he was engaged to serve as our Vice President
of Business Development. Mr. Fisher is entitled to receive an annual base salary of $180,000. Pursuant to the employment agreement, Mr. Fisher also was granted, as a signing
bonus, a stock option to purchase up to 23,750 shares of common stock of the Company, at an exercise price equal to $11.80 per share, which was the closing market price of
the Company’s common stock on August 10, 2015 (i.e., the date of grant), under the 2013 Equity Incentive Plan. Such option vested and became exercisable as to 1,375 shares
on the first anniversary of the grant date, as to 3,375 shares on the second anniversary of the grant date, as to 6,375 shares on the third anniversary of the grant date, and will vest
and become exercisable as to12,625 shares on the fourth anniversary of the grant date, provided that Mr. Fisher remains an employee of the Company through such vesting
date. The option has a ten-year term and is on such other terms set forth in the Company’s standard form of non-qualified stock option agreement. Additionally, the Company
granted Mr. Fisher under the 2013 Plan, effective as of August 11, 2016, a stock option to purchase up to 5,000 shares of common stock of the Company. Such option has an
exercise price equal to the closing price of our common stock on the date of grant, and vests and becomes exercisable as to (i) 300 shares on August 11, 2017, (ii) 700 shares on
August 11, 2018, (iii) 1,350 shares on August 11, 2019, and (iv) 2,650 shares on August 11, 2020, provided Mr. Fisher is in the employ of the Company on August 11, 2019
and 2020. Further, Mr. Fisher is eligible to participate in the Company’s 2011 Equity Incentive Plan and 2013 Plan, and is eligible to receive medical and dental benefits, life
insurance, short and long-term disability coverage, and to participate in the Company’s Section 125 cafeteria plan, vision plan and 401K plan
On September 18, 2017, we and Mr. Fisher entered into Amendment No. 1 to Mr. Fisher’s employment agreement, effective August 10, 2015, pursuant to which,
effective as of February 11, 2017, item 2, entitled “Performance Bonuses,” of Exhibit A of Mr. Fisher’s employment agreement was deleted in its entirety and replaced with the
new item 2 that was set forth in the amendment to employment agreement. Such amendment provided that Mr. Fisher would become entitled to receive performance-based
stock and cash bonuses if certain milestones were satisfied by February 11, 2018, so long as Mr. Fisher remained an employee of the Company as of the date the applicable
milestone was satisfied. No such bonuses were earned as of December 31, 2017. On February 21, 2018, the Company and Mr. Fisher entered into Amendment No. 2 to Mr.
Fisher’s employment agreement, pursuant to which the foregoing February 11, 2018 date was extended to December 31, 2018. On January 10, 2019, the Company granted Mr.
Fisher an option to purchase up to 11,832 shares of common stock in exchange for the cancellation of his accrued but unpaid vacation balance at December 31, 2018. On March
7, 2019, the Company issued 1,500 shares of common stock under the 2013 Plan to Mr. Fisher connected with the satisfaction of a performance milestone.
Former Executive Officer’s Employment Agreements
Mark J. Cola
Effective as of February 21, 2017, the Company and Mark. Cola entered into an employment agreement (the “Original Agreement”), pursuant to which, among other
things reported in our previous filings with the Securities and Exchange Commission, Mr. Cola agreed to serve as the Company’s President, Chief Executive Officer and Chief
Operating Officer, and was entitled to receive an annual base salary of $220,000.
In July, 2017, the Company and Mr. Cola entered into a new employment agreement (the “Employment Agreement”) for a two-year term (unless earlier terminated as
provided in the Employment Agreement), pursuant to which Mr. Cola agreed to serve as the Company’s Chief Technology Officer and continue to serve as the Company’s
President (with the title of Co-Founder, President and Chief Technology Officer). Under the Employment Agreement, Mr. Cola was (i) entitled to receive (a) an annual base
salary of $180,000 (the “Base Salary”), and (b) during each 12-month period during the term of Mr. Cola’s employment, a nondiscretionary annual founder’s bonus (the
“Annual Bonus”) in the total amount of $40,000, payable and earned in 24 equal bi-monthly installments, and (ii) eligible to receive one or more additional bonuses
(“Discretionary Bonuses”) in recognition of extraordinary accomplishments.
42
Effective as of immediately prior to the Effective Date, the Original Agreement was terminated by the parties, and Mr. Cola resigned as Chief Executive Officer, Chief
Operating Officer and as a director of the Company. The parties agreed that the Nonqualified Stock Option Agreement, dated as of February 21, 2017, between the Company
and Mr. Cola evidencing the grant to Mr. Cola under the Original Agreement of a stock option to purchase up to 123,750 shares of the Company’s common stock at an exercise
price per share equal to $3.48 (the “Original Option”) was amended under the Employment Agreement such that (a) any unvested portion of the Original Option immediately
and automatically vested as a result of a Termination Event (as defined below), (b) the definition of “Termination For Cause” under the Original Option was replaced with the
definition of “Cause” under the Employment Agreement, and (c) upon the occurrence of a Corporate Transaction (as defined in the 2013 Equity Incentive Plan of the
Company), the Original Option, if outstanding as of the date of such applicable Corporate Transaction, will remain outstanding and exercisable in accordance with its terms,
except as provided in the Employment Agreement.
Under the Employment Agreement, Mr. Cola was entitled to receive (a) an annual base salary of $180,000 (the “Base Salary”), and (b) during each 12-month period
during the term of Mr. Cola’s employment, a nondiscretionary annual founder’s bonus (the “Annual Bonus”) in the total amount of $40,000, payable and earned in 24 equal bi-
monthly installments.
Pursuant to the Employment Agreement, on February 21, 2018, the Company granted Mr. Cola under the Company’s 2013 equity incentive plan (i) a ten-year non-
qualified stock option to purchase 61,750 shares of the Company’s common stock (“Option A”), and (ii) a ten-year non-qualified stock option to purchase 61,750 shares of the
Company’s common stock (“Option B”, and together with Option A, the “Options”), with the Options each (a) having an exercise price equal to the closing price of the
Company’s common stock on the date of grant (i.e., February 21, 2018), (b) to vest and become exercisable in seventeen equal (as closely as possible) monthly installments on
the 15th day of each month commencing on March 15, 2018, subject in each case to Mr. Cola’s continuing employment, and (c) to be on such other terms set forth in the
Company’s standard form of non-qualified stock option agreement (except that the definition of “Termination For Cause” under such agreement was replaced with the definition
of “Cause” under the Employment Agreement). Additionally, (x) upon the occurrence of a Corporate Transaction, all stock options of the Company held by Mr. Cola as of the
date of such applicable Corporate Transaction will remain outstanding and exercisable in accordance with their terms (except as provided in the Employment Agreement and as
set forth in (y) below), and (y) upon the occurrence of a Change of Control (as defined in the Employment Agreement), his unvested stock options will fully vest.
On September 10, 2018, Mr. notified us that he would retire from the Company, effective October 10, 2018. Mr. Cola is entitled to receive the severance and other
benefits described in his Employment Agreement. Effective as of his retirement, Mr. Cola became Chief Technology Officer Emeritus. Mr. Cola and the Company have entered
into a consulting agreement under which he will continue to provide services to the Company on an as needed basis.
43
Outstanding Equity Awards at 2018 Fiscal Year-End
The following table sets forth outstanding equity awards issued under our 2013 Equity Incentive Plan as of December 31, 2018 that are held by our named executive officers.
Name
John Rice(1)
Mark J. Cola(2)
Ronald Fisher(3)
Darren Beckett(4)
Number of securities
underlying
unexercised options
(#) exercisable
Number of securities
underlying
unexercised options
(#) unexercisable
Option
exercise
price ($)
Option Awards
20,000
20,000
20,000
20,000
20,000
20,000
20,000
68,750
22,916
123,750
72,648
11,125
1,000
1,438
750
—
—
—
—
—
—
—
—
—
—
—
—
50,852
12,625
4,000
27,312
14,250
15,000
20,000
Option
expiration
date
4/18/23
4/18/23
4/18/23
4/29/23
5/30/23
6/29/23
7/30/23
12/31/23
11/30/23
2/20/27
2/20/28
8/10/25
8/22/26
4/18/23
10/12/22
2/25/28
10/17/23
1.88
1.54
1.48
1.10
1.47
1.19
1.87
1.79
1.57
3.48
1.49
11.80
10.56
1.22
1.92
1.56
1.22
(1) On April 19, 2018, we granted Mr. Rice three options (the “Options”) to purchase up to 20,000 shares of our common stock under our 2013 Equity Incentive Plan in
connection with his employment arrangement. The Options have an exercise price per share equal to $1.88, $1.54 and $1.48, respectively, and each is fully vested. The
Company also granted Mr. Rice an option to purchase up to 20,000 shares on each of April 30, 2018, May 31, 2018, June 30, 2018 and July 31, 2018. Such options have an
exercise price per share equal to $1.10, $1.47, $1.19 and $0.87, respectively, and each is fully vested. On November 1, 2018 the Company granted Mr. Rice a fully vested
option to purchase up to 68,758 shares at an exercise price of $1.79. On December 1, 2018 the Company granted Mr. Rice a fully vested option to purchase up to 22,916 shares
at an exercise price of $1.57.
(2) Pursuant to Mr. Cola’s employment agreement, on February 21, 2018, the Company granted Mr. Cola under the Company’s 2013 equity incentive plan (i) an option to
purchase 61,750 shares of the Company’s common stock (“Option A”), and (ii) an option to purchase 61,750 shares of the Company’s common stock (“Option B”, and together
with Option A, the “Options”), with the Options each (a) having an exercise price equal to $1.49, and Option A is fully vested and Option B vests and becomes exercisable in 17
equal (as closely as possible) monthly installments on the 15th day of each month commencing on March 15, 2018. On February 21, 2017, an option to purchase up to 123,750
shares of the Company’s common stock at an exercise price per share equal to $3.48, was granted to Mr. Cola under his then employment agreement. Such option is fully
vested.
44
(3) In August 2015, in conjunction with the hiring of Ronald Fisher, the Company’s Vice President of Business Development, the Company granted to Mr. Fisher a stock option
(the “Option”) to purchase up to 23,750 shares of common stock of the Company, at an exercise price equal to $11.80 per share, which was the closing market price of the
Company’s common stock on August 10, 2015 (i.e., the date of grant), under the 2013 Plan. The Option vested and became exercisable as to 1,375 shares on the first
anniversary of the grant date and as to 3,375 shares on the second anniversary of the grant date, and will vest and become exercisable as to (i) 6,375 shares on the third
anniversary of the grant date, and (ii) 12,625 shares on the fourth anniversary of the grant date, provided, in each case, that Mr. Fisher remains an employee of the Company
through such vesting date. The Option has a ten-year term and is on such other terms set forth in the Company’s standard form of non-qualified stock option agreement. The
Company granted Mr. Fisher under the 2013 Equity Incentive Plan, effective as of August 11, 2016, a stock option to purchase up to 5,000 shares of common stock of the
Company. Such option has an exercise price equal to the closing price of our common stock on the date of grant, and vested and became exercisable as to 300 shares on August
11, 2017, and vests and becomes exercisable as to (i) 700 shares on August 11, 2018, (ii) 1,350 shares on August 11, 2019, and (iii) 2,650 shares on August 11, 2020, provided
Mr. Fisher is in the employ of the Company on August 11, 2017, 2018, 2019 and 2020.
(4) On February 26, 2018 and October 18, 2018, we granted Mr. Beckett an option to purchase up to 15,000 and 20,000 shares of our common stock, respectively, under our
2013 Equity Incentive Plan in connection with his employment arrangement. The options have an exercise price per share equal to $1.56 and $1.206, respectively. The February
2018 option vests as follows: 750 shares vested and became exercisable on October 13, 2018; 2,250 shares will vest and become exercisable on October 13, 2019; 3,750 shares
will vest and become exercisable on October 13, 2020; and 8,250 shares will vest and become exercisable on October 13, 2021. The October 2018 option vests in equal annual
installment over four years from the date of grant. On October 13, 2017, we granted Mr. Beckett an option to purchase up to 15,000 shares of our common stock under our 2013
Equity Incentive Plan in connection with his employment arrangement. The option has an exercise price per share equal to $1.92. The option vests as follows: 750 shares vested
and became exercisable on October 13, 2018; 2,250 shares will vest and become exercisable on October 13, 2019; 3,750 shares will vest and become exercisable on October
13, 2020; and 8,250 shares will vest and become exercisable on October 13, 2021
Equity Awards
We offer stock options and stock awards to certain of our employees, including our executive officers, as the long-term incentive component of our compensation
program. We generally grant equity awards to new hires upon their commencing employment with us. Our stock options allow employees to purchase shares of our common
stock at a price per share equal to the fair market value of our common stock on the date of grant and may or may not be intended to qualify as “incentive stock options” for
U.S. federal income tax purposes. We sometimes also offer stock options and stock awards to our consultants in lieu of cash. Our stock options allow consultants to purchase
shares of our common stock at a price per share equal to the fair market value of our common stock on the date of grant and are not intended to qualify as “incentive stock
options” for U.S. federal income tax purposes. Stock options and stock awards granted to our executive officers may be subject to accelerated vesting in certain circumstances.
Retirement Plans
We maintain a qualified 401(k) plan, in which all eligible employees may participate. We have elected to match 100% of each participant’s contribution up to 3% of
salary, and 50% of the next 2% of salary contributed. We may also elect, on an annual basis, to make a discretionary contribution to the plan, but have not done so to date. Our
matches and elective contributions vest to participant accounts as follows: 20% after two years of service, and 20% per year thereafter until the participant reaches 6 years of
service, at which time, employer contributions vest 100%. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not
taxable to the employees until distributed from the 401(k) plan.
No Tax Gross-Ups
We do not make gross-up payments to cover our executive officers’ personal income taxes that may pertain to any of the compensation paid or provided by our
company.
45
2011 Equity Incentive Plan
On March 9, 2011, our Board of Directors approved the Company’s 2011 Equity Incentive Plan, which was approved on March 31, 2011 by holders of at least a
majority of the issued and outstanding shares of common stock of the Company. As of December 31, 2016, an aggregate of 750 shares of our common stock were subject to the
2011 Equity Incentive Plan. The terms and conditions of the 2011 Equity Incentive Plan are substantially similar to the terms and conditions of our 2013 Equity Incentive Plan
(the “2013 Plan”).
2013 Equity Incentive
Plan Purpose
Our Board of Directors adopted the 2013 Plan to (1) encourage selected employees, officers, directors, consultants and advisers to improve our operations and increase
our profitability, (2) encourage selected employees, officers, directors, consultants and advisers to accept or continue employment or association with us, and (3) increase the
interest of selected employees, officers, directors, consultants and advisers in our welfare through participation in the growth in value of our common stock. All of our 20
current employees, directors and consultants are eligible to participate in the 2013 Plan.
Administration
The 2013 Plan is to be administered by the Board or by a committee to which administration of the Plan, or of part of thereof, is delegated by the Board. The 2013 Plan
is currently administered by our Compensation Committee, which we refer to below as the “Administrator.” The Administrator is responsible for selecting the officers,
employees, directors, consultants and advisers who will receive Options, Stock Appreciation Rights and Stock Awards. Subject to the requirements imposed by the 2013 Plan,
the Administrator is also responsible for determining the terms and conditions of each Option and Stock Appreciation Right award, including the number of shares subject to the
Option, the exercise price, expiration date and vesting period of the Option and whether the option is an Incentive Option or a Non-Qualified Option. Subject to the requirements
imposed by the 2013 Plan, the Administrator is also responsible for determining the terms and conditions of each Stock Award, including the number of shares granted, the
purchase price (if any), and the vesting, transfer and other restrictions imposed on the stock. The Administrator has the power, authority and discretion to make all other
determinations deemed necessary or advisable for the administration of the 2013 Plan or of any award under the 2013 Plan.
Neither the Board nor any committee of the Board to which administration of the 2013 Plan is delegated will provide advice to participants about whether or not to
accept or exercise their awards. Each participant must make his or her own decision about whether or not to accept or exercise an award.
The 2013 Plan is not subject to the Employee Retirement Income Security Act of 1974 and is not a qualified pension, profit sharing or bonus plan under Section 401(a)
of the Internal Revenue Code
Stock Subject to the 2013 Plan
Subject to the provisions of the 2013 Plan relating to adjustments upon changes in common stock, an aggregate of 1,650,000 shares of common stock are currently
subject to outstanding awards under the 2013 Plan or future awards under the 2013 Plan.
If awards granted under the 2013 Plan expire or otherwise terminate or are cancelled without being exercised in full, the shares of common stock not acquired pursuant
to such awards will again become available for issuance under the 2013 Plan. If shares of common stock issued pursuant to awards under the 2013 Plan are forfeited to or
repurchased by us, the forfeited or repurchased stock will again become available for issuance under the 2013 Plan.
If shares of common stock subject to an award are not delivered to a participant because such shares are withheld for payment of taxes incurred in connection with the
exercise of an Option, or the issuance of shares under a Stock Award, or the award is exercised through a reduction of shares subject to the award (“net exercised”), then the
number of shares that are not delivered will not again be available for issuance under the 2013 Plan. In addition, if the exercise price of any award is satisfied by the tender of
shares of common stock to us (whether by actual delivery or attestation), the shares tendered will not again be available for issuance under the 2013 Plan.
46
Eligibility
All directors, employees, consultants and advisors of the Company and its subsidiaries are eligible to receive awards under the 2013 Plan. Incentive Options may only
be granted under the 2013 Plan to a person who is a full-time officer or employee of the Company or a subsidiary. The Administrator will determine from time to time which
directors, employees, consultants and advisers will be granted awards under the 2013 Plan.
Terms of Awards
Written Agreement
Each award under the 2013 Plan will be evidenced by an agreement in a form approved by the Administrator.
Exercise Price; Base Value
The exercise price for a Non-Qualified Option or an Incentive Option may not be less than 100% of the fair market value of the Common Stock on the date of the grant
of the Non-Qualified Option or Incentive Option. With respect to an Option holder who owns stock possessing more than 10% of the total voting power of all classes of our
stock, the exercise price for an Incentive Option may not be less than 110% of the fair market value of the Common Stock on the date of the grant of the Incentive Option. The
base value of a Stock Appreciation Right shall also be no less than 100% of the Common Stock on the date of the grant of the Stock Appreciation Right. The 2013 Plan does not
specify a minimum exercise price for Stock Awards.
Vesting
Each Option, Stock Appreciation Right or Stock Award will become exercisable or non-forfeitable (that is, “vest”) under conditions specified by the Administrator at
the time of grant. Vesting typically is based upon continued service as a director or employee, but may be based upon any performance criteria and other contingencies that are
determined by the Administrator. Shares subject to Stock Awards may be subject to specified restrictions concerning transferability, repurchase by the Company and forfeiture
of the shares issued, together with such other restrictions as may be determined by the Administrator.
Expiration Date
Each Option or Stock Appreciation Right must be exercised by a date specified in the award agreement, which may not be more than ten years after the grant date.
Except as otherwise provided in the relevant agreement, an Option or Stock Appreciation Right ceases to be exercisable ninety days after the termination of the holder’s
employment with us.
Transfers of Options
Unless otherwise determined by the Administrator, Options are not transferable except by will or the laws of descent and distribution.
47
Purchase Price Payment
Unless otherwise determined by the Administrator, the purchase price of Common Stock acquired under the 2013 Plan is payable by cash or check at the time of an
Option exercise or acquisition of a Stock Award. The Company does not charge participants any fees or commissions in connection with their acquisition of Common Stock
under the 2013 Plan. The Administrator also has discretion to accept the following types of payment from participants:
● A secured or unsecured promissory note, provided that this method of payment is not available to a participant who is a director or an executive officer;
●
Shares of our Common Stock already owned by the Option or Stock Award holder as long as the surrendered shares have a fair market value that is equal to the acquired
stock and have been owned by the participant for at least six months;
●
The surrender of shares of Common Stock then issuable upon exercise of an Option; and
● A “cashless” option exercise in accordance with applicable regulations of the SEC and the Federal Reserve Board.
Withholding Taxes
At the time of his or her exercise of an Option or Stock Appreciation Right, an employee is responsible for paying all applicable federal and state withholding taxes. A
holder of Stock Awards is responsible for paying all applicable federal and state withholding taxes once the shares covered by the award cease to be forfeitable or at any other
time required by applicable law.
Securities Law Compliance
Shares of Common Stock will not be issued pursuant to the exercise of an Option or the receipt of a Stock Award unless the Administrator determines that the exercise
of the Option or receipt of the Stock Award and the issuance and delivery of such shares will comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933 (the “Securities Act”), applicable state and foreign securities laws and the requirements of any stock exchange on which our Common Stock is traded.
Effects of Certain Corporate Transactions
Except as otherwise determined by the Administrator, in the event of a “corporate transaction,” all previously unexercised Options and Stock Appreciation Rights will
terminate immediately prior to the consummation of the corporate transaction and all unvested Restricted Stock awards will be forfeited immediately prior to the consummation
of the corporate transaction. The Administrator, in its discretion, may permit exercise of any Options or Stock Appreciation Rights prior to their termination, even if those
awards would not otherwise have been exercisable, or provide that outstanding awards will be assumed or an equivalent Option or Stock Appreciation Right substituted by a
successor corporation. The Administrator, in its discretion, may remove any restrictions as to any Restricted Stock awards or provide that all outstanding Restricted Stock
awards will participate in the corporate transaction with an equivalent stock substituted by the successor corporation subject to the restrictions. In general, a “corporate
transaction” means:
● Our liquidation or dissolution;
● Our merger or consolidation with or into another corporation as a result of which we are not the surviving corporation;
● A sale of all or substantially all of our assets; or
● A purchase or other acquisition of more than 50% of our outstanding stock by one person, or by more than one person acting in concert.
Other Adjustment Provisions
If the stock of the Company is changed by reason of a stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification, appropriate
adjustments shall be made by the Administrator, in its discretion, in (1) the number and class of shares of stock subject to the 2013 Plan and each Option and grant of Stock
Awards outstanding under the 2013 Plan, and (2) the purchase price of each outstanding Option and (if applicable) Stock Award. For example, if an Option is for 1,000 shares
for $2.00 per share and there is a 2-for-1 stock split, the Option would be adjusted to be exercisable for 2,000 shares at $1.00 per share.
48
Amendment or Termination of the Plan
The Board of Directors may at any time amend, discontinue or terminate the 2013 Plan. With specified exceptions, no amendment, suspension or termination of the
Plan may adversely affect outstanding Options or Stock Appreciation Rights or the terms that are applicable to outstanding Stock Awards. No amendment, suspension or
termination of the Plan requires stockholder approval unless such approval is required under applicable law or under the rules of any stock exchange on which our Common
Stock is traded. Unless terminated earlier by the Board of Directors, the 2013 Plan will terminate automatically on March 15, 2023, which is the tenth anniversary of the date of
the 2013 Plan’s adoption by the Board.
As of March 27, 2019, there were 1,161,891 shares previously issued or subject to outstanding awards under the 2013 Plan and 488,109 shares were available for
future issuance under the 2013 Plan.
Director Compensation
We believe that a combination of cash and equity compensation is appropriate to attract and retain the individuals we desire to serve on our Board of Directors. Our
cash compensation policies are designed to encourage frequent and active interaction between directors and our executives both during and between formal meetings as well as
compensate our directors for their time and effort. Further, we believe it is important to align the long-term interests of our non-employee directors (i.e. directors who are not
employed by us as officers or employees) with those of the Company and its stockholders, and that awarding equity compensation to, and thereby increasing ownership of our
common stock by, our non-employee directors is an appropriate means to achieve this alignment. Directors who are also employees of our company do not receive
compensation for their service on our Board of Directors.
Under our director compensation program, each non-employee director will receive annual compensation of $27,000 and 50,000 shares of restricted common stock,
which vest ratably each quarter. In addition, the Chairperson of the Audit Committee will receive a $5,000 annual retainer in cash. All cash fees are to be paid quarterly. Also,
each non-employee director may be reimbursed for his reasonable expenses incurred in the performance of his duties as a director as our Board of Directors determines from
time to time. Our Compensation Committee periodically evaluates our director compensation program and determines whether any changes should be recommended to the
Board.
The following table sets forth certain information concerning the compensation paid to non-employee directors in 2018 for their services as directors of the Company.
The compensation of Mr. Rice, who serves as a director and serves as our President and Chief Executive Officer, is described in the Summary Compensation Table of Executive
Officers. Our non-employee directors do not receive fringe or other benefits.
Name
Salvatore Battinelli(1)
Dennis Duitch(2)
Frank Garofalo(3)
Kent Summers(4)
Fees Earned or
Paid in Cash ($)
27,000
32,000
27,000
68,475
Stock Awards
($)(5)
Option Awards
($)
Total ($)
64,066
64,066
27,000
64,066
—
—
—
—
91,066
96,066
91,066
132,541
(1) The fees shown were paid to Mr. Battinelli for services as a director. In January and April 2018, the Company issued 5,814 and 44,186 shares, respectively, of the
Company’s common stock to Mr. Battinelli, pursuant to the Company’s 2013 Equity Incentive Plan, in connection with his service as a director, with such shares to vest in
four equal, successive quarterly installments. Such shares were valued at $10,000 or $1.72 per share and $54,066 or $1.22 per share, respectively.
(2) The fees shown were paid to Mr. Duitch for services as a director, including $5,000 as a retainer for serving as the Chairman of the Audit Committee. In January and April
2018, the Company issued 5,814 and 44,186 shares, respectively, of the Company’s common stock to Mr. Duitch, pursuant to the Company’s 2013 Equity Incentive Plan, in
connection with his service as a director, with such shares to vest in four equal, successive quarterly installments. Such shares were valued at $10,000 or $1.72 per share and
$54,066 or $1.22 per share, respectively.
(3) The fees shown were paid to Mr. Garofalo for services as a director. In January and April 2018, the Company issued 5,814 and 44,186 shares, respectively, of the Company’s
common stock to Mr. Garofalo, pursuant to the Company’s 2013 Equity Incentive Plan, in connection with his service as a director, with such shares to vest in four equal,
successive quarterly installments. Such shares were valued at $10,000 or $1.72 per share and $54,066 or $1.22 per share, respectively.
(4) The fees shown were paid to Mr. Summers for services as a director, including $42,750 for his additional services as a director in his capacity as the Chairman of the Special
Projects Committee. In January and April 2018, the Company issued 5,814 and 44,186 shares, respectively, of the Company’s common stock to Mr. Summers, pursuant to
the Company’s 2013 Equity Incentive Plan, in connection with his appointment and service as a director, with such shares to vest in four equal, successive quarterly
installments. Such shares were valued at $10,000 or $1.72 per share and $54,066 or $1.22 per share, respectively
(5) This column represents the aggregate grant date fair value of stock awards computed in accordance with FASB ASC Topic 718. These amounts do not correspond to the
actual value that will be recognized by the named directors from these awards.
49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial ownership of our common stock as of March 27, 2019 (a) by each person known by us to own
beneficially 5% or more of any class of our common stock, (b) by our named executive officers and each of our directors (and director nominees) and (c) by all executive
officers and directors of the Company as a group.
The number of shares beneficially owned by each stockholder is determined in accordance with SEC rules. Under these rules, beneficial ownership includes any shares
as to which a person has sole or shared voting power or investment power. Percentage ownership is based on 10,536,090 shares of our common stock outstanding on March 27,
2019. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to stock options,
warrants or other rights held by such person that are currently convertible or exercisable or will become convertible or exercisable within 60 days of March 27, 2019 are
considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person.
Unless otherwise stated, the address of each 5% or greater beneficial holder is c/o Sigma Labs, Inc., 3900 Paseo del Sol, Santa Fe, New Mexico 87507. We believe,
based on information provided to us, that each of the stockholders listed below has sole voting and investment power with respect to the shares beneficially owned by the
stockholder unless noted otherwise, subject to community property laws where applicable.
Name and Address of Beneficial Owner
Named Executive Officers and Directors
John Rice(1)
Ronald Fisher(2)
Darren Beckett(3)
Salvatore Battinelli(4)
Dennis Duitch(4)
Frank J. Garofalo(4)
Kent J. Summers(4)
Mark J. Cola(5)
All executive officers and directors as a group persons)(6)
5% or Greater Stockholders
Carl I. Schwartz(7)
*Less than 1%.
Number of Shares
Beneficially Owned
Percentage of Shares
Beneficially Owned
305,646
27,261*
750*
108,213
107,489
110,000
100,000
232,720
997,644
2.90%
1.03%
1.02%
1.04%
0.95%
2.21%
9.4%
1,500,000
14.24%
(1)
(2)
(3)
(4)
(5)
(6)
Includes 300,414 shares that may be acquired now or within 60 days of March 27, 2019 upon the exercise of outstanding stock options
Includes 26,761 shares that may be acquired now or within 60 days of March 27, 2019 upon the exercise of outstanding stock options.
Includes 750 shares that may be acquired now or within 60 days of March 27, 2019 upon the exercise of outstanding stock options
Includes (i) 5,814 shares that vest in four equal (as closely as possible) installments, beginning on April 18, 2018., and (ii) 44,186 shares that vest in four equal (as closely as
possible) installments, beginning on April 19, 2018.
Includes 232,720 shares that may be acquired now or within 60 days of March 27, 2019 upon the exercise of outstanding stock options.
Includes 566,210 shares that may be acquired now or within 60 days of March 27, 2019 upon the exercise of outstanding stock options.
(7) According to a report on Schedule 13G filed with the SEC on February 13, 2019, Carl I Schwartz has sole voting and dispositive power over the shares shown. The address
of Carl I. Schwartz is 3750 Las Vegas Blvd. South, Apartment 4303, Las Vegas, Nevada, 89518.
50
Equity Compensation Plan Information
The following table provides certain information with respect to our equity compensation plans as of December 31, 2018.
Plan Category
2011 Equity Incentive Plan(1)
2013 Equity Incentive Plan(2)
Equity compensation plans not approved by security holders
(a)
(b)
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
0
3,901,867
-
$
0
3.50
N/A
750
508,135
-
(1) On March 9, 2011, the Company’s board of directors approved the Company’s 2011 Equity Incentive Plan, which was approved on March 31, 2011 by holders of at least a
majority of the issued and outstanding shares of common stock of the Company. As of December 31, 2018, the Company issued an aggregate of 154,250 shares of the
Company’s common stock pursuant to the Company’s 2011 Equity Incentive Plan.
(2) On March 15, 2013, the Company’s board of directors approved the Company’s 2013 Equity Incentive Plan. The 2013 Equity Incentive Plan was approved by holders of at
least a majority of the issued and outstanding shares of common stock of the Company on October 10, 2013. Pursuant to the 2013 Equity Incentive Plan, the Company is
authorized to grant “incentive stock options” and “non-qualified stock options”, grant or sell common stock subject to restrictions or without restrictions, and grant stock
appreciation rights to employees, officers, directors, consultants and advisers of the Company and its subsidiaries. Incentive stock options granted under the 2013 Equity
Incentive Plan are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code (the “Code”). Non-qualified stock options
granted under the 2013 Equity Incentive Plan are not intended to qualify as incentive stock options under the Code. As of December 31, 2018, the Company issued an
aggregate of 315,598 shares of the Company’s common stock, as well as options to purchase up to 826,267 shares of the Company’s common stock, some of which are subject
to vesting restrictions, pursuant to the Company’s 2013 Equity Incentive Plan. On October 18, 2018, an amendment to our 2013 Equity Incentive Plan was approved by holders
of at least a majority of the issued and outstanding shares of common stock of the Company, to increase the number of shares of our common stock subject to the 2013 Equity
Incentive Plan to 1,650,000.
Other Equity Compensation
We have entered into various engagement and placement agent agreements with Dawson James Securities, Inc. (“Dawson”) for which compensation has been paid
with equity securities that have been previously disclosed in our filings with the SEC, including warrants issued in April 2018 to purchase up to 140,0000 shares of common
stock at an exercise price of $1.47 per share and a Unit Purchase Option issued in June 2018 to acquire up to 191,200 Units, at an exercise price of $1.25 per Unit, consisting of
191,200 shares of common stock and warrants to purchase up to 57,360 shares of common stock at an exercise price of $1.08.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following summarizes transactions by us in which any of our directors, director nominees, executive officers or, to our knowledge, beneficial owners of more than
5% of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other
compensation, termination, change in control and other arrangements, which are described under “Executive Compensation” and “Director Compensation” above.
Transactions with Directors and Officers
On August 8, 2017, we engaged Garofalo & Associates, LLC, a limited liability company owned and controlled by Mr. Garofalo, a director of the Company, to
provide services to the Company as corporate development consultant and financial advisor. Under the engagement letter agreement, Garofalo & Associates, LLC, is entitled to
receive in consideration for its services a monthly retainer of $3,000 in cash during the term of the engagement (the engagement may be terminated by both parties upon 30
days’ written notice), and (i) 105,000 shares of common stock of the Company upon the closing of an acquisition by the Company of all or substantially all of the equity or
assets (or a controlling interest therein) (the “Closing”) with respect to a specified entity (the value of such shares would have been $238,350 if such shares would have been
issued on August 8, 2017, based on a closing price per share of $2.27 on such date), and (ii) 75,000 shares of common stock of the Company upon the Closing with respect to at
least one of two other specified entities (the value of such shares would have been $170,250 if such shares would have been issued on August 8, 2017, based on a closing price
per share of $2.27 on such date). As of the date of this Annual Report, there are no agreements with respect to the acquisition by the Company of any third party, and there can
be no assurance that any agreements will be entered into or, if entered into, that any acquisition or other transaction will be consummated.
51
On September 14, 2017, we entered into an employment letter agreement with Nannette Toups, effective September 28, 2017 (the “Effective Date”), pursuant to which
Ms. Toups agreed to serve as our Chief Financial Officer, Treasurer, principal accounting officer, principal financial officer and Secretary on an “at-will” basis. Under the
employment letter agreement, Ms. Toups is entitled to (i) an annual base salary of $110,000 (such base salary is not subject to decrease, but may be increased in the discretion of
the Company’s Compensation Committee of the Board of Directors based on an annual assessment of Ms. Toups’ performance and other factors), (ii) all benefits that we elect
in our sole discretion to provide from time to time to our other executive officers, and (iii) a grant under our 2013 Plan of (1) a five-year stock option to purchase up to 2,500
shares of common stock of the Company, which has an exercise price equal to the closing price of the Company’s common stock on the Effective Date, and vested and became
exercisable in full on the Effective Date, and (2) a five-year stock option to purchase up to 47,500 shares of common stock of the Company, which will have an exercise price
equal to the closing price of the Company’s common stock on the Effective Date, and which will vest and become exercisable as follows: 3,065 shares vested and became
exercisable on the one-year anniversary of the Effective Date, 7,125 shares will vest and become exercisable on the second-year anniversary of the Effective Date, 11,185 shares
will vest and become exercisable on the third-year anniversary of the Effective Date, and 26,125 shares will vest and become exercisable on the fourth-year anniversary of the
Effective Date, provided, in each case, that Ms. Toups’ remains an employee of the Company through such vesting date. The options are on such other terms and provisions as
are contained in the Company’s standard form nonqualified stock option agreement. On December 16, 2018, the Company increased the annual base salary of Ms. Toups to
$135,000, and on January 1, 2019, the Company granted Ms. Toups an option to purchase up to 16,000 shares of common stock under the 2013 Plan, at an exercise price of
$1.50 per share, The option has a term of five years and vests in equal annual installments over four years from the date of grant.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers. These agreements, among other things, require us to indemnify
each director and executive officer to the fullest extent permitted by Nevada law, including indemnification of expenses such as attorneys’ fees, judgments, fines and settlement
amounts incurred by the director or executive officer in any action or proceeding, including any action or proceeding by or in the right of us, arising out of the person’s services
as a director or executive officer.
Policies and Procedures for Related Person Transactions
Our Audit Committee is responsible for reviewing and approving, as appropriate, all transactions with related persons (other than compensation-related matters, which
should be reviewed by our Compensation Committee), in accordance with its Charter and the Nasdaq marketplace rules. In reviewing and approving any such transactions, our
Audit Committee is tasked to consider all relevant facts and circumstances, including, but not limited to, whether the transaction is on terms comparable to those that could be
obtained in an arm’s length transaction and the extent of the related person’s interest in the transaction.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our Audit Committee has approved Haynie & Company (“H&C”) to continue as our independent registered public accounting firm to audit our financial statements
for the fiscal year ending December 31, 2018.
52
During the Company’s two most recent fiscal years, neither we nor anyone acting on our behalf consulted with H&C regarding either (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and neither a written report
nor oral advice was provided to the Company that H&C concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or
financial reporting issue, or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item
304 of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
Fees Paid to the Independent Registered Public Accounting Firm
The following table sets forth fees billed with respect to the years ended December 31, 2018 and 2017:
Audit Fees
Audit Related Fees
Tax Fees
All Other Fees
2018
2017
$
$
85,270 $
14,600
4,000
—
103,870 $
91,173
—
—
—
91,173
In the above table, in accordance with the SEC’s definitions and rules, “audit fees” are fees that Sigma Labs, Inc. paid for professional services for the audit of our
financial statements included in our Form 10-K and for services that are normally provided by the registered public accounting firm in connection with statutory and regulatory
filings or engagements; “audit-related fees” are fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial
statements; and “tax fees” are fees for tax compliance, tax advice and tax planning.
Our Board of Directors established an Audit Committee written charter in February 2017. The Audit Committee’s pre-approval policies and procedures and other
protocols are discussed in its written charter which can be found at www.sigmalabsinc.com under the tab “Investors.”
Auditor Independence
In our fiscal year ended December 31, 2018, there were no professional services provided, other than those listed above, that would require our Audit Committee to
consider their compatibility with maintaining the independence of H&C.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
PART IV
Our financial statements and related notes thereto are listed and included in this Annual Report beginning on page F-1. The following documents are furnished as
exhibits to this Form 10-K. Exhibits marked with an asterisk are filed herewith. The remainder of the exhibits previously have been filed with the SEC and are incorporated
herein by reference.
53
Exhibit
Number Description
1.1
1.2
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
Placement Agency Agreement, dated as of June 22, 2018, between Sigma Labs, Inc. and Dawson James Securities, Inc..(filed as Exhibit 1.1 to the Company’s
Current Report on Form 8-K filed June 26, 2018, and incorporated herein by reference).
Placement Agency Agreement, dated as of March 13, 2019, between Sigma Labs, Inc. and Dawson James Securities, Inc..(filed as Exhibit 1.1 to the Company’s
Current Report on Form 8-K filed March 14, 2019, and incorporated herein by reference).
Amended and Restated Articles of Incorporation of the Company, as amended.**
Certificate of Correction to Amended and Restated Articles of Incorporation, as filed with the Nevada Secretary of State on May 25, 2011 (filed as Exhibit 3.2 to the
Company’s Current Report on Form 8-K filed June 1, 2011, and incorporated herein by reference).
Articles of Merger (filed as Exhibit 3.3 to the Company’s Form 10-K, filed on March 16, 2016, for the fiscal year ended December 31, 2015, and incorporated herein
by reference).
Certificate of Change Pursuant to NRS 78.209 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 21, 2016, and incorporated herein by
reference).
Certificate of Change Pursuant to NRS 78.209 (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed February 21, 2017, and incorporated herein
by reference).
Certificate of Designation of Rights, Preference and Privileges of Series A Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed February 21, 2017, and incorporated herein by reference).
Certificate of Designation of Rights, Preference and Privileges of Series B Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed April 6, 2018, and incorporated herein by reference).
Certificate of Designation of Rights, Preference and Privileges of Series C Convertible Preferred Stock of Sigma Labs, Inc. (filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed June 26, 2018, and incorporated herein by reference).
Amended and Restated Bylaws of the Company, as amended (filed as Exhibit 3.1 to the Company’s Form 10-Q filed November 14, 2017, for the period ended
September 30, 2017, and incorporated herein by reference).
Form of Common Stock Purchase Warrant (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed April 6, 2018, and incorporated herein by
reference).
Form of Placement Agent Warrants (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed April 6, 2018, and incorporated herein by reference).
Form of Common Stock Purchase Warrant.(filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 26, 2018, and incorporated herein by
reference).
Form of Common Stock Purchase Warrant (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed March 14, 2019, and incorporated herein by
reference).
Form of Unit Purchase Option (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed March 14, 2019, and incorporated herein by reference).
Asset Purchase Agreement dated April 17, 2010 between B6 Sigma, Inc. and Technology Management Company, Inc. (filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K/A filed November 12, 2010, and incorporated herein by reference).
2011 Equity Incentive Plan adopted by the Board of Directors as of March 9, 2011 (filed as Exhibit 10.1 to the Company’s Form 10-Q, filed on May 16, 2011, for the
period ended March 31, 2011, and incorporated herein by reference).*
2013 Equity Incentive Plan, as amended, of Sigma Labs, Inc. (the “Plan”) (previously filed by the Company as Annex A to the Company’s Definitive Proxy
Statement on Schedule 14A filed on September 7, 2018, and incorporated herein by reference).*
54
10.4
10.5
10.6
10.7
10.8
10.9
Form of Nonqualified Stock Option Agreement for the 2013 Equity Incentive Plan . * **
Form of Incentive Stock Option Agreement for the 2013 Equity Incentive Plan (filed as Exhibit 4.3 to the Company’s Form S-8 Registration Statement, filed on July
24, 2014, and incorporated herein by reference).*
Form of Restricted Stock Agreement for the 2013 Equity Incentive Plan.* **
Employment Offer Letter Agreement, effective August 10, 2015, between Sigma Labs, Inc. and Ronald Fisher (Filed as Exhibit 10.12 to the Company’s Form 10-K,
filed on March 16, 2016, for the fiscal year ended December 31, 2015, and incorporated herein by reference).*
Form of Indemnification Agreement for directors and officers of Sigma Labs, Inc. (filed as Exhibit 10.12 to the Company’s Registration Statement on Form S-1, filed
on July 28, 2016, and incorporated herein by reference).*
Securities Purchase Agreement, dated as of October 17, 2016, by and among Sigma Labs, Inc. and the investors named therein (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed October 20, 2016, and incorporated herein by reference).
10.10
Form of Secured Convertible Note issued as of October 17, 2016 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed October 20, 2016, and
incorporated herein by reference).
10.11
Security Agreement, dated as of October 17, 2016, by and between Sigma Labs, Inc. and L 1 Capital Global Opportunities Master Fund Ltd, in its capacity as
Collateral Agent (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed October 20, 2016, and incorporated herein by reference).
10.12
Amended and Restated Employment Agreement, dated as of July 24, 2017, between Sigma Labs, Inc. and Mark J. Cola. (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed July 27, 2017 and incorporated herein by reference).*
10.13
Summary of unwritten Employment Agreement between Sigma Labs, Inc. and John Rice entered into on August 8, 2017 (filed as Exhibit 10.2 to the Company’s
Form 10-Q, filed on November 14, 2017, for the period ended September 30, 2017, and incorporated herein by reference).*
10.14
Employment Letter Agreement, effective as of September 28, 2017, between Sigma Labs, Inc. and Nannette Toups (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on September 20, 2017 and incorporated herein by reference).*
10.15
Amendment No. 1, dated September 18, 2017, to Employment Offer Letter Agreement, effective August 10, 2015, between Sigma Labs, Inc. and Ronald Fisher
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 20, 2017 and incorporated herein by reference).*
10.16
Amendment No. 2, dated February 21, 2018, to Employment Offer Letter Agreement between the Company and Ronald Fisher (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on February 27, 2018 and incorporated herein by reference).*
10.17
Form of Amendment of Warrant and Note, entered into as of September 29, 2017, between the Company and the Holders named therein (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on October 5, 2017 and incorporated herein by reference).
10.18
Securities Purchase Agreement, dated as of April 6, 2018, between Sigma Labs, Inc. and the Purchasers thereunder (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on April 6, 2018 and incorporated herein by reference).
10.19
Employment Agreement, effective as of September 25, 2017, between Darren Beckett and Sigma Labs, Inc. (filed as Exhibit 10.1 to the Company’s Form 10-Q, filed
on November 14, 2018, for the period ended September 30, 2018, and incorporated herein by reference).*
55
23.1
31.1
31.2
32.1
Consent of Haynie & Company.**
Certificate of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
Certificate of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
Certificate of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.***
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
* Indicates a management contract or compensatory plan or arrangement.
** Filed herewith.
*** Furnished herewith.
ITEM 16. FORM 10-K SUMMARY.
None
56
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
April 1, 2019
April 1, 2019
SIGMA LABS, INC.
By:
By:
/s/ John Rice
John Rice
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Nannette Toups
Nannette Toups
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signature
/s/ John Rice
John Rice
/s/ Nannette Toups
Nannette Toups
/s/ Salvatore Battinelli
Salvatore Battinelli
/s/ Dennis Duitch
Dennis Duitch
/s/ Frank Garofalo
Frank Garofalo
/s/ Kent Summers
Kent Summers
Title
President and Chief Executive Officer
(Principal Executive Officer) and Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
57
Date
April 1, 2019
April 1, 2019
April 1, 2019
April 1, 2019
April 1, 2019
April 1, 2019
Index to Financial Statements
Financial Statements:
Report of Independent Registered Public Accounting Firm – Haynie & Company
Balance Sheets
Statements of Operations
Statement of Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Sigma Labs, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Sigma Labs, Inc. (the Company) as of December 31, 2018 and 2017, and the related statements of operations,
stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial
statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the
results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in
the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Haynie & Company
Haynie & Company
Salt Lake City, Utah
April 1, 2019
We have served as the Company’s auditor since 2018.
F-2
Sigma Labs, Inc.
Balance Sheets
ASSETS
December 31,
2018
December 31,
2017
$
$
$
Current Assets:
Cash
Accounts Receivable, net
Note Receivable, net
Inventory
Prepaid Assets
Total Current Assets
Other Assets:
Property and Equipment, net
Intangible Assets, net
Investment in Joint Venture
Prepaid Stock Compensation
Total Other Assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable
Note Payable
Deferred Revenue
Accrued Expenses
Total Current Liabilities
Long-Term Liabilities
TOTAL LIABILITIES
Commitments & Contingencies
Stockholders’ Equity
Preferred Stock, $0.001 par; 10,000,000 shares authorized;
None issued and outstanding
Common Stock, $0.001 par; 22,500,000 shares authorized;
8,776,629 and 4,978,929 issued and outstanding, respectively
Additional Paid-In Capital
Accumulated Deficit
Total Stockholders’ Equity
1,279,782 $
38,800
121,913
240,086
67,255
1,747,836
277,944
404,978
500
-
683,422
1,515,674
104,538
788,500
192,705
55,278
2,656,695
411,643
294,396
500
31,576
738,115
2,431,258 $
3,394,810
217,488 $
50,000
51,498
376,833
695,819
-
695,819
-
8,777
21,501,407
(19,774,745)
1,735,439
100,884
100,000
35,680
146,330
382,894
-
382,894
-
4,979
17,192,394
(14,185,457)
3,011,916
3,394,810
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,431,258 $
See accompanying notes to financial statements
F-3
Sigma Labs, Inc.
Statements of Operations
Years Ended
December 31,
2018
December 31,
2017
REVENUES
COST OF REVENUE
GROSS PROFIT
EXPENSES:
Salaries & Benefits
Stock-Based Compensation
Operating R&D Costs
Investor & Public Relations
Legal & Professional Service Fees
Office Expenses
Depreciation & Amortization
Other Operating Expenses
Total Operating Expenses
LOSS FROM OPERATIONS
OTHER INCOME (EXPENSE)
Interest Income
State Incentives
Change in fair value of derivative liabilities
Exchange Rate Gain (Loss)
Interest Expense
Loss on Disposal of Assets
Debt discount amortization
Total Other Income (Expense)
LOSS BEFORE PROVISION FOR INCOME TAXES
Provision for Income Taxes
Net Loss
Preferred Dividends
Net Loss applicable to Common Stockholders
Net Loss per Common Share - Basic and Diluted
Weighted Average Number of Shares Outstanding - Basic and Diluted
$
$
$
$
388,574 $
270,107
118,467
2,056,584
1,145,530
493,410
633,035
564,854
466,657
192,374
134,827
5,687,271
641,049
272,372
368,677
1,509,672
719,796
302,043
554,990
563,300
324,920
196,943
95,990
4,267,654
(5,568,804)
(3,898,977)
35,178
-
-
162
(3,966)
(36,733)
-
(5,359)
40,107
154,568
(186,908)
-
(161,852)
(13,161)
(358,280)
(525,526)
(5,574,163)
(4,424,503)
-
-
(5,574,163) $
(4,424,503)
(15,125)
-
(5,589,288) $
(4,424,503)
(.81) $
6,898,047
(1.00)
4,403,479
See accompanying notes to financial statements
F-4
Sigma Labs, Inc.
Statement of Stockholders’ Equity
For The Years Ended December 31, 2018 and 2017
Balance December 31, 2016
3,133,789
$
3,135
$
10,734,857 $
(9,760,954) $
977,038
Common
Stock
Shares
Common
Stock
Amount
Additional
Paid in
Capital
Accumulated
Deficit
Totals
Shares issued for services – net of forfeitures
Fractional shares issued at reverse stock split
32,684
1,178
32
1
75,546
-
Shares and warrants sold in public offering, net of offering
costs
1,410,000
1,410
5,071,226
141,000
204,278
56,000
-
-
141
204
56
-
-
(141)
408,352
111,944
280,114
510,496
-
-
-
-
-
-
-
-
75,578
1
5,072,636
-
408,556
112,000
280,114
510,496
Shares issued for services – net of forfeitures
200,000
200
256,064
-
256,264
-
4,978,929
$
-
4,979
$
-
17,192,394 $
(4,424,503)
(14,185,457) $
(4,424,503)
3,011,916
Shares and warrants sold in public offering, net of offering
costs
2,040,000
2,040
1,720,360
Convertible preferred shares sold
-
-
1,224,000
1,350,000
177,900
25,000
4,800
-
-
-
1,350
178
25
5
-
-
-
-
-
-
-
-
-
1,722,400
1,224,000
-
192,132
50,000
-
(15,125)
(15,125)
(1,350)
191,954
49,975
(5)
-
868,015
-
868,015
-
(5,574,163)
(5,574,163)
8,776,629
$
8,777
$
21,501,407 $
(19,774,745) $
1,735,439
See accompanying notes to financial statements
F-5
Shares issued from exchange of unit purchase options
Shares issued for note & accrued interest conversion
Shares issued from exercise of warrants
Write-off of derivative liability - note conversions
Stock based compensation
Net loss
Balance December 31, 2017
Shares issued for conversion of preferred
Shares issued from exercise of warrants
Shares issued for note & accrued interest conversion
Shares issued for cashless exchange of warrants
Preferred dividends paid upon conversion
Stock based compensation
Net loss
Balance December 31, 2018
Sigma Labs, Inc. and Subsidiaries
Statements of Cash Flows
OPERATING ACTIVITIES
Net Loss
Adjustments to reconcile Net Loss to Net Cash used in operating activities:
Noncash Expenses:
Depreciation and Amortization
Stock Based Compensation
Loss on Write-off of Asset
Refund on Write-off of Asset
Loss on Change in Derivative Balance
Original Issue Discount Amortization
Debt Discount Amortization
Change in assets and liabilities:
Accounts Receivable
Interest Receivable
Inventory
Prepaid Assets
Accounts Payable
Deferred Revenue
Accrued Expenses
NET CASH USED IN OPERATING ACTIVITIES
INVESTING ACTIVITIES
Purchase of Property and Equipment
Purchase of Intangible Assets
Advance of Funds for Notes Receivable
Payment Received from Notes Receivable
NET CASH (PROVIDED BY) INVESTING ACTIVITIES
FINANCING ACTIVITIES
Gross Proceeds from issuance of Convertible Preferred and Warrants
Gross Proceeds from issuance of Common Stock and Warrants
Less Offering Costs
Payments on Notes Payable
Proceeds from exercise of Warrants
Dividends on Preferred
NET CASH PROVIDED BY FINANCING ACTIVITIES
NET CHANGE IN CASH FOR PERIOD
CASH AT BEGINNING OF PERIOD
CASH AT END OF PERIOD
Supplemental Disclosures:
Noncash investing and financing activities disclosure:
Write-off of Derivative Liability
Conversion of Convertible Debt for Stock
Common Stock Issued for Conversion of Series B&C Preferred
Common Stock Issued for Cashless Exchange of Warrants
Other noncash operating activities disclosure:
Issuance of Common Stock for services
Disclosure of cash paid for:
Interest
Income Taxes
Years Ended
December 31,
2018
December 31,
2017
$
(5,574,163) $
(4,424,503)
192,374
1,145,530
36,733
-
-
-
-
65,738
34,390
(24,844)
(1,652)
116,604
15,818
230,501
(3,762,971)
(79,116)
(149,409)
-
632,197
403,672
1,350,000
2,040,100
(443,700)
-
192,132
(15,125)
3,123,407
(235,892)
1,515,674
1,279,782 $
- $
(50,000) $
1,350
5
256,264 $
12,205 $
- $
196,943
719,796
13,161
15,700
186,908
88,442
358,280
183,698
-
(5,464)
(16,957)
(11,291)
32,365
24,529
(2,638,393)
(69,463)
(70,997)
(788,500)
-
(928,960)
-
5,823,300
(750,664)
(500,000)
112,000
-
4,684,636
1,117,283
398,391
1,515,674
(280,114)
(408,556)
-
-
75,578
89,348
-
$
$
$
$
$
$
See accompanying notes to financial statements
F-6
SIGMA LABS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018
NOTE 1 – Summary of Significant Accounting Policies
Nature of Business –Sigma Labs, Inc., formerly named Framewaves, Inc., a Nevada corporation, was founded by a group of scientists, engineers and businessmen to develop
and commercialize novel and unique manufacturing and materials technologies. Sigma believes that some of these technologies will fundamentally redefine conventional
quality assurance and process control practices by embedding them into the manufacturing processes in real time, enabling process intervention and ultimately leading to closed
loop process control. The Company anticipates that its core technologies will allow its clientele to combine advanced manufacturing quality assurance and process control
protocols with novel materials to achieve breakthrough product potential in many industries including aerospace, defense, oil and gas, bio-medical, and power generation. The
terms the “Company,” “Sigma,” “we,” “us” and “our” refer to Sigma Labs, Inc.
Basis of Presentation – The accompanying financial statements have been prepared by the Company in accordance with Generally Accepted Accounting Principles (“GAAP”)
in the United States of America. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at December 31, 2018 and 2017 and for the periods then ended have been made.
Reclassification – Certain amounts in prior-period financial statements have been reclassified for comparative purposes to conform to presentation in the current-period
financial statements. In addition, $153,013 of issuance costs associated with the February 2017 capital raise have been reclassified from operating costs to additional paid-in-
capital.
Continuing Operations – The Company has sustained losses and had negative cash flows from operating activities since its inception. In 2017 and 2018, management has
reported a change of strategy under which the Company ceased to make sales and installations for research and development applications in order to focus its efforts entirely on
potential customers already manufacturing 3D metal parts and therefore, already in need of quality improvement. As a result of this change there was a significant decrease in
revenues beginning in September 2017 which the Company hopes to replace with orders for serial production following the successful completion of Proof of Concept
installations. The Company has raised significant equity capital as it continues to develop new products with commercial applications that may increase future revenues. On
February 21, 2017, the Company closed an underwritten public offering of equity securities resulting in net proceeds of approximately $5,097,000, after deducting underwriting
discounts and commissions and other offering expenses payable by the Company. The Company was able to fund operations for 2017 with these funds and end the year with a
cash balance of $1,515,674. On March 28, 2018, Sigma received $535,000 in full payment of the Morf 3D note and related accrued interest balance. In addition, on April 6,
2018, the Company closed a private placement offering of equity securities resulting in net proceeds of approximately $877,500, after deducting commissions and other offering
expenses payable by the Company. On June 26, 2018 the Company closed a public offering of equity securities including the sales of Series C Preferred Stock resulting in net
proceeds of approximately $2,068,900, after deducting placement agent commissions and other offering expenses payable by the Company. On March 15, 2019, the Company
closed a public offering of equity securities resulting in net proceeds of approximately $1,679,230, after deducting placement agent commissions and other offering expenses
payable by the Company.
As a result, the Company currently has sufficient cash and working capital to fund operations through the end of the third quarter of 2019 and is anticipating that Phase II proof
of concept contracts may be closed in the second and third quarter of fiscal 2019 generating additional cash flow in the near term. In addition, the Company has access to public
and private markets from which to derive additional financing to sustain operations beyond that term, if required.
Loss Per Share – The computation of loss per share is based on the weighted average number of shares outstanding during the period in accordance with ASC Topic No. 260,
“Earnings Per Share.” Shares underlying the Company’s outstanding warrants, options or note conversion features were excluded due to the anti-dilutive effect they would
have on the computation. At December 31, 2018 the Company had 3,050,600 warrants, 826,267 stock options and a $50,000 Convertible Note Payable outstanding. The total
number of shares of common stock underlying these instruments is 3,901,867. At December 31, 2017 the Company had 1,434,000 warrants, 299,938 stock options and a
$100,000 Convertible Note Payable outstanding. The total number of shares of common stock underlying these instruments is 1,783,938.
Property and Equipment – Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment
are capitalized upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. The estimated life has been determined to be five years unless a unique circumstance exists, which is then fully
documented as an exception to the policy.
F-7
In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis. This review in 2017 indicated that the actual useful life of
the leasehold improvements the Company made to the leased facilities at 3900 Paseo del Sol, Santa Fe, New Mexico in 2014, is less than the fifteen-year estimated useful life
that was being used for depreciation purposes in the Company’s financial statements. As a result, effective January 1, 2017, the Company changed the estimated useful life of
these improvements to seven years. The effect of this change in estimate was to increase 2017 depreciation expense by $12,291.
Fair Value of Financial Instruments - The Company applies ASC 820, “Fair Value Measurements.” This guidance defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
●
●
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial instrument.
●
Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.
The carrying amounts reported in the balance sheets for the cash and cash equivalents, prepaid stock compensation, receivables, accounts payable, and accrued liabilities each
qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected
realization and their current market rate of interest.
Although the Company had no other financial instruments requiring fair value disclosures, during 2017, the company wrote off a $93,206 fair value amount of a derivative
liability balance from December 31, 2016. The derivative liability was the result of the original $1 million of Notes, and the 80,000 warrants, that were issued in October 2016,
both of which contain anti-dilution provisions in the event the Company engages in specified transactions which occurred in February 2017. As a result, the instruments no
longer required derivative treatment and were written off in February 2017. The following table presents a reconciliation of the derivative liability measured at fair value on a
recurring basis using significant unobservable input (Level 3):
Balance December 31, 2016
Change in fair value
Write-off of derivative
Balance December 31, 2017
$
$
Notes & Warrants
93,206
186,908
(280,114)
-
During 2018 there were no instruments measured at fair value on a recurring basis.
Income Taxes – The Company accounts for income taxes in accordance with ASC Topic No. 740, “Accounting for Income Taxes.”
The Company has no tax positions at December 31, 2018 and 2017 for which the ultimate deductibility is highly uncertain but for which there is uncertainty about the timing of
such deductibility.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the years ended December 31,
2018 and 2017, the Company recognized no interest and penalties. All tax years starting with 2015 are open for examination.
Accounts Receivable and Allowance for Doubtful Accounts - Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts.
We determine the allowance for doubtful accounts by identifying potential troubled accounts and by using historical experience and future expectations applied to an aging of
accounts. Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded as income when
received. There was no allowance for doubtful accounts at December 31, 2018 or 2017.
F-8
Long-Lived and Intangible Assets – Long-lived assets and certain identifiable definite life intangibles to be held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company continuously evaluates the recoverability of
its long-lived assets based on estimated future cash flows and the estimated liquidation value of such long-lived assets, and provides for impairment if such undiscounted cash
flows are insufficient to recover the carrying amount of the long-lived assets. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is
recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external
appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value. No impairment was recorded in the year ended
December 31, 2017. $50,255 of dental patents were written off in January of 2018.
Cash Equivalents - The Company considers all highly liquid investments with an original maturity of three months or less at date of purchase to be cash equivalents.
Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Stock Based Compensation – The Company recognizes compensation costs to employees under ASC Topic No. 718, “Compensation – Stock Compensation.” Under ASC
Topic No. 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs
in the financial statements over the period during which employees are required to provide services. Share based compensation arrangements may include stock options, grants
of shares of common stock with and without restrictions, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost
is measured on the date of grant at its fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option or stock grants.
Equity instruments issued to non-employees are recorded on the basis of the fair value of the instruments, as required by ASC Topic No. 505, “Equity Based Payments to Non-
Employees.” In general, the measurement date is either (a) when a performance commitment, as defined, is reached or (b) the earlier of the date that (i) the non-employee
performance requirement is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and
circumstances of each particular grant as defined in the FASB Accounting Standards Codification.
Amortization - Utility patents are amortized over a 17 year period. Patents which are pending are not amortized.
Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make
estimates and assumptions that affect certain reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated by management. Significant accounting
estimates that may materially change in the near future are impairment of long-lived assets, values of stock compensation awards and stock equivalents granted as offering costs,
and allowance for bad debts and inventory obsolescence.
Revenue Recognition – The Company’s revenue is derived primarily from sales of our software and related hardware suite and from providing engineering services under
contracts. The Company recognizes revenue in accordance with ASC Topic No. 606. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that superseded nearly all
existing revenue recognition guidance under prior U.S. GAAP and replace it with a principles-based approach for determining revenue recognition. The core principle of the
standard is the recognition of revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to
be entitled in exchange for those goods or services.
We adopted this new revenue recognition standard along with is related amendments on January 1, 2018 and have updated our accounting policy for revenue recognition. As
expected, at our current level of revenue, the adoption of this new standard did not impact our financial position or results of operations operating cash flows.
In general, we determine revenue recognition by: (1) identifying the contract, or contracts, with our customer; (2) identifying the performance obligations in the contract; (3)
determining the transaction price; (4) allocating the transaction price to performance obligations in the contract; and (5) recognizing revenue when, or as, we satisfy performance
obligations by transferring the promised goods or services.
F-9
Deferred Stock Offering Costs – Costs related to stock offerings (if any) are deferred and will be offset against the proceeds of the offering in additional paid-in capital. In the
event a stock offering is unsuccessful, the costs relating to the offering will be written-off directly to expense.
Inventory – Inventories consisting of raw materials used in the production of customized parts totaled $240,086 and $192,705, as of December 31, 2018 and 2017,
respectively, and nominal work-in-process components which will be sold to customers. Inventories are valued at the lower of cost or market, using the first-in, first-out (FIFO)
method.
Research and Development – Research and development costs are expensed as they are incurred. Research and development costs for the years ended December 31, 2018 and
2017 were $493,410 and $302,043, respectively.
NOTE 2 - Notes Receivable
On May 1, 2017, the Company made a loan in the principal amount of $250,000 to Jaguar Precision Machine, LLC, a New Mexico limited liability company, pursuant to a
Secured Convertible Promissory Note dated May 1, 2017 delivered by Jaguar to the Company. The loan bore interest at the rate of 7% per annum, was due and payable in full
on May 1, 2018, was secured by certain assets of Jaguar, and is convertible at the Company’s option into 10% of the outstanding shares of the common stock of Jaguar unless
Jaguar exercises its right under specified circumstances to repay all principal and accrued interest on the loan. The purpose of the loan was to provide working capital to Jaguar
to, among other things, start up a metallurgical laboratory and become ASM9100 certified for contracts related to AM of high-precision aerospace and defense components, in
furtherance of our strategic alliance. Sigma received from Jaguar priority for use of certain machines and services of Jaguar. On April 27, 2018, the promissory note was
amended whereby the due date of the note was extended to June 1, 2018 in exchange for a cash payment of $5,000 received on May 1, 2018, 50% of which will be retained as
payment for the 30-day extension. On June 6, 2018 the promissory note was amended whereby the due date was extended to August 1, 2018 in exchange for cash payments of
$10,000 by each of June 7, 2018 and July 1, 2018, $8,000 of which is to be retained as payment for the 60-day extension. The first of the $10,000 payments was received by the
Company on June 6, 2018. On June 15, 2018, the Company received a $150,000 payment from Jaguar, $17,803 of which was applied to accumulated interest through that date
and $132,197, the balance, of which, was applied to the principal balance of the note. The holder of the promissory note has committed to paying the remaining principal
balance along with accumulated interest on or before April 15, 2019. The December 31, 2018 principal balance of the note was $117,803 and the accumulated interest balance
due was $4,110.
On March 27, 2017, the Company made a loan in the principal amount of $500,000 bearing interest at the rate of 7% per annum to Morf3D, Inc., an Illinois corporation,
pursuant to a Secured Convertible Promissory Note dated March 27, 2017 delivered by Morf3D to the Company. The $500,000 loan principal and $35,000 of accumulated
interest was paid in full on March 17, 2018.
NOTE 3 - Inventory
At December 31, 2018 and December 31, 2017, the Company’s inventory was comprised of:
Raw Materials
Work in Process
Finished Goods
Total Inventory
December 31
2018
December 31,
2017
$
$
168,623 $
46,688
24,775
240,086 $
127,076
251
65,378
192,705
F-10
NOTE 4 – Property and Equipment
The following is a summary of property and equipment, purchased, used and depreciated over a five year period, less accumulated depreciation, as of December 31, 2018 and
2017:
Property and Equipment
Less: Accumulated Depreciation
Net Property and Equipment
Year Ended December 31,
2018
2017
$
$
1,074,888 $
(796,944)
277,944 $
1,027,966
(616,322)
411,643
Depreciation expense on property and equipment was $190,280 and $193,892 for the years ended December 31, 2018 and 2017, respectively.
NOTE 5 – Intangible Assets
The Company’s intangible assets consist of Patents and Patent Pending Applications.
Provisional patent applications are not amortized until a patent has been granted. Once a patent is granted, the Company will amortize the related costs over the estimated useful
life of the patent. If a patent application is denied, then the costs will be expensed at that time.
During 2018, the Company wrote off $37,649 of issued patent cost and $13,522 of related accumulated amortization along with $12,606 of provisional patent application cost
as a result of the Company’s decision to abandon one patent and three pending patent applications that were specific to medical implants. In addition, $25,021 of cost related to
the patent issued to us on June 19, 2018 was reclassified from provisional patent application to patent status and began to be amortized as of the date of issue.
The following is a summary of definite-life intangible assets less accumulated amortization as of December 31, 2018 and 2017, respectively:
Year Ended December 31,
2018
2017
Provisional Patent Applications
Patents
Less: Accumulated Amortization
Net Intangible Assets
$
$
Amortization expense on intangible assets was $2,094 and $3,051 for the years ended December 31, 2018 and 2017.
The estimated aggregate amortization expense for each of the succeeding years ending December 31 is as follows:
2019
2020
2021
2022
Thereafter
$
$
F-11
254,570
59,701
(19,875)
294,396
366,353 $
47,073
(8,448)
404,978 $
2,769
2,769
2,769
2,769
27,549
38,625
NOTE 6 - Notes Payable
On September 29, 2017, the Company entered into amendments (the “Amendments”) to the October 17, 2016 Secured Convertible Promissory Notes and Warrants to purchase
shares of the Company’s common stock, pursuant to which, among other things set forth in the Amendments, (1) the exercise price of the Warrants was reduced from $4.13 per
share to $2.00 per share, and (2) the conversion price of the Notes was reduced from $4.13 per share to $2.00 per share. Under the Amendments, we paid the Holders an
aggregate amount equal to $500,000 (representing 50% of the outstanding principal balance of the Notes) plus all accrued interest on the Notes. In consideration of the
foregoing, the Holders agreed to, among other things, extend the payment date of the remaining 50% of the outstanding principal balance of the Notes from October 17, 2017 to
the earlier of May 18, 2018 or the closing of our next underwritten public offering of securities in which we raise gross proceeds of at least $3,000,000 (should we elect to
commence and close such an offering of securities).
In December 2017, the Holders Converted $400,000 of the $500,000 Notes principal and $8,556 of accrued interest on one of the notes into 204,278 shares of common stock
and exercised 56,000 of the warrants @ $2.00 per share for 56,000 additional shares of common stock.
In April 2018, the Company entered into an amendment of the remaining $100,000 Note which extended the payment due date to October 18, 2018, deleted the covenant
providing for acceleration of the payment due date in the event of a public offering closing of at least $3,000,000 and required the Company to pay the balance of accrued and
unpaid interest as of the effective date of the amendment. The Company paid the $8,761 balance of accrued interest to the holder in April 2018.
In May 2018 the Holder Converted $50,000 of the Note principal into 25,000 shares of common stock and executed a cashless exercise of 24,000 of the warrants for an
additional 4,800 shares of common stock.
In October 2018, the Note was amended pursuant to which the due date was extended to April 18, 2019. Under the amendment, Sigma paid the $3,444 total accrued interest
balance as of October 18, 2018 and agreed to make future payment dates of accrued interest on December 31, 2018 and April 18, 2019.
At December 31, 2018 the Company had the remaining $50,000 Convertible Note outstanding plus accrued interest of $1,028. The accrued interest amount was paid to the
holder in January 2019.
F-12
NOTE 7 – Stockholders’ Equity
Common Stock
Effective February 15, 2017, our Articles of Incorporation were amended to provide for a reverse stock split of the outstanding shares of our common stock on a 1-for-2 basis
(the “Reverse Stock Split”), and a corresponding decrease in the number of shares of our common stock that we are authorized to issue (the “Share Decrease”).
The effects of the stock split have been retroactively reflected to all periods presented.
Effective March 5, 2018, the Articles of Incorporation were again amended to increase the authorized number of shares of common stock to 15,000,000.
Effective October 18, 2018, the Articles of Incorporation were again amended to increase the authorized number of shares of common stock to 22,500,000.
In 2018, the Company issued 200,000 shares of common stock to directors valued at $1.28 per share, or $256,264.
In May 2018, we issued an aggregate of 1,000,000 shares of common stock upon conversion of the 1,000 shares of Series B Preferred Stock issued in April 2018 (as described
below under “Preferred Stock”).
In May 2018, the Company issued 29,800 shares of common stock as the result of a conversion of the $50,000 principal balance of Notes Payable and the cashless exercise of
24,000 warrants.
In June 2018, as part of its public offering of equity securities described in Note 1, the Company issued 350 shares of Series C convertible preferred stock, 2,040,000 shares of
common stock, and warrants to purchase a total of 717,000 shares of common stock (including the warrants described under “Preferred Stock” below that were issued on June
26, 2018). Each warrant has an initial price of $1.08 per share. The net proceeds to the Company were approximately $2,068,900 after commissions and other offering expenses.
The Company also issued to Dawson James Securities, Inc., its placement agent in the public offering, a Unit Purchase Option to acquire up to 191,200 Units, at an exercise
price of $1.25 per Unit, consisting of 191,200 shares of common stock and warrants to purchase up to 57,360 shares of common stock at an exercise price of $1.08 as
compensation.
Between August and October 2018, the Company issued 350,000 shares of common stock upon conversion of 350 shares of Series C Preferred Stock issued in June 2018 (as
described below under “Preferred Stock”).
Between October and December 2018, the Company issued 177,900 shares of common stock as the result of the exercise of warrants resulting in cash proceeds of $192,132.
F-13
On February 14, 2017, The NASDAQ Stock Market LLC informed the Company that it had approved the listing of the Company’s common stock on The NASDAQ Capital
Market, effective as of February 15, 2017. The Company’s common stock ceased trading on the OTCQB on February 15, 2017, and on such date the common stock
commenced trading on The NASDAQ Capital Market under the ticker symbol “SGLB”.
In October 2017, pursuant to an advisory agreement with Dawson James Securities, the Company issued to Dawson James a total of 141,000 shares of the Company’s common
stock in exchange for the surrender by Dawson James of its Unit Purchase Option to acquire up to 70,500 Units that was issued by the Company in the 2017 public offering.
In November 2017, the Company issued 56,000 shares of common stock as the result of the exercise of warrants resulting in cash proceeds of $112,000.
In December 2017, the Company issued 204,578 shares of common stock as the result of a conversion of the $400,000 principal balance of Notes Payable and $8,556 of
accrued interest.
In 2017, the Company issued 40,934 shares of common stock to directors at an average value of $2.09 per share, or $85,408. Also in 2017, 7,500 shares previously issued to a
director and 750 shares previously issued to an employee, with a combined carrying value of $9,830, were forfeited.
Deferred Compensation
In previous years and 2018, the Company issued to various employees, directors, and contractors shares of the Company’s common stock, subject to restrictions, pursuant to the
2013 Equity Incentive Plan (the “2013 Plan”). Such shares were valued at the fair value at the date of issue. The fair value was expensed as compensation over the vesting period
and recorded as a reduction of stockholders’ equity. During 2018 and 2017, $277,515 and $209,300, respectively, of the unvested compensation cost related to these issues was
recognized.
As of December 31, 2018 and 2017, the balance of unvested compensation to be recognized was $21,355 and $31,576, respectively, and is recorded as prepaid stock
compensation as of those dates.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, $0.001 par value. No shares of preferred stock were issued and outstanding at December 31, 2018 or
2017.
In April 2018, the Company issued 1,000 shares of the Company’s newly-created non-voting Series B Convertible Preferred Stock, which were convertible into 1,000,000
shares of common stock and warrants to purchase an aggregate of 750,000 shares of the Company’s common stock, for an aggregate purchase price of $1,000,000. The warrants
have an initial exercise price of $1.47 per share, the closing price of the Company’s common stock reported on The NASDAQ Capital Market on April 6, 2018, subject to
adjustment in certain circumstances. The net proceeds to the Company were approximately $877,500 after commissions and other offering expenses. The Company also issued
to Dawson James Securities, Inc., its placement agent in the foregoing private placement, warrants to purchase up to 140,000 shares of common stock, at an exercise price of
$1.47 per share, as compensation.
In June 2018, as part of the public offering described in Note 1, the Company issued 350 shares of the Company’s newly-created non-voting Series C Convertible Preferred
Stock, which were convertible into 350,000 shares of common stock, and warrants to purchase an aggregate of 105,000 shares of the Company’s common stock. The warrants
have an initial exercise price of $1.08 per share, 11% above the closing price of the Company’s common stock reported on The NASDAQ Capital Market on June 26, 2018,
subject to adjustment in certain circumstances.
F-14
Stock Options
In October 2017, at the Annual Meeting of Stockholders of the Company, the Company’s stockholders approved an amendment to the 2013 Plan to increase the number of
shares of the Company’s common stock reserved for issuance under the 2013 Plan by 375,000 shares of our common stock to a total of 750,000 shares. As of December 31,
2017, an aggregate of 750 shares and 450,062 shares of common stock were reserved for issuance under the 2011 Plan and the 2013 Plan, respectively.
In October 2018, at the Annual Meeting of Stockholders of the Company, the Company’s stockholders approved an amendment to the 2013 Plan to increase the number of
shares of the Company’s common stock reserved for issuance under the 2013 Plan by 900,000 shares of our common stock to a total of 1,650,000 shares. As of December 31,
2018, an aggregate of 750 shares and 508,885 shares of common stock were reserved for issuance under the 2011 Plan and the 2013 Plan, respectively.
During 2018, the Company granted a total of 534,329 options to 18 employees and 1 consultant with vesting periods ranging from immediately/upon issue to 4 years beginning
February 2018. In 2018, 415,492 options vested and $868,015 of compensation cost was recognized during the year. As of December 31, 2018, there were options to purchase
826,267 shares issued and outstanding under the 2013 Plan. Of this amount, there are vested options exercisable for 500,980 shares of common stock. No options were
exercised during the year ended December 31, 2018.
During 2017, the Company granted a total of 213,750 options to 5 employees with vesting periods ranging from 18 months to 4 years beginning May 2017. In 2017, 82,676
options vested, and $510,496 of compensation cost was recognized during the year. As of December 31, 2017, there were options to purchase 299,938 shares issued and
outstanding under the 2013 Plan. Of this amount, there are vested options exercisable for 85,614 shares of common stock. As of December 31, 2017, the Company had 200,419
shares reserved for future grant under its plans and there were no options exercised during the year ended December 31, 2017.
The Company generally grants stock options to employees and directors at exercise prices equal to the fair market value of the Company’s stock on the dates of grant. Stock
options are typically granted throughout the year and generally vest over four years of service and expire ten years from the date of the award, unless otherwise specified. The
Company recognizes compensation expense for the fair value of the stock options over the requisite service period for each stock option award.
Total share-based compensation expense included in the consolidated statements of operations for the years ended December 31, 2018 and 2017 is $1,145,530, of which
$868,015 is related to stock options, and $719,796, of which $510,496 is related to stock options, respectively. There was no capitalized share-based compensation cost as of
December 31, 2018 and 2017, and there were no recognized tax benefits during the years ended December 31, 2018 and 2017.
To estimate the value of an award, the Company uses the Black-Scholes option-pricing model. This model requires inputs such as expected life, expected volatility and risk-free
interest rate. The forfeiture rate also impacts the amount of aggregate compensation. These inputs are subjective and generally require significant analysis and judgment to
develop. While estimates of expected life, volatility and forfeiture rate are derived primarily from the Company’s historical data, the risk-free rate is based on the yield available
on U.S. Treasury constant maturity rates with similar terms to the expected term of the stock option awards. The fair value of share-based awards was estimated using the Black-
Scholes model with the following weighted-average assumptions for the years ended December 31, 2018 and 2017:
F-15
Assumptions:
Dividend yield
Risk-free interest rate
Expected volatility
Expected life (in years)
Option activity for the year ended December 31, 2018 and 2017 was as follows:
2018
0.00
2.68-3.10%
104.9-137.3%
5-10
2017
0.00
1.91-2.45%
115.9-139%
5-10
Options outstanding at December 31, 2016
Granted
Exercised
Forfeited or cancelled
Options outstanding at December 31, 2017
Granted
Exercised
Forfeited or cancelled
Options outstanding at December 31, 2018
Options expected to vest in the future as of December 31, 2018
Options exercisable at December 31, 2018
Options vested, exercisable, and options expected to vest at
December 31, 2018
Weighted Average
Exercise
Price
($)
Options
Weighted
Average
Remaining
Contractual
Life (Yrs.)
Aggregate
Intrinsic
Value ($)
101,188
213,750
-
(15,000)
299,938
534,329
-
(8,000)
826,267
325,287
500,980
826,267
8.39
2.95
-
5.43
4.57
1.45
-
4.59
2.49
2.54
2.42
2.49
9.29
7.72
-
-
7.33
6.58
-
-
6.47
6.84
6.23
6.47
-
16,600
-
-
16,600
-
-
-
60,090
28,332
31,758
60,090
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock for those awards that
have an exercise price currently below the $1.50 closing price of our Common Stock on December 31, 2018. Sixteen of the 2018 option grants have an exercise price currently
below $1.50.
At December 31, 2018, there was $312,655 of unrecognized share-based compensation expense related to unvested share options with a weighted average remaining
recognition period of 6.47 years.
Warrants
At December 31, 2018, the Company had outstanding warrants to purchase a total of 3,050,600 shares of common stock; 1,621,500 warrants at an exercise price of $4.00 per
share, which if not exercised, will expire on February 21, 2022, 890,000 warrants at an exercise price of $1.47 per share, which if not exercised, will expire on October 07,
2023, and 539,100 warrants at an exercise price of $1.08 per share, which if not exercised, will expire on June 26, 2023.
Warrant activity for the year ended December 31, 2018 and 2017 was as follows:
Warrants outstanding at December 31, 2016
Granted
Exercised
Forfeited or cancelled
Options outstanding at December 31, 2017
Granted
Exercised
Forfeited or cancelled
Options outstanding at December 31, 2018
Weighted Average
Exercise
Price
($)
Warrants
Weighted
Average
Remaining
Contractual
Life (Yrs.)
80,000
1,621,500
(56,000)
-
1,645,500
1,607,000
(201,900)
-
3,050,600
2.00
4.00
2.00
-
3.97
1.30
1.19
-
2.75
2.79
4.15
-
-
4.11
4.64
-
-
3.86
On May 31, 2018, 24,000 warrants with an exercise price of $2.00 were exercised in a cashless exchange transaction resulting in the issuance of 4,800 shares of the Company’s
common stock.
F-16
Between October 18, 2018 and December 17, 2018, 177,900 warrants with an exercise price of $1.08 were exercised resulting in the issuance of 177,900 shares of common
stock.
NOTE 8 – Income Taxes
The Company accounts for income taxes in accordance with ASC Topic No. 740. This standard requires the Company to provide a net deferred tax asset or liability equal to the
expected future tax benefit or expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carryforwards.
Income tax returns open for examination by the Internal Revenue Service consist of tax years ended December 31, 2015 through 2017.
The Company has available at December 31, 2018, unused operating loss carryforwards of approximately $10,027,000, which may be applied against future taxable income
and which expire in various years through 2038. However, if certain substantial changes in the Company’s ownership should occur, there could be an annual limitation on the
amount of net operating loss carryforward which can be utilized. The amount of and ultimate realization of the benefits from the operating loss carryforwards for income tax
purposes is dependent, in part, upon the tax laws in effect, the future earnings of the Company and other future events, the effects of which cannot be determined. Because of the
uncertainty surrounding the realization of the loss carryforwards, the Company has established a valuation allowance equal to the tax effect of the loss carryforwards and other
temporary differences of approximately $2,123,700 and $2,929,900 at December 31, 2018 and 2017, respectively, and, therefore, no deferred tax asset has been recognized for
the loss carryforwards.
Deferred tax assets are comprised of the following:
Deferred tax assets:
NOL carryover
Depreciation
Valuation allowance
Net deferred tax asset
2018
2017
$
$
2,105,600 $
18,100
(2,123,700)
- $
2,929,900
-
(2,929,900)
-
The reconciliation of the provision for income taxes computed at the U.S. federal statutory tax rate (21%) to the Company’s effective tax rate for the period ended December 31,
2018 and 2017 is as follows:
Book Loss
Depreciation
Meals & Entertainment
Stock Compensation
Loss on Asset Disposal
Change in valuation allowance
Provision for Income Taxes
$
$
2018
2017
(1,170,600) $
13,400
2,600
242,730
7,714
904,156
- $
(1,556,355)
-
3,200
-
1,553,200
-
F-17
NOTE 9 – Loss Per Share
The following data show the amounts used in computing loss per share and the effect on income and the weighted average number of shares of dilutive potential common stock
for the periods ended December 31, 2018 and 2017:
Loss from continuing
Operations available to
Common stockholders (numerator)
Weighted average number of
common shares Outstanding
used in loss per share during
the Period (denominator)
Year Ended December 31
2018
2017
$
(5,574,163) $
(4,424,503)
6,898,047
4,403,479
Dilutive loss per share was not presented as the Company’s outstanding warrants, stock options and note conversion features common equivalent shares for the periods
presented would have had an anti-dilutive effect. At December 31, 2018, the Company had outstanding 3,050,600 warrants which could be converted to 3,050,600 shares of
common stock, a $50,000 note payable convertible into 25,000 shares of common stock, and 826,267 stock options exercisable for 826,267 shares of common stock resulting
in a potential total additional 3,901,867 common stock shares outstanding in the future. At December 31, 2017 the Company had outstanding 1,434,000 warrants which could
be converted to 1,434,000 shares of common stock, a $100,000 note payable convertible into 50,000 shares of common stock, and 299,938 stock options exercisable for
299,938 shares of common stock resulting in a potential total additional 1,783,938 common stock shares outstanding in the future.
NOTE 9 – Commitments and Contingencies
Operating Leases – The Company leases office and laboratory space under operating leases. Expense relating to these operating leases was $70,187 and $59,700 for the years
ended December 31, 2018 and 2017, respectively. The future minimum lease payments required under non-cancellable operating leases at December 31, 2018 was $42,630. The
future minimum lease payments are due during the year 2019.
NOTE 10 – Concentrations
Revenues – During the years ended December 31, 2018 and 2017, the Company had the following significant customers who accounted for more than 10% each of the
Company’s revenue in at least one of the periods presented. The change in the composition of customers between the two years resulted primarily from the change of focus
from sales to R&D customers to Proof of Concept sales to customers preparing to initiate commercial production.
Customer
A
B
C
D
E
F
G
2018
2017
23.34%
12.87%
12.62%
12.18%
0.94%
0.21%
-
0.77%
-
-
28.75%
19.83%
14.23%
12.85%
Accounts Receivable – The Company had the following significant customers who accounted for more than 10% each of the Company’s accounts receivable balance at
December 31, 2018 and 2017, respectively.
Customer
2018
2017
A
B
C
D
E
F
F-18
64.43%
17.01%
12.11%
-
-
-
-
-
-
44.34%
23.21%
21.33%
NOTE 11 - Joint Venture
In July 2015, we entered into a joint venture agreement with Arete Innovative Solutions LLC (“Arete”). The Joint Venture was not consolidated, but rather was accounted for on
the equity method of recording investments. There were no operating activities during the fiscal 2017 and net operations resulted in a loss on the investment of $105 in fiscal
2016. The Company and Arete agreed in 2017 to terminate the Joint Venture and are in the process of paying final costs. The remaining cash asset of the company will be
distributed to the former partners in 2019.
Note 12 - Defined Contribution Plan
In 2014, the Company adopted a qualified 401(K) plan (“the Plan”), in which all employees over the age of 21 may participate. The Company has elected to match 100% of
each participant’s contribution up to 3% of salary, and 50% of the next 2% of salary contributed. The Company may also elect, on an annual basis, to make a discretionary
contribution to the plan. Company matches and discretionary contributions vest to participant accounts as follows: 20% after two years of service, and 20% per year thereafter
until the participant reaches 6 years of service, at which time, employer contributions vest 100%. The costs of matching contributions were $51,415 in 2018 and $33,725 in
2017.
NOTE 13 – Related Party Transactions
On September 10, 2018 Mr. Cola submitted notice to the Company of his resignation effective October 10, 2018. As a result, Mr. Cola was entitled to receive the severance and
other benefits described under Section 10 of the Employment Agreement. As of October 10, 2018, the Company determined the total cost of the continuation to be $224,818
and recognized that amount as severance expense and a severance obligation. Through December 31, 2018, the Company has paid out $40,862 of the obligation and has a
remaining obligation of $183,956 that is scheduled to be paid out in nineteen semi-monthly installments of $9,367 through October 1, 2019 and a final $5,983 installment on
October 15, 2019. Effective October 10, 2018 the Company entered into a one-year Consulting Agreement with Mr. Cola as an independent contractor to provide non-exclusive
consulting services to the Company on as an-needed basis at the rate of $250 per hour. The agreement provides that as long as the Consulting Agreement remains in effect, the
stock options of the Company held by Mr. Cola shall remain exercisable and continue to vest in accordance with the terms of the Consultants existing stock options agreements
of the Company. Through December 31, 2018, Mr. Cola has $2,678 in payment for services rendered under the Consulting Agreement.
NOTE 14 – Subsequent Events
In January 2019, Sigma issued each of its four non-employee directors 50,000 shares of common stock, under the 2013 Equity Incentive Plan, with such shares to vest ratably
over four quarterly installments, subject in each case to such director’s continuing service as a director.
In January 2019, the Company granted to twelve employees options under the 2013 Equity Incentive Plan options to purchase an aggregate of up to 99,376 shares of common
stock, with each option having an exercise price equal to $1.50 per share, which was the closing market price of the company’s stock on December 31, 2018, (i.e., the trading
day immediately preceding the date of grant) and vesting ratably over four years on each anniversary date of the grant subject in each case to the employee’s continuing
employment with the Company.
In January 2019, the Company granted to our Vice-President of Business Development a fully vested option to purchase up to 11,832 shares of common with an exercise price
of $2.02, which was the closing price of the Company’s stock on the date of grant, in exchange for the cancellation of his accrued and unpaid vacation balance as of December
31, 2018.
Also in January 2019, the Company issued 90,831 shares of common stock upon the cashless exercise of Unit Purchase Options issued in our June 2018 public offering.
In January and February 2019, the Company issued a total of 67,830 shares of common stock upon the exercise of 67,830 warrants having an exercise price of $1.08 resulting
in gross cash proceeds of $73,256.
In the first quarter of 2019, the Company granted our CEO and President three options (the “Options”) to purchase up to 22,916 shares of our common stock under our 2013
Equity Incentive Plan in connection with his employment arrangement. The Options have an exercise price per share equal to $1.50, $1.9262, and $2.04, respectively, and each
is fully vested.
On March 9, 2019, the Company issued to our Vice President of Business Development 1,500 shares of common stock, which vested immediately, in connection with the
satisfaction of a performance milestone.
On March 15, 2019, the Company closed a public offering of equity securities in which it issued 1,400,800 shares of common stock and warrants to purchase a total of 420,240
shares of common stock resulting in net proceeds of approximately $1,679,230, after deducting placement agent commissions and other offering expenses payable by the
Company.
During the first quarter of 2019, the Company received notice of the issuance of two new patents: Patent No. 10207489 “Systems and Methods for Additive Manufacturing
Operations” and Patent No. 10226817, Material Qualification System and Methodology”.
F-19
SIGMA LABS, INC.
FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT
THIS NON-QUALIFIED STOCK OPTION AGREEMENT (this “Agreement”) is made effective as of the ________ day of ___________ (the “Effective Date”) by
and between Sigma Labs, Inc., a Nevada corporation (the “Company”), and _________ (“Optionee”).
R E C I T A L
The action of the Compensation Committee of the Board of Directors of the Company (the “Board”) has authorized the granting to Optionee as an employee of the
Company of a non-qualified stock option, pursuant to the Company’s 2013 Equity Incentive Plan (the “Plan”), to purchase the number of shares of common stock of the
Company specified in Section 1 hereof, at the price specified therein, such option to be for the term and upon the terms and conditions hereinafter stated.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and of the undertakings of the parties hereto contained herein, it is hereby agreed:
1. Number of Shares; Option Price. Pursuant to said action of the Board, the Company hereby grants to Optionee the option (“Option”) to purchase, upon and subject to
the terms and conditions of the Plan, _________ shares of common stock of the Company (“Shares”) at the closing price of the Company’s common stock on the Effective
Date. The grant of the Option is made in consideration of the services to be rendered by the Optionee to the Company and is subject to the terms and conditions of the Plan.
2. Term. The Option shall expire at midnight on the day before the fifth anniversary of the Effective Date (the “Expiration Date”), unless such Option shall have been
terminated prior to that date in accordance with the provisions of this Agreement.
3. Shares Subject to Exercise. The Option shall be exercisable as follows:__________________, provided, however, that a foregoing installment shall not become
exercisable if the Optionee is not employed as an employee of the Company, or any of its subsidiaries, as of such anniversary date. Once exercisable, the Option shall thereafter
remain exercisable as to such Shares for the term specified in Section 2 hereof, unless Optionee’s employment is terminated pursuant to Section 6 hereof or the Option is
terminated pursuant to a Corporate Transaction (as defined in the Plan).
4. Method and Time of Exercise. The Option may be exercised by written notice delivered to the Company at its principal executive office stating the number of shares
with respect to which the Option is being exercised, together with:
(A) a check or money order made payable to the Company in the amount of the exercise price and any withholding tax, as provided under Section 5 hereof; or
(B) if expressly authorized in writing by the Board, in its sole discretion, at the time of the Option exercise, the tender to the Company of shares of the
Company’s common stock owned by Optionee having a fair market value not less than the exercise price, plus the amount of applicable federal, state and local withholding
taxes; or
Optionee’s full recourse promissory note in a form approved by the Company; or
(C) if expressly authorized in writing by the Board, subject to the Sarbanes-Oxley Act of 2002, in its sole discretion, at the time of the Option exercise, the
tender of such consideration having a fair market value not less than the exercise price, plus the amount of applicable federal, state and local withholding taxes.
(D) if any other method such as cashless exercise is expressly authorized in writing by the Board, in its sole discretion, at the time of the Option exercise, the
Only whole shares may be purchased.
5. Tax Withholding. As a condition to exercise of this Option, the Company may require Optionee to pay over to the Company all applicable federal, state and local
taxes which the Company is required to withhold with respect to the exercise of this Option, if any. At the discretion of the Board and upon the request of Optionee, the
minimum statutory withholding tax requirements may be satisfied by the withholding of Shares otherwise issuable to Optionee upon the exercise of this Option.
6. Exercise on Termination of Employment. If for any reason Optionee ceases to be employed by the Company or any of its subsidiaries (such event being called a
“Termination”), this Option (to the extent then exercisable) may be exercised in whole or in part at any time, except with respect to a Termination For Cause, only within 90
days of the date of such Termination, but in no event after the earlier of the Expiration Date or a Corporate Transaction which terminates the Option pursuant to Section 15
hereof. For purposes of this Agreement, Optionee’s employment shall not be deemed to terminate by reason of a transfer to or from the Company or its subsidiary or among
such entities, or sick leave, military leave or other leave of absence approved by the Board, if the period of any such leave does not exceed ninety (90) days or, if longer, if
Optionee’s right to reemployment by the Company or any Affiliate is guaranteed either contractually or by statute. For purposes of this Agreement, “Termination For Cause”
shall mean Optionee’s loss of employment by the Company or any of its subsidiaries due to Optionee’s (a) willful breach or habitual neglect or continued incapacity to perform
Optionee’s required duties, (b) commission of acts of dishonesty, fraud, misrepresentation or other acts of moral turpitude as would prevent the effective performance of
Optionee’s duties or (c) termination for cause under any employment agreement between the Company and Optionee (as defined therein). In the event Optionee’s employment
by the Company or any of its subsidiaries is Terminated For Cause, then the Option shall cease to be exercisable as of the date of such Termination.
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7. Non-Transferability. This Option may not be assigned or transferred except by will or by the laws of descent and distribution, and may be exercised only by
Optionee during the Optionee’s lifetime and after the Optionee’s death, by the Optionee’s personal representative or by the person entitled thereto under the Optionee’s will or
the laws of intestate succession.
8. Optionee Not a Stockholder. Optionee shall have no rights as a stockholder with respect to the Shares covered by this Option until the date of issuance of a stock
certificate or stock certificates to the Optionee upon exercise of this Option. No adjustment will be made for dividends or other rights for which the record date is prior to the
date such stock certificate or certificates are issued.
9. No Right to Employment. Nothing in the Option granted hereby shall interfere with or limit in any way the right of the Company or of any of its subsidiaries to
terminate Optionee’s employment at any time, nor confer upon Optionee any right to continue in the employ of the Company or any of its subsidiaries.
10. Modification and Waiver. This Option may not be modified except by a writing signed by both parties, except that either party may waive any right hereunder by
an instrument unilaterally signed.
11. Restrictions on Sale of Shares. Optionee represents and agrees that upon the Optionee’s exercise of this Option, in whole or in part, unless there is in effect at that
time under the Securities Act of 1933 a registration statement relating to the Shares issued to the Optionee, the Optionee will acquire the Shares issuable upon exercise of this
Option for the purpose of investment and not with a view to their resale or further distribution, and that upon such exercise thereof the Optionee will furnish to the Company a
written statement to such effect, satisfactory to the Company in form and substance. Optionee agrees that any certificates issued upon exercise of this Option may bear a legend
indicating that their transferability is restricted in accordance with applicable state and federal securities law. Any person or persons entitled to exercise this Option under the
provisions of Sections 6 and 7 hereof shall, upon each exercise of this Option under circumstances in which Optionee would be required to furnish such a written statement, also
furnish to the Company a written statement to the same effect, satisfactory to the Company in form and substance.
12. Nevada Law Governs. This Agreement shall be interpreted under the internal laws of the State of Nevada and any action hereunder shall be brought in the state or
federal courts of Nevada.
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13. Notices. All notices to the Company shall be addressed to the Corporate Secretary at the principal executive office of the Company at 3900 Paseo del Sol, Santa Fe,
New Mexico 87507, and all notices to Optionee shall be addressed to Optionee at the address of Optionee on file with the Company, or to such other address as either may
designate to the other in writing. A notice shall be deemed to be duly given if and when enclosed in a properly addressed sealed envelope deposited, postage prepaid, with the
United States Postal Service. In lieu of giving notice by mail as aforesaid, written notices under this Agreement may be given by personal delivery to Optionee or to the
Corporate Secretary (as the case may be).
14. Sale or Other Disposition. If Optionee at any time contemplates the disposition (whether by sale, gift, exchange, or other form of transfer) of any Shares acquired
by exercise of this Option, the Optionee shall first notify the Company in writing of such proposed disposition and cooperate with the Company in complying with all applicable
requirements of law, which, in the judgment of the Company, must be satisfied prior to such disposition.
15. Corporate Transactions. In the event of a Corporate Transaction (as such term is defined in the Plan), the Board shall notify Optionee at least thirty (30) days prior
thereto or as soon as may be practicable. To the extent not previously exercised, this Option shall terminate immediately prior to the consummation of such Corporate
Transaction unless the Board determines otherwise in its sole discretion; provided, however, that the Board, in its sole discretion, may (i) permit exercise of this Option prior to
its termination, even if this Option would not otherwise have been exercisable, and (ii) provide that this Option shall be assumed or an equivalent option substituted by an
applicable successor corporation or any subsidiary of the successor corporation.
16. Non-Compete Agreement. Notwithstanding anything to the contrary provided herein, as a condition to the receipt of Shares pursuant to the exercise of this Option,
at any time during which this Option is outstanding and for six (6) months after any exercise of this Option or the receipt of Shares pursuant to the exercise of this Option,
Optionee shall not directly or indirectly, as agent, employee, consultant, stockholder, partner or in any other capacity, own, operate, manage, control, engage in, invest in or
participate in any manner in, act as a consultant or advisor to, render services for, or otherwise assist any person or entity that engages in or owns, invests in, operates, manages
or controls, any venture or enterprise that directly or indirectly competes with the Company, provided, however, that nothing contained herein shall be construed to prevent
Optionee from investing in the stock of any competing corporation listed on a national securities exchange or traded in the over-the-counter market, but only if Optionee is not
involved in the business of said corporation and if Optionee (together with Optionee’s spouse, parents, siblings, and children) does not own more than an aggregate of five
percent (5%) of the stock of such corporation. Optionee agrees to notify the Company within ten (10) days of any violation of this Section 16. Failure to comply with this
Section 16 shall cause such Option and the exercise or issuance of Shares hereunder to be rescinded and the benefit of such exercise or issuance to be repaid to the Company.
Optionee agrees and understands that Optionee’s failure to comply with this Section 16 will subject Optionee’s benefit from the Option to be forfeited and repaid to the
Company, and Optionee agrees to do so within ten (10) days of notification by the Company.
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17. Adjustments. In the event of any stock split, reverse stock split, stock dividend or other change set forth in Section 6.1.1 of the Plan, the number of Shares covered
by this Option and the exercise price of this Option shall be appropriately adjusted for any such stock split, reverse stock split or stock dividend; provided, that the Company
shall not be required to issue fractional shares as a result of any such adjustment.
18. Right of First Refusal. Notwithstanding anything to the contrary, Optionee acknowledges and agrees that the Shares covered by this option are subject to a right of
first refusal (“Right of First Refusal”) of the Company set forth in Exhibit A of this Agreement. Except in compliance with such Right of First Refusal, Optionee shall not sell or
otherwise transfer any Shares.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date and year first above written.
SIGMA LABS, INC.
By:
Name:
Title:
John Rice
President and Chief Executive Officer
OPTIONEE:
Address:
Social Security Number
5
Exhibit A
Right of First Refusal
must provide the Company with a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (a) (the “Right of First Refusal”).
(a) Right of First Refusal. Before any Shares held by Optionee may be sold or otherwise transferred (collectively, “Transfer” or “Transferred”), Optionee
(i) Notice of Proposed Transfer. Before Optionee may Transfer any Shares, Optionee shall deliver to the Company a notice (the “Notice”) stating
Optionee’s desire to Transfer such Shares and the number of Shares to be Transferred. Optionee shall deliver the Notice to the Company, and such Notice shall be deemed to
have been received by the Company, only as follows: (a) if hand delivered to the Company’s Chief Executive Officer or the Company’s Chief Financial Officer, upon written
confirmation (including by e-mail) of receipt by such officer and the time of delivery of the Notice; or (b) if sent by e-mail in the same e-mail to the Company’s Chief Executive
Officer and Chief Financial Officer, upon written confirmation (including by e-mail) of transmission by at least one such officer.
(ii) Exercise of Right of First Refusal. Subject to the last sentence of this Section (a)(ii), at any time within one day after receipt of the Notice, the
Company may, by giving written notice (“Company Notice”) to Optionee, elect, in its sole discretion, to waive the Right of First Refusal, in full or in part, or elect, in its sole
discretion, to purchase any or all of the Shares proposed to be Transferred, at a price per Share equal to the average of the opening price and the closing price of the Company’s
common stock on the date the Notice is delivered to the Company (the “Purchase Price”). The Company shall deliver the Company Notice to Optionee only by hand delivery
(with written confirmation (including by e-mail) of delivery) or e-mail to Optionee by the Company’s Chief Executive Officer (or the Company’s Chief Financial Officer in the
absence of the Chief Executive Officer). If the Company does not deliver the Company Notice to Optionee by the later of (a) 24 hours after the Notice is delivered to the
Company, or (b) 3:30 pm (Eastern Time) on the day following the date the Notice is delivered to the Company, the Company shall be deemed to have waived the Right of First
Refusal in full as to the applicable Transfer.
(iii) Payment. If the Company exercises its Right of First Refusal as to a particular Transfer, payment by the Company of the Purchase Price shall be
made in cash (by check or wire) for all of the Shares purchased by the Company pursuant to such exercise within two business days following the date the applicable Notice is
delivered to the Company.
(iv) Optionee’s Right to Transfer. If any of the Shares proposed in a Notice to be Transferred are not purchased by the Company as provided in this
Section (a), then, subject to Sections 11 and 14 of the Option Agreement, Optionee may Transfer any unpurchased Shares specified in the Notice, provided, however, that
Optionee agrees and understands that Optionee’s failure to comply with this Section (a) will subject Optionee’s benefit from the Transfer of such Shares to be forfeited and
repaid to the Company, and Optionee agrees to do so within ten days of notification by the Company.
(v) Exception for Certain Family Transfers. Anything to the contrary contained in this Section (a) notwithstanding, subject to Section 14 of the
Option Agreement, the Transfer of any or all of the Shares during Optionee’s lifetime or on Optionee’s death by will or intestacy to Optionee’s Immediate Family or a trust for
the benefit of Optionee’s Immediate Family shall be exempt from the provisions of this Section (a). “Immediate Family” as used herein shall mean lineal descendant or
antecedent, spouse (or spouse’s antecedents), father, mother, brother or sister (or their descendants), stepchild (or their antecedents or descendants), aunt or uncle (or their
antecedents or descendants), brother-in-law or sister-in-law (or their antecedents or descendants) and shall include adoptive relationships. In such case, the transferee or other
recipient shall receive and hold the Shares so transferred subject to the provisions of this Section (a), and there shall be no further transfer of such Shares except in accordance
with the terms of this Section (a).
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BY E-MAIL
________________
Re: Form of Grant of Restricted Stock
Dear _________________:
As you know, I am pleased to inform you that, effective as of __________, upon the terms and subject to the conditions set forth in this letter (this “Letter
Agreement”), Sigma Labs, Inc. (the “Company”) granted you _________ shares of common stock of the Company, based on a stock price of $____ per share (the “Shares”),
under the Company’s 2013 Equity Incentive Plan, as amended (the “Plan”). A copy of the Plan, as in effect on the date hereof, is attached as Exhibit A.
The Shares will “vest” in four successive quarterly installments of _______ Shares each, beginning on __________ which is the first quarterly anniversary of the
__________ grant date, provided, however, that an installment shall not vest if you are not a director of the Company as of the applicable quarterly anniversary date
(collectively, the “Unvested Shares”).
The Company will retain custody of certificates representing the Unvested Shares, accompanied by a stock power in blank executed by you, as provided below, until
the Unvested Shares represented by the certificates vest. Upon your written request at any time, the Company will deliver to you a stock certificate in your name representing the
vested shares. If any of the Unvested Shares have not vested at the time that you are no longer a director of the Company, such Unvested Shares will be deemed automatically
forfeited by you, and you will thereafter have no right or claim to such Unvested Shares.
Upon receipt of the certificate(s) for the Unvested Shares, please deliver such certificate(s), together with an Assignment Separate from Certificate, in substantially the
form of that attached as Exhibit B, executed in blank by you, with respect to each such certificate, to the Secretary of the Company to hold in escrow for so long as such
Unvested Shares remain restricted stock, with the authority to take all such actions and to effectuate all such transfers and/or releases as may be necessary or appropriate to
accomplish the objectives of this Letter Agreement in accordance with its terms. In so doing, you acknowledge that the appointment of the Secretary of the Company as the
escrow holder hereunder with the stated authorities is a material inducement to the Company to make this Letter Agreement and that such appointment is coupled with an
interest and is accordingly irrevocable. Such escrow holder will not be liable to any party to this Letter Agreement (or to any other party) for any actions or omissions unless
such escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be
genuine and may resign at any time.
Under Section 83 of the Internal Revenue Code (the “Code”), restricted stock is taxable to the holder based on its value as and when the forfeiture provisions lapse.
However, you may make an election under Section 83(b) of the Code to be taxed on the value of the Shares at the date of grant (which value shall be determined without regard
to any restrictions set forth in this Letter Agreement or otherwise) at ordinary income rates, subject to payroll tax withholding.
Page 1 of 9
Page 2
If you make a timely Section 83(b) election (i.e., on or before January 30, 2019), you agree to immediately pay the Company the amount necessary to satisfy any
applicable federal, state, and local income and employment tax withholding requirements. A form of election under Section 83(b) of the Code is attached as Exhibit C. If you do
not make a timely Section 83(b) election, you agree to, either at each time that the Share restrictions lapse under this Letter Agreement or at the time withholding is otherwise
required by any applicable law, pay the Company the amount necessary to satisfy any applicable federal, state, and local income and employment tax withholding requirements.
In the event of any stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification, or if the Company effects a spin-off of the
Company’s subsidiary, if any, any new, substituted or additional securities or other property (including money paid) which is by reason of any such transaction distributed to
you with respect to the Shares shall be immediately subject to the restrictions imposed hereunder. Appropriate adjustments to reflect the distribution of such securities or
property shall be made to the number of Shares and the Company may require the establishment of an escrow account for any property or money distributed with respect to the
Shares covered by such restrictions.
Further, notwithstanding any other provision of this Letter Agreement, you agree that no Share is transferable or otherwise subject to disposition or hypothecation as
long as the Share remains forfeitable as provided in this Letter Agreement. Also, you agree that you shall not sell any of the Shares unless such sale is in compliance with the
Company’s Insider Trading Policy.
After you have reviewed the terms of this Letter Agreement, please sign below to indicate your consent and agreement, and return a signed copy to me at your earliest
convenience. Please have your spouse, if any, execute a Consent of Spouse, in substantially the form of that attached as Exhibit D. This Letter Agreement may be executed in
counterparts, all of which together shall constitute but one and the same instrument.
Lastly, notwithstanding anything to the contrary, you acknowledge and agree that the Shares are subject to a right of first refusal (“Right of First Refusal”) of the
Company set forth in Exhibit E of this Letter Agreement. Except in compliance with such Right of First Refusal, you shall not sell or otherwise transfer any Shares.
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Please do not hesitate to contact me if you have any questions regarding this Letter Agreement or the Plan.
Consented and Agreed:
Very Truly Yours,
SIGMA LABS, INC.
By:
John Rice
Chief Executive Officer
3900 Paseo del Sol
Santa Fe, New Mexico 87507
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EXHIBIT A
2013 EQUITY INCENTIVE PLAN
[SEE ATTACHED]
Page 4 of 9
EXHIBIT B
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, I, ________, hereby sell, assign and transfer to Sigma Labs, Inc. (the “Company”) _____________ shares of its Common Stock standing in my
name on the books of such Company, and do hereby irrevocably constitute and appoint the Secretary of the Company with full power and authority to transfer such shares of
Common Stock on the books of the Company with full power of substitution in the premises.
Dated: _________, _______
Signature
This Assignment Separate from Certificate was executed in conjunction with the terms of a restricted stock letter agreement between the above assignor and the
Company, effective as of __________, and shall not be used in any manner except as provided in such letter agreement.
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EXHIBIT C
ELECTION UNDER SECTION 83(b) OF
THE INTERNAL REVENUE CODE
The undersigned hereby makes an election pursuant to Section 83(b) of the Internal Revenue Code with respect to the property described below and supplies the
following information in accordance with the regulations promulgated thereunder:
1. The name, address and social security number of the undersigned:
Name:____________________________
Address: __________________________
_________________________________
Social Security No. __________________
2. Description of property with respect to which the election is being made:
____________ shares of common stock, $0.001 par value per share (the “Shares”), of Sigma Labs, Inc., a Nevada corporation (the “Company”).
3. The date on which the property was transferred is __________.
4. The taxable year to which this election relates is calendar year _________.
5. All __________ of the Shares are subject to the provisions of a Letter Agreement. Such shares are subject to forfeiture under the terms of such Letter Agreement.
6. The fair market value of the property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse):
$_____ per share x ________shares = $__________
7. The amount paid by taxpayer for the property was nothing.
8. The undersigned taxpayer will file this election with the Internal Revenue Service office with which the taxpayer files his or her annual income tax return not later
than 30 days after the date of the transfer of the property. A copy of the election also will be furnished to the Company. Additionally, the undersigned will include a copy of the
election with his or her income tax return for the taxable year in which the property is transferred. The undersigned is the person performing the services in connection with
which the property was transferred.
Dated: _______, ______
Taxpayer’s Name
Taxpayer’s Spouse’s Name
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PROCEDURES FOR MAKING ELECTION
UNDER INTERNAL REVENUE CODE SECTION 83(b)
The following procedures must be followed with respect to the attached form for making an election under Internal Revenue Code section 83(b) in order for the
election to be effective:
A. You must file one copy of the completed election form with the IRS Service Center where you file your federal income tax returns within 30 days after the Date of
Award of your Restricted Stock.
B. At the same time you file the election form with the IRS, you must also give a copy of the election form to the Secretary of the Company.
C. You must file another copy of the election form with your federal income tax return for the taxable year in which the stock is transferred to you. It is suggested
that a copy also be attached to the state income tax return that you file for that year.
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EXHIBIT D
CONSENT OF SPOUSE
The undersigned, being the spouse of the recipient of the Shares who is a signatory to the above Letter Agreement, hereby acknowledges that the undersigned has read
and is familiar with the provisions of such Letter Agreement, and agrees thereto and joins therein to the extent, if any, that the undersigned’s agreement and joinder may be
necessary; and the undersigned hereby further agrees that the recipient of the Shares may join in any future amendments or modifications of such Letter Agreement without any
further signature, acknowledgment, agreement or consent by the undersigned.
Dated: __________, _____
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EXHIBIT E
RIGHT OF FIRST REFUSAL
the Company with a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (a) (the “Right of First Refusal”).
(a) Right of First Refusal. Before any Shares held by you may be sold or otherwise transferred (collectively, “Transfer” or “Transferred”), you must provide
(i) Notice of Proposed Transfer. Before you may Transfer any Shares, you shall deliver to the Company a notice (the “Notice”) stating your desire to
Transfer such Shares and the number of Shares to be Transferred. You shall deliver the Notice to the Company, and such Notice shall be deemed to have been received by the
Company, only as follows: (a) if hand delivered to the Company’s Chief Executive Officer or the Company’s Chief Financial Officer, upon written confirmation (including by
e-mail) of receipt by such officer and the time of delivery of the Notice; or (b) if sent by e-mail in the same e-mail to the Company’s Chief Executive Officer and Chief Financial
Officer, upon written confirmation (including by e-mail) of transmission by at least one such officer.
(ii) Exercise of Right of First Refusal. Subject to the last sentence of this Section (a)(ii), at any time within one day after receipt of the Notice, the
Company may, by giving written notice (“Company Notice”) to you, elect, in its sole discretion, to waive the Right of First Refusal, in full or in part, or elect, in its sole
discretion, to purchase any or all of the Shares proposed to be Transferred, at a price per Share equal to the average of the opening price and the closing price of the Company’s
common stock on the date the Notice is delivered to the Company (the “Purchase Price”). The Company shall deliver the Company Notice to you only by hand delivery (with
written confirmation (including by e-mail) of delivery) or e-mail to you by the Company’s Chief Executive Officer (or the Company’s Chief Financial Officer in the absence of
the Chief Executive Officer). If the Company does not deliver the Company Notice to you by the later of (a) 24 hours after the Notice is delivered to the Company, or (b) 3:30
pm (Eastern Time) on the day following the date the Notice is delivered to the Company, the Company shall be deemed to have waived the Right of First Refusal in full as to
the applicable Transfer.
(iii) Payment. If the Company exercises its Right of First Refusal as to a particular Transfer, payment by the Company of the Purchase Price shall be
made in cash (by check or wire) for all of the Shares purchased by the Company pursuant to such exercise within two business days following the date the applicable Notice is
delivered to the Company.
(iv) Your Right to Transfer. If any of the Shares proposed in a Notice to be Transferred are not purchased by the Company as provided in this
Section (a), then, subject to the terms and restrictions under the Letter Agreement between you and the Company covering the Shares, you may Transfer any unpurchased
Shares specified in the Notice, provided, however, that you agree and understand that your failure to comply with this Section (a) will subject your benefit from the Transfer of
such Shares to be forfeited and repaid to the Company, and you agree to do so within ten days of notification by the Company.
(v) Exception for Certain Family Transfers. Anything to the contrary contained in this Section (a) notwithstanding, subject to the terms and
restrictions under the Letter Agreement between you and the Company covering the Shares, the Transfer of any or all of the Shares during your lifetime or on your death by will
or intestacy to your Immediate Family or a trust for the benefit of your Immediate Family shall be exempt from the provisions of this Section (a). “Immediate Family” as used
herein shall mean lineal descendant or antecedent, spouse (or spouse’s antecedents), father, mother, brother or sister (or their descendants), stepchild (or their antecedents or
descendants), aunt or uncle (or their antecedents or descendants), brother-in-law or sister-in-law (or their antecedents or descendants) and shall include adoptive relationships. In
such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section (a), and there shall be no further transfer of
such Shares except in accordance with the terms of this Section (a).
Page 9 of 9
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-174897, 333-197616, 333-212612, 333-222369, and 333-228628 on forms S-8, Registration
Statement No. 333-225377 on Form S-3, and Registration Statement Nos. 333-224621, 333-218021, and 333-212735 on Form S-1 of Sigma Labs, Inc. of our report dated April
1, 2019, relating to our audits of the financial statements which appear in this Annual Report on Form 10K of Sigma Labs, Inc. for the years ended December 31, 2018 and
2017.
/s/ Haynie & Company
Haynie & Company
Salt Lake City, Utah
April 1, 2019
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, John Rice, certify that:
1. I have reviewed this Annual Report on Form 10-K of Sigma Labs, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: April 1, 2019
By:
Name:
Title:
/s/ John Rice
John Rice
President and Chief Executive Officer
(Principal Executive Officer)
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Nannette Toups, certify that:
1. I have reviewed this Annual Report on Form 10- K of Sigma Labs, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: April 1, 2019
/s/ Nannette Toups
By:
Name: Nannette Toups
Title:
Chief Financial Officer, Treasurer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the accompanying Annual Report of Sigma Labs, Inc., (the “Company”) on Form 10-K for the period ended December 31, 2018 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officers of the Company certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that to their knowledge:
(i) The Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 1, 2019
Date: April 1, 2019
By:
Name:
Title:
/s/ John Rice
John Rice
President and Chief Executive Officer (Principal Executive Officer)
/s/ Nannette Toups
By:
Name: Nannette Toups
Title:
Chief Financial Officer (Principal Financial and Accounting Officer)