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, 2020
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
Trading Symbol(s)
SGLB
SGLBW
Name of each exchange on which registered
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None.
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an 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 [X]
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes [ ] No [X]
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, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $10,385,980. 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 23, 2021 was 8,302,098 after giving effect to the 1-for-10 reverse stock split of the outstanding shares of the registrant’s common
stock effected on February 27, 2020.
Documents incorporated by reference: None
SIGMA LABS, INC.
FORM 10-K — FISCAL YEAR ENDED DECEMBER 31, 2020
INDEX
PART I
PART II
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
PART III
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
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16. FORM 10-K SUMMARY
SIGNATURES
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4
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18
18
18
19
19
22
22
22
22
23
23
31
44
45
46
46
49
50
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, but not limited to, statements regarding our expectations about development and
commercialization of our technology, any projections of revenues or statements regarding our anticipated 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, references to the “Company,” “Sigma,” “Sigma Labs,” “we,” “us”
and “our” refer to Sigma Labs, Inc. On February 27, 2020, we effected a one-for-ten reverse stock split of the outstanding shares of our common stock. All common stock and
per share information (other than par value) contained in this Annual Report on Form 10-K have been adjusted to reflect the foregoing reverse stock split.
3
ITEM 1. BUSINESS.
The Company:
PART I
Sigma is an 11-year-old software company that was founded by scientist-engineers composed of physicists and metallurgists then working at Los Alamos National Labs for the
entrepreneurial purpose of developing sophisticated metallurgical products. Since 2016, the Company’s focus has been on solving the complex and challenging problem of how
to best assure the high quality of metal parts manufactured in laser powder bed additive manufacturing machines. Sigma and many others believe that until this problem was
solved, 3D manufacturing of metal parts would not be scalable enough to grow past prototyping and mature into a major industry enjoying high quality yields and cost-efficient
production runs. The solution that Sigma developed to solve this problem is In-Process-Quality-Assurance (“IPQA®”) software known as PrintRite3D®.
In 2018, the Sigma team enhanced and added user features to its PrintRite3D® technology. In 2019, the Company began to productize and test PrintRite3D® on various 3D
metal printers at customers’ sites through the Company’s Rapid Test and Evaluation (“RTE”) program. Upon receiving favorable responses from the various RTEs, in 2020 the
Company began to aggressively market PrintRite3D®. However, the worldwide COVID-19 pandemic caused a reduction, and in some cases a freeze, in capital spending within
the Company’s targeted industries and had what the Company believes to be a short-term negative impact on the Company’s expected timing of generating meaningful revenue.
Despite the pandemic, the Company moved forward with its plan to market PrintRite3D® to the following industry segments: (1) global manufacturing companies with
Additive Manufacturing (“AM”) initiatives; (2) 3D printer Original Equipment Manufacturers (“OEMs”) for purchases of licenses and generating fees and royalties thereafter;
(3) additive manufacturing software venders for alliances and licenses for co-sales; and (4) research foundations, standards organizations and universities, all in service of
Sigma’s potential for setting the industry standard of measurement by providing data and analytics as a metrics-based quality standard of metal quality for all 3D laser powder
bed manufactured parts, notwithstanding the design, metal, or brand of equipment upon which parts are manufactured.
4
Additive Metal Manufacturing and the role and need for Sigma’s technology:
Additive Manufacturing, or 3D printing, has been among the most heavily explored manufacturing innovations in the history of modern manufacturing. The use of 3D printing
technology dates back to the 1980s for polymer applications, but the ability to print functional parts from metal alloys has spurred significant interest and investment into AM
over recent years. AM is now reshaping the product design process, entire supply chains, and the vast landscape of manufacturing. Engineers are embracing new design
freedoms to realize valuable product performance improvements and cost efficiencies with lighter weight, better thermal management capability, better fluid mixing,
customization, and/or the ability to make different structures and textures that yield better part integration.
Several significant hurdles still prevent the wider adoption of additive technologies. The lack of quality, consistency and standards are most often cited. The Company believes
that the lack of technology such as PrintRite3D®, could be the last sizable barrier to the widespread industrialization of 3D metal printing. Additionally, many believe that the
disruption to complex and rigid supply chains caused by COVID-19 exposed the country’s vulnerability to shortages in times of crisis. It appears that many manufacturers are
devising strategies to be able to be more agile, increase their ability to manufacture mission critical parts on demand, with more customization, and closer to where the end part
will be needed.
We anticipate that the enterprise adoption of the technology will accelerate in 2021, evolving over time as follows:
● Stage 1 – International research & development organizations and universities will establish centers of excellence for Advanced Manufacturing and be a major
resource for enterprises seeking to adopt best practices for AM.
● Stage 2 - Enterprises will start with their own R&D initiatives and select a 3D printer vendor, or vendors, that meets their requirements. During this time, they will
focus on experimenting with different metal powder alloys, part structures, design guidelines, and in-process quality metrics.
● Stage 3 – Once R&D is complete, enterprises will select one part to test and move into production, improving the process from design to production and confirming
the economics and quality of the process.
● Stage 4 – International standards will be established by organizations such as NIST, ISO, ATSM, etc., ensuring the consistency of components and processes. These
standards will become increasingly important as the industry moves to full industrialization.
● Stage 5 – As the adoption of AM accelerates, enterprises will utilize multiple 3D printers from multiple manufacturers due to printer innovations and advancements,
varying production requirements, divisional preferences, etc.
● Stage 6 – Independent standards-based, IPQA systems, such as PrintRite3D®, will be required to assure consistent quality in heterogeneous factories.
5
PrintRite3D® Technology and Product Family
PrintRite3D® is an interactive in-process quality assurance system that combines inspection, feedback, data collection and critical analysis. It is a platform-independent
solution that can be installed as a retrofit to an existing 3D printer or requested as a factory option from select 3D printer OEMs. PrintRite3D® provides a high-fidelity, accurate
system that can confidently scale to multi-laser 3D metal printers. The PrintRite3D® system discovers potential anomalies and incorporates machine learning in conjunction
with developed metrics to map those metrics to the post-process data. This provides the ability to reduce post-production testing and costs, while creating a certification
framework that serves the needs of end-users, printer manufacturers, and standards organizations.
The Company currently offers three versions of PrintRite3D® for Laser Bed Fusion Systems: (1) PrintRite3D® Lite which has a smaller footprint and is geared towards single-
laser machines for Research and Development, or small production lots. (2) PrintRite3D® Pro, for single, dual and quad laser machines and is suited well for environments
with less than 10 machines, and (3) PrintRite3D® Enterprise for plant-wide networks. PrintRite3D® Lite expands the Company’s addressable market to mid-range 3D printer
manufacturers for potential OEM opportunities.
The Company announced in late 2020 PrintRite3D® for Direct Energy Deposition (“DED”), opening up another segment of the market for Sigma to sell and distribute its
technology. DED is based on a laser process in which a laser beam generates a melt pool on a substrate. An additional metallic powder material is transported to the melt pool,
where it becomes molten. Due to a feed movement, the molten material cools down and welding tracks are formed. By placing weld tracks side-by-side and on top of one
another, a build-up is obtained. Three-dimensional structures can then be generated by depositing one layer or track at the top of another previously welded layer or track.
Distribution Methods
Sigma Labs employs a multi-channel distribution model for its IPQA products including a direct sales force, value added resellers (VARs) and 3D printer Original Equipment
Manufacturers (OEMs). In 2020, the majority of the Company’s revenue was generated by direct sales in North America and Europe. VARs are currently used in Japan and
India. The Company plans to extend its VAR channel outside of North America and Europe. In 2020 the Company moved aggressively to establish and extend relationships
with 3D printer OEMs and expects that the percentage of the Company’s revenue coming from OEMs will increase in 2021 and beyond.
The Company markets its products through webinars, email and social media campaigns, and participation, both in person and virtually, in industry events and tradeshows. In
addition, the Company collaborates with international standards organizations in the establishment of standards for AM.
Sources and Availability of Parts and Materials
We have important relationships with several suppliers for critical components of our PrintRite3D® systems, in particular optics and data acquisition components, and
development of our user interface. To-date, we have not experienced shortages of components, however, in some cases COVID-19 has resulted in increased lead times for
certain parts. We manage the risk of component shortages by sourcing backup suppliers, and in the case of our user interface, hiring engineers in-house to support the ongoing
development and maintenance.
Agreements with Original Equipment Manufacturers (“OEMs”)
The Company entered into distribution agreements with two international 3D printer OEMs. The Company supports the OEMs with joint marketing programs and field sales
and technical support personnel to assist in the sale of its technology. It is the Company’s intent to continue to build the OEM channel through distribution relationships with
other 3D printer OEMs in the future.
Competition and Sigma’s Intellectual Property Safeguards
PrintRite3D® is a third-party, agnostic In-Process Quality Assurance system designed to provide a consistent, standards-based measurement and prediction of quality across a
heterogeneous collection of 3D printers. Competition is primarily from the printer OEMs who offer their own monitoring system, usually as a separately priced option to its
printers. Sigma believes that the future of AM will consist of factories with various generations of printers from various manufacturers. The primary reasons that global
manufacturers will have machines from various vendors is that certain machines and technologies are better suited for different applications than others. Additionally, as the
industry progresses, innovation will accelerate, and new leaders will emerge. Finally, many believe that there will be a consolidation of 3D metal manufacturers and the number
of vendors will decrease from approximately 50 to a much small number over the next decade. Although standards for monitoring are slowly being set by various international
standards organizations, it is highly unlikely that printer OEMs will modify their monitoring systems to work with other OEMs machines. Therefore, we believe that the only
way to produce parts with a consistent level of quality is with a third-party, agnostic, standards based IPQA system, such as PrintRite3D®. To the Company’s knowledge, there
is no competitor currently offering an IPQA system with similar functionality which has been validated to operate across as many 3D metal printers as PrintRite3D®.
Sigma began its investigation and research into optical and thermal data collection and measurement for quality assurance and intervention approximately 7 years ago and
began to develop its intellectual property protection at that time. The international IP law firm, Kilpatrick Townsend, has advised the Company on building a patent portfolio,
trade secrets, trademarks, etc. and filed and prosecuted patents as the Company has grown its body of intellectual property.
6
Jurisdiction
US
PCT
EP
Germany
China
Japan
Korea
Total
Sigma Labs, Inc. Patent Portfolio
Granted
13
-
-
-
1
-
-
14
In Process
14
1
4
6
3
1
1
30
Total
27
1
4
6
4
1
1
44
Based upon the evidence of competitors’ claims received by Sigma to-date, it appears to us that Sigma’s solution to the quality problems of 3D metal printing is a significantly
different technological approach than that of our principal known competition. It continues to appear to the Company that the intellectual property protection of PrintRite3D®’s
acuity, meaningful metrics of thermal data correlated to part quality, and usability of its software accord Sigma freedom to operate with its technology and will be a significant
barrier to entry to competitors attempts to pursue the technology path traveled by Sigma.
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 thirty foreign and U.S. patent applications related to our IPQA® technology and rapid qualification of additive manufacturing for metal parts. 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.
7
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
Material Qualification System and Methodology
Optical Manufacturing Process Sensing and Status Indication System
Systems and Methods for Measuring Radiated Thermal Energy During an Additive
Manufacturing Operation
Optical Manufacturing Process Sensing and Status Indication System
Systems and Methods for Additive Manufacturing Operations
Systems and Methods for Measuring Radiated Thermal Energy During an Additive
Manufacturing Operation
Photodetector Array for Additive Manufacturing Operations
Multi-Sensor Quality Inference and Control for Additive Manufacturing Processes
Government Regulation
Type
US Utility
US Utility
US Utility
US Utility
US Utility
US Utility
China Utility
US Utility
US Utility
US Utility
US Utility
US Utility
US Utility
US Utility
Patent No. or Application
No.
Expiration Date
8,354,608
8,372,224
8,359,979
9,999,924
10,207,489
10,226,817
ZL201680010333.X
10,317,294
10,479,020
10,520,372
10,717,264
10,639,745
10,786,850
10,786,948
3/16/31
10/15/30
3/21/27
5/11/36
6/20/37
4/26/37
1/13/26
5/2/35
8/1/38
3/25/35
12/28/38
2/21/39
2/21/39
4/24/37
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.
As of March 24, 2021, we do not have any active contracts with government agencies. During fiscal year 2020, we did not enter into any contracts with government
agencies, nor do we seek to do so in the future.
Employees and Human Capital Resources
As of December 31, 2020, we had 20 full-time employees. We continue to search for additional, qualified personnel, to support our expanding operations in the area of
IPQA® for AM. We believe that our future success largely depends upon our continued ability to attract and retain highly skilled employees, as well as highly qualified
management and technical personnel. Employee engagement is important to us and we focus on continuously enhancing our corporate culture.
Properties
We lease approximately 3,700 square feet of space at 3900 Paseo del Sol, Santa Fe, New Mexico 87507, including 1,772 square feet of office space at units, C-14, C-
15, C-16, C-17, C-20, C-21 and D-34 for a total monthly rent expense of approximately $3,840 under the lease, and 1,928 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 expire on July 31, 2021.
We believe that our facilities are suitable for our current needs. We currently intend to renew such leases, 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.
Recent Developments
On March 15, 2021, we announced that we were awarded a contract for an initial system of our PrintRite3D in-process quality assurance solution by Lockheed Martin
Space Additive Design & Manufacturing Center based in Sunnyvale, California. The Additive Design & Manufacturing Center supports the entire Space portfolio and
integrates key materials research and manufacturing processes to streamline the affordable delivery of satellite components. As a part of this initial contract, the Lockheed
Martin team will assess the viability and performance of PrintRite3D technology for the Space division in support of a variety of defense and civil space programs.
On January 12, 2021, the Company closed a public offering of equity securities in which it issued 1,711,783 shares of common stock (including the exercise in full of
the underwriters’ over-allotment option of 223,276 shares). Net proceeds to the Company after deducting offering expenses were approximately $4,532,444.
On December 18, 2020, we announced that we were selected by DMG MORI as the preferred melt pool monitoring system for their LASERTEC SLM machines.
Engineering teams from both companies worked extensively to test the integrated solution to ensure that it meets the demanding needs of industrial manufacturers utilizing
DMG MORI’s family of metal 3D printers. DMG MORI will be providing an interface with its printers to accommodate our optics, ensuring that the systems are PrintRite3D®
ready.
8
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 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 applicable to common stockholders for the years ended December 31, 2020 and 2019 were $7,009,414, and $6,320,849, respectively. As of
December 31, 2020, our accumulated deficit was $33,105,008. 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, 2020 and December 31, 2019 were $807,488 and $402,446, respectively, and our operating expenses for those
periods were $5,914,299 and $6,211,830, 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 will 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.
In January 2021, we completed a public offering of shares of our Common Stock resulting in net cash proceeds to us of approximately $4,532,444. We will need to
raise additional amounts to fund our operations, maintain compliance with the NASDAQ listing requirements and implement our business plan. There is no assurance as to the
amount and availability of any required future financing or the terms thereof. Such financing, if in the form of equity, may be highly dilutive to our existing stockholders and
may otherwise include onerous terms. If in the form of debt, such financing may include covenants and repayment obligations which may be difficult to meet and that could
adversely affect our business operations. There is also significant uncertainty from the affect that the novel coronavirus may have on the availability and type of financing. To
the extent that funds are not available to us, we may be required to delay, limit or terminate our business operations and lose our NASDAQ listing.
Our operating history makes evaluation of our business difficult.
We 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 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.
9
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.
10
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 ten years, and we expect to grow in the near future as our business develops and becomes further
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 Mark Ruport, 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:
● 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:
● the progression of contracts;
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● 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:
● 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 filed forty-four foreign and U.S. patent applications pertaining to
our IPQA® technology and rapid qualification of additive manufacturing for metal parts. We have been awarded thirteen U.S. patents and one foreign patent. 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 was 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 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.
Our results of operations may be negatively impacted by the coronavirus outbreak.
The outbreak of the novel coronavirus (COVID-19) has evolved into a global pandemic. The extent to which the coronavirus impacts our business and operating
results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning the coronavirus
and the actions that contain the coronavirus or treat its impact, among others.
The spread of the coronavirus, which has caused a broad impact globally, including restrictions on travel and quarantine policies put in place by businesses and
governments, may have a material economic effect on our business. To-date, the outbreak has not had a material adverse impact on our operations, though we have experienced
delays in certain customer purchase orders. While the Company believes that such purchase orders will ultimately be realized, it is impossible to predict the timing. Further, the
future impact of the outbreak is highly uncertain and cannot be predicted and there is no assurance that the outbreak will not have a material adverse impact on the future results
of the Company. Additionally, the coronavirus has already caused, and is likely to result in further, significant disruption of global financial markets, which may reduce our
ability to access capital either at all or on favorable terms.
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, 2020 and December 31, 2020, the trading price of our common stock has ranged from a low of $2.02 to a high of $10.30 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 2017 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:
● 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
● 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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Historically, there has been a limited trading market in our common stock, and you may therefore have difficulty selling your securities at a price that you determine
is satisfactory.
Our common stock is listed on The Nasdaq Capital Market. Historically, there has been a limited trading market for our common stock. There is no assurance that our
common stock will actively trade in the public market at or above a price that you consider acceptable. If an active market for our common stock is not maintained, it may be
difficult for you to sell your shares of common stock 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 continue to satisfy the continued listing requirements of The Nasdaq Capital Market. For example, there is no assurance
that we will be able to satisfy all of the quantitative continued listing requirements, including the minimum stockholders’ equity requirement of at least $2,500,000 for
continued listing on The Nasdaq Capital Market, which we have previously failed to satisfy. If we fail to satisfy a Nasdaq requirement 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 offering and may not use them effectively.
We intend to use our cash for the development of our products and services. 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, 2020, we had 5,995,320 outstanding shares of
common stock. On January 12, 2021, we closed a public offering in which we issued an additional 1,711,783 shares of our common stock. Sales of a large number of the shares
such as 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:
● 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 (in the
absence of a chief executive officer) 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.
● the ability of our directors to issue one or more series of preferred stock with dividend, liquidation, conversion, voting or other rights which would dilute the interest of
or impair the voting power of our common stockholders.
These provisions could inhibit or prevent possible transactions that some stockholders may consider attractive.
We 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 Board of Directors is authorized to issue up to 10,000,000 shares of preferred stock and may determine the terms of future preferred stock offerings without
further action by our stockholders. If we issue preferred stock, it could affect your rights or reduce the value of our outstanding common stock. In particular, specific rights
granted to future holders of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion, and redemption rights, sinking fund provisions,
and restrictions on our ability to merge with or sell our assets to a third party. As of December 31, 2020, 715 shares of our preferred stock are outstanding, consisting of 382
shares of Series D Preferred Stock and 333 shares of Series E Preferred Stock. In addition to the possible negative effect on the market price of our common shares resulting
from the public sale or perceived sale of common shares issuable upon conversion or exercise of these securities, the Certificate of Designations for the Series D Preferred
Stock provides that upon occurrence of certain triggering events described in the Certificate, including but not limited to, payment defaults, breaches of the transaction
documents pertaining to the Series D Preferred Stock and failure to maintain listing on the NASDAQ Capital Market, the Series D Preferred Shares would become subject to
redemption, at the option of the holder, at a 125% premium to the underlying value of the Series D Shares being redeemed.
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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 1,772 square feet of office space at units, C-14, C-
15, C-16, C-17, C-20, C-21 and D-34 for a total monthly rent expense of approximately $3,840 under the lease, and 1,928 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. The leases expire on July 31, 2021. 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 trades on The NASDAQ Capital Market under the symbol “SGLB.”
Shareholders
As of March 23, 2021, there were approximately 554 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. Pursuant to the Series D Preferred Stock Certificate of Designations, the Company may not declare or pay any cash dividend or distribution on any of its capital stock,
other than as required by the Certificate of Designations.
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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, 2020.
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.
Overview
Sigma is a leading provider of in-process quality assurance (IPQA®) software to the additive manufacturing industry. Sigma specializes in the development and
commercialization of real-time monitoring solutions known as PrintRite3D® for 3D metal advanced manufacturing technologies. PrintRite3D detects and classifies defects and
anomalies real-time during the manufacturing process, enabling significant cost-savings and production efficiencies. We are dedicated to setting the quality standard for
Additive Manufacturing and accelerating the worldwide adoption of 3D metal printing. We work closely with international standards organizations, renowned universities,
research organizations, advanced manufacturers, and leading design and simulation software companies. PrintRite3D is printer agnostic and works with most of the leading 3D
metal printers.
Covid-19 Business Update
As stated earlier, the worldwide COVID-19 pandemic caused a reduction, and in some cases a freeze, in capital spending within the Company’s targeted industries and
had what the Company believes to be a short-term negative impact on the Company’s expected timing of generating meaningful revenue. Further, the future impact of the
outbreak, including variations of the virus, is highly uncertain and cannot be predicted so that no assurance can be given that the outbreak will not have a material adverse
impact on the future results of the Company. It is also uncertain as to any further disruption of the global financial markets, which may reduce our ability to access capital,
either at all, or on favorable terms.
Reverse Stock Split
Effective February 27, 2020, we effected a reverse split of our common stock on a 1-for-10 basis. Accordingly, all common shares, stock options, warrants, and per
share amounts contained in this Annual Report have been retroactively adjusted to reflect the reverse split for all periods presented.
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, 2020 Compared to the Year Ended December 31, 2019.
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 revenues from our contract manufacturing
activities in metal AM. 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 whether key prospective customers continue to move from AM metal prototyping to production.
During the fiscal year ended December 31, 2020 (“fiscal 2020”), we generated an aggregate of $807,488 in revenues, as compared to an aggregate of $402,446 in
revenues generated by us in the fiscal year ended December 31, 2019 (“fiscal 2019”). The contributors to the $405,042 increase were increases in new PrintRite3D® 6.0 system
sales of $394,959, increased revenues from our Rapid Test and Evaluation (“RTE”) program of $37,064, increased annual maintenance revenues of $11,240, and increased
revenue from contract AM jobs of $8,651, partially offset by decreases in on-site engineering and installation revenues of $47,872. Our cost of revenue for fiscal 2020 was
$591,957 compared to $574,301 during the same period in 2019, an increase of $17,656. The increase is primarily due to increased PrintRite3D® 6.0 system sales, and parts
and materials upgrades for certain customers.
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Sigma’s total operating expenses for fiscal 2020 were $5,914,299 as compared to $6,211,830 for fiscal 2019, a $297.531 decrease.
In fiscal 2020, salaries and benefits costs were $2,622,162 as compared to $2,354,329 for the same period in 2019. The $267,833 increase resulted primarily from
salary increases and related employer payroll taxes of $148,270, employee bonuses of $127,250, and increased sales commissions of $8,800, partially offset by lower benefits
costs of $23,578.
Stock-based compensation for fiscal 2020 was $596,842 compared to $497,240 for the same period in 2019. This $99,602 increase resulted primarily from stock
grants made to employees of $23,610 and additional stock options granted to employees of $75,992.
During fiscal 2020, Sigma incurred research and development expenditures of $351,404 compared to $647,994 in the same period of 2019. The $296,590 decrease is
primarily the result of completed product development, as well as the reduced use of consultants during the year.
Sigma’s investor and public relation fees incurred in fiscal 2020 were $434,852, compared to $417,750 in fiscal 2019. The increase in the comparative expenditures
results primarily from an additional investor relations consultant of $90,369, increased investor conferences and virtual shareholder meetings of approximately $20,000,
partially offset by decreased advertising and trade show expenses of $100,000.
Organization costs for fiscal 2020 were 425,847, compared to $530,958 for the same period in 2020. The decrease of $105,111 is primarily attributable to lower
directors’ compensation in 2020 of $135,944 and investment bank consulting fees of $31,500, partially offset by increased shareholder services costs of $49,149 as a result of a
special shareholders meeting held in March 2020 and costs incurred for the conversion of Series D Preferred Stock throughout 2020.
Legal and professional service fees in fiscal 2020 were $676,142 compared to $664,403 paid in fiscal 2019. The increase of $11,739 is primarily attributable to an
increase in legal fees of $128,010 related to a special shareholders meeting, Nasdaq compliance related matters, and our 2020 financings, and an increase in IT services fees of
$17,101, partially offset by reduced utilization of recruiting firms of $49,851 and consultants of $86,574.
During fiscal 2020, Sigma’s office expenses were $416,580 compared to $747,881 in the same period of 2019. The $331,301 decrease in these expenditures resulted
primarily from reduced travel costs of $309,451 as a result of COVID-19 restrictions, and lower office supplies expense of $56,371 due to employees working remotely for
most of the year, partially offset by an increase in postage and shipping costs of $18,446 related to PrintRite 3D returns from expired RTE programs.
Depreciation and amortization expense in 2020 was $105,175, as compared to $192,569 in 2019. The decrease of $87,394 is primarily the result of our fully
depreciated 3D printer in 2020, partially offset by an increase in patent amortization expense during the year.
Other operating expenses for fiscal 2020 totaled $285,295, compared to $158,706 for fiscal 2019. The increase of $126,589 is primarily due to an increase in insurance
premiums, in particular our Director’s & Officer’s policy premium which increased by $115,396.
In fiscal 2020, our net other income & expense was net income of $498,629 compared to net income of $62,836 in 2019. The increase of $435,793 is primarily due to
increased incentives from the State of New Mexico of $99,780 and income from the Company’s Payroll Protection Plan loan of $361,700, partially offset by a decrease in
interest income of $17,702 and an increase in interest expense of $5,223.
Sigma’s net loss before preferred dividends for fiscal 2020 decreased $1,120,710 overall and totaled $5,200,139, as compared to a net loss before preferred dividends
of $6,320,849 for fiscal 2019. Net loss applicable to common stockholders for fiscal 2020 was $7,009,414, as compared to $6,320,849 for fiscal 2019. The 2020 net operating
loss component of the overall loss being $684,917 lower than in 2019 and the other income component being a $435,793 higher. Preferred stock dividends were $1,809,275 in
2020 and $0 in 2019.
Liquidity and Capital Resources
As of December 31, 2020, we had $3,700,814 in cash and working capital of $4,332,053, as compared to $86,919 in cash and a working capital deficit of $98,315 as
of December 31, 2019. On January 12, 2021, the Company closed a public offering of common stock resulting in net proceeds of approximately $4,532,444 after deducting
commissions and other offering expenses payable by the Company. In February and March of 2021, the Company received net cash proceeds of $1,136,010 from the exercise
of outstanding warrants.
We believe that our existing cash on hand will be sufficient to fund our anticipated operating costs and capital expenditure requirements through 2021. We have based
this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect.
Because of the numerous risks and uncertainties associated with the research, development, and commercialization of our products, we are unable to estimate the exact
amount of our working capital requirements. Our future capital requirements will depend on many factors, including:
● The cost of expending, maintaining, and enforcing our intellectual property portfolio, including filing, prosecuting, defending and enforcing our patent claims and
other intellectual property rights;
● The effect of competing technological and market developments;
● The revenue from the sales of our existing and future products;
● The cost of operating as a public company; and
● The other factors listed under Item 1A “Risk Factors.”
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 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. In May 2019, the Company closed a private placement of equity securities resulting in net proceeds of
approximately $515,000, after deducting placement agent commissions and other offering expenses payable by the Company. In August 2019, the Company closed a public
offering of equity securities resulting in net proceeds of approximately $1,971,000, after deducting placement agent commissions and other offering expenses payable by the
Company. In September 2019, Aegis Capital Corp. partially exercised its over-allotment option granted by the Company in the foregoing August 2019 public offering, resulting
in net proceeds of $148,800 after deducting placement agent commissions. In January 2020, we completed two private placements consisting of shares of our newly created
Series D and Series E Preferred Stock, warrants to purchase additional shares of Series D Preferred Stock and warrants to purchase shares of our Common Stock resulting in net
cash proceeds to us of approximately $1,711,124. During 2020, institutional holders of the Series D Preferred Warrants exercised 6,146 of 6,156 such warrants resulting in net
proceeds to the Company of $5,820,998. As of March 23, 2021, if all of the remaining common warrants to purchase our common stock are exercised by the holders thereof,
the potential net proceeds to us will be $1,291,000. On April 6, 2020, we closed an offering of equity securities in which the Company sold and issued to certain institutional
investors (a) shares of the Company’s common stock and pre-funded warrants, and (b) Series A Warrants (the “Private Warrants”) to purchase shares of the Company’s
common stock pursuant to a private placement resulting in net proceeds of approximately $1,230,000. As of March 23, 2021, if all of the Series A Warrants are exercised by the
holders thereof for cash, the potential gross cash proceeds to us will be $956,015. On January 12, 2021, the Company closed a public offering of equity securities resulting in
net proceeds of approximately $4,532,444 after deducting commissions and other offering expenses payable by the Company.
We will need to raise additional amounts to fund our operations, maintain compliance with the NASDAQ listing requirements and implement our business plan. There
is no assurance as to the amount and availability of any required future financing or the terms thereof. Such financing, if in the form of equity, may be highly dilutive to our
existing stockholders and may otherwise include onerous terms. If in the form of debt, such financing may include covenants and repayment obligations which may be difficult
to meet and that could adversely affect our business operations. There is also significant uncertainty from the affect that the novel coronavirus may have on the availability and
type of financing. To the extent that funds are not available to us, we may be required to delay, limit, or terminate our business operations and lose our NASDAQ listing.
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During 2021, we expect to sustain our operations and our commercialization and marketing efforts with our cash reserves and revenues generated from sales of our
PrintRite 3D® technology. We expect that continued enhancements of our IPQA®-enabled PrintRite3D® technology will enable us to further commercialize this technology
into the AM metal market in 2021. To support the commercialization of our PrintRite3D® technology, 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 through the use of proceeds from sales of our securities.
Net Cash Used in Operating Activities
Net cash used in operating activities in 2020 decreased to $4,809,868 from $5,514,805 in 2019, which is a decrease in cash used of $704,937. This decrease is primarily
attributable to: (1) a decrease in our net loss before preferred dividends of $1,120,710; (2) higher equity-based compensation expenses of $150,644 due to: (a) increased options
and common share grants awarded to employees of $99,602; (b) increased stock options granted to consultants in lieu of cash of $70,096, partially offset by (c) lower equity
based compensation for directors of $60,117; (3) an increase in accounts receivable of $259,282 due to increased sales; (4) a decrease in inventory growth in 2020 from 2019 of
$297,700; (5) a decrease in current and long-term prepaid expenses of $319,463 primarily due to the release of collateral for a letter of credit and amortization of our three-year
membership in the UK’s National Centre for Additive Manufacturing (“NCAM”); (6) a decrease in accounts payable and accrued expenses of $732,471 due to payments in
2020 related to 2019 payables as well as lower accounts payable in 2020 resulting from our improved cash position; (7) a decrease in deferred revenue of $149,439; (8) long-
term Stock Appreciation Rights granted to employees and consultants of $48,341; (9) long-term deferral of Payroll Taxes under the CARES Act of $37,728; and (10) a decrease
in depreciation expense of $87,394.
Net Cash Used by Investing Activities
Net cash used by investing activities during fiscal 2020 was $298,359, which compares to cash used by investing activities during the same period of 2019 totaling
$85,798. The increase is primarily due to increased purchases of fixed assets of $54,587, additional costs incurred for patents of $36,561 and the receipt of cash from loan
repayments of $121,913 in 2019.
Net Cash Provided by Financing Activities
Cash provided by financing activities during fiscal 2020 increased to $8,722,122 from $4,407,740 during the same period in 2019, an increase of $4,314,382 primarily as
a result of the exercise of Series D Preferred warrants from our January 2020 private offering, which resulted in net proceeds to the Company of $5,820,998, partially offset by
lower net proceeds from our 2020 private and public offerings over 2019.
We have no credit lines as of March 24, 2021, nor have we ever had a credit line since our inception.
Our ability to continue to fund our liquidity and working capital needs will be dependent upon the success of our efforts to generate revenues from existing and future
PrintRite3D®-proof-of-concept contracts, follow-on contracts resulting from successful proof-of-concept engagements, possible strategic partnerships, and 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. The Company is unable to predict the effect, if any, that the novel coronavirus outbreak may have on its
access to the financing markets. 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.
21
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 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, 2020.
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.
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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 applicable to smaller reporting companies that permit us to
provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the fourth quarter of the year ended December 31, 2020 that have materially
affected, or are reasonably likely to materially affect, our internal control 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 24, 2021:
Name
Mark K. Ruport
Frank Orzechowski
Ronald Fisher
Darren Beckett
Age
68
61
51
47
Position
President and Chief Executive Officer
Chief Financial Officer, Treasurer and Corporate Secretary
Vice President of Business Development
Chief Technology Officer
Mark Ruport served as Executive Chairman from December 3, 2019 until April 30, 2020 and became our President and Chief Executive Officer on April 30, 2020.
Additional information regarding Mr. Ruport is set forth below under “Board of Directors and Corporate Governance.”
Frank Orzechowski has served as our Chief Financial Officer, Treasurer, principal accounting officer, principal financial officer, and Corporate Secretary since July 1,
2019. Prior to joining the Company, Mr. Orzechowski served as the Chief Financial Officer of StormHarbour Partners LP, an independent global markets and financial advisory
firm since September 2013. From May 2013 to August 2013, Mr. Orzechowski served as a contract CFO for Etouches Inc., a cloud-based event management software
company, to assist with financial matters in connection with that company’s planned equity financing. Prior to that, he served as President and Owner/Operator of Four-O
Technologies Inc. from August 2009 to December 2012, where he successfully launched and guided operations for two Cartridge World franchise units in Connecticut. From
February 2006 to July 2009, Mr. Orzechowski served as President and Chief Financial Officer of Nikko Americas Holding Company Inc., where he was responsible for
managing all of the support and infrastructure for that company’s U.S. business, as well as investment manager selection and due diligence functions for its World Series
Platform. Mr. Orzechowski began his career at Coopers & Lybrand in 1982, received his CPA certification in 1984 and received his Bachelor of Science in Business
Administration with a major in Accounting from Georgetown University in 1982.
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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 24, 2021, and certain other information regarding our directors:
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Directors
John Rice
Mark K. Ruport
Salvatore Battinelli(1)(2)(3)
Dennis Duitch(1)(2)(3)
Kent Summers(1)(2)(3)
Class
I
I
II
III
III
Age
74
68
79
76
62
Position
Chairman of the Board and Director
President and Chief Executive Officer
Director
Director
Director
Director
Since
2017
2019
2017
2017
2018
Current Term
Expires
2021
2021
2022
2023
2023
(1) Member of our Audit Committee
(2) Member of our Compensation Committee
(3) Member of our Nominating and Corporate Governance Committee
Directors
John Rice was appointed to our Board of Directors on February 15, 2017, was appointed as Chairman of our Board on April 19, 2017, was appointed as our interim
Chief Executive Officer on July 24, 2017, became our Chief Executive Officer on July 14, 2017 and was appointed as our President on October 10, 2018. Effective April 30,
2020, Mr. Rice resigned from his position as President and Chief Executive Officer. Mr. Rice remains a director on the Board of Directors and continues to serve as Chairman
of the Board. 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.
Mark K. Ruport was appointed as Executive Chairman and as a director on December 3, 2019. Effective April 30, 2020, Mr. Ruport became our President and Chief
Executive Officer. Mr. Ruport remains a director on the Board of Directors but no longer serves as Executive Chairman. Mr. Ruport brings more than 30 years of public and
private company experience in the software sector to his position at Sigma Labs. Prior to joining Sigma Labs, Mr. Ruport served since 2010 as the President of Step Function
Consulting, LLC, a consulting firm that provides strategic consulting services to early and mid-stage portfolio software companies. Mr. Ruport also served from 2014 to 2017
as the Executive Chairman of the Board of Directors of Content Analyst Company, a leading developer of advanced analytics software for searching and analyzing unstructured
text, and before that served as its Vice Chairman from 2012 to 2013. From 2005 to 2009, Mr. Ruport served as the President and Chief Executive Officer of Configuresoft, Inc.,
a venture-backed Enterprise Systems Management company, where he orchestrated an OEM agreement which later led to its acquisition by EMC Corp. Prior to Configuresoft,
Mr. Ruport served from 2004 to 2005 as the Executive Vice President of Worldwide Operations at Stellent, Inc., which was subsequently acquired by Oracle, Inc., and from
1995 to 2005 as the President, Chief Executive Officer and Chairman of the Board of Directors of Optika, Inc., a venture-backed Enterprise Content Management Company
that he led through its initial public offering and merger with Stellent, Inc. From 1990 to 1994, Mr. Ruport served as the President and Chief Executive Officer of Interleaf, Inc.,
a public software company. He also held various senior executive positions from 1985 to 1989 at Informix, Inc., a relational database management system company later
acquired by IBM, and from 1985 to 1989 at Cullinet, Inc., a mainframe database management system and enterprise resource planning company later acquired by Computer
Associates, Inc. Mr. Ruport received his Bachelor of Science degree and MBA from Bowling Green State University.Mr. Ruport received a Bachelor of Science in Business and
an MBA from Bowling Green State University.
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Our Board of Directors believes that Mr. Ruport is qualified to serve as a member of the board because of his extensive experience in management and leadership in
the technology industry.
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 responsibility for 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. Mr. Summers also currently serves as Chairman, Board of Managers, Massachusetts Materials Technologies LLC.
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).
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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 previous role as Chief Executive Officer, Mr. Rice is not considered an independent
director. As a result of his April 30, 2020 appointment as Chief Executive Officer, Mr. Ruport is also not considered an independent director. 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 directors are John Rice and Mark Ruport, with terms expiring at our 2021 annual meeting of stockholders;
● the Class II director is Salvatore Battinelli, with a term expiring at our 2022 annual meeting of stockholders; and
● the Class III directors are Dennis Duitch and Kent Summers, with terms expiring at our 2023 annual meeting of stockholders.
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.
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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. Our Board of Directors believes it is important to select the
Company’s Chairman and Chief Executive Officer in the manner it considers in the best interests of the Company at any given time. Our Board of Directors believes that the
Chairman and Chief Executive Officer positions may be filled by one individual or by two different individuals, as determined by our Board of Directors based on
circumstances then in existence.
On August 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 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, and has in the past combined the
roles of Chairman and Chief Executive Officer. Our Board currently is committed to the separated roles given the circumstances of our Company. However, our Board of
Directors continually evaluates our leadership structure and could, in the future, decide to combine 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, 2020, the Board of Directors held five 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 2020 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;
28
● 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 the applicable 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 2020.
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).
29
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.
30
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.
Delinquent Section 16(a) Reports
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, 2020, its executive officers, directors and greater than 10% stockholders complied
with the filing requirements under Section 16(a), except that each of Salvatore Battinelli and Mark Ruport filed a Form 4 late in connection with their respective purchase of
shares of the Company’s Series E Preferred Stock and warrants to purchase shares of common stock.
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, 2020 (the foregoing executives are herein collectively referred to as the “named executive officers”).
31
Name and Principal Position
John Rice - Former President & Chief
Executive Officer(1) and Director
(Chairman of the Board)
Mark Ruport - President & Chief
Executive Officer and Director(2)
Ronald Fisher - Vice President
of Business Development
Darren Beckett - Chief Technology Officer
Summary Compensation Table
Salary ($)
(3)
Bonus ($)
(3)
Stock
Awards ($)
(5)
Option
Awards ($)
(6)
All Other
Compensation
($)
Total ($)
51,667
155,000
-
-
-
-
29,583(7)
210,347(8)
10,052
-
91,302
365,347
155,000
12,917
50,000(4)
-
1,986
-
618,980(9)
451,823(10)
802
-
826,768
464,740
180,000
180,000
-
-
2,306
-
76,493(11)
23,870(12)
21,835
-
280,634
203,870
180,000
180,000
18,000(4)
-
2,306
-
152,984(13)
36,100(14)
928
-
354,218
216,100
Year
2020
2019
2020
2019
2020
2019
2020
2019
(1) Mr. Rice served as President and Chief Executive Officer from January 1, 2020 through April 30, 2020.
(2) Mr. Ruport has served as President and Chief Executive Officer since April 30, 2020.
(3) Actual amounts paid or accrued.
(4) On February 25, 2021, the Compensation Committee granted Mr. Ruport a $50,000 performance bonus for the fiscal year ended December 31, 2020. In October 2020, we
granted Mr. Beckett a performance bonus of $10,000, and in December 2020, Mr. Beckett was granted an additional performance bonus of $8,000.
(5) On April 10, 2020 Messrs. Ruport, Fisher, and Beckett were granted 969, 1,125, and 1,125 shares of our common stock, respectively, at the closing price of $2.05 on the
date of the grant. The shares fully vested on December 31, 2020.
(6) Includes option awards and stock appreciation rights awards. On June 23, 2020, we adopted the 2020 Stock Appreciation Rights Plan. The Plan only provides for incentive
awards that are only made in the form of stock appreciation rights (“SARs”) payable in cash. No shares of common stock were reserved in connection with the adoption of
the Plan since no shares will be issued pursuant to the Plan. The Fair Value of option and SARs awards are calculated in accordance with FASB ASC Topic 718. The
amount recognized for all awards is calculated using the Black Scholes pricing model.
(7) On May 1, 2020, we granted Mr. Rice an option to purchase up to 16,044 shares of our common stock under our 2013 Equity Incentive Plan in connection with his
employment arrangement. The option has an exercise price of $2.28, is fully vested, and had an aggregate grant date fair value of $29,583.
(8) On each of the first day of each month commencing January 1, 2019 and ending on August 1, 2019, we granted Mr. Rice an option to purchase up to 2,292 shares of our
common stock, under our 2013 Equity Incentive Plan in connection with his employment arrangement. The options are fully vested and have the following exercise prices:
$15.00, $19.30, $20.40, $14.70, $15.00, $12.00, $14.00, and $7.40. The options had an aggregate grant date fair value of $26,630, $34,254, $36,418, $26,161, $26,642,
$21,291, $25,405, and $13,546, respectively
(9) On May 28, 2020, we granted Mr. Ruport an option to purchase 116,654 shares of our common stock under our 2013 Equity Incentive Plan in connection with his
employment arrangement. The option has an exercise price of $2.50 and vests as follows: 25%, or 29,164 shares vested and became exercisable on June 15, 2020, and the
remaining 87,490 shares will vest in equal monthly installments over the next three years. As of December 31, 2020, 43,744 shares were vested and exercisable. The option
had an aggregate grant date fair value of $254,474. On November 24, 2020, we granted Mr. Ruport and option to purchase 114,915 shares of our common stock under our
2013 Equity Incentive Plan in connection with his employment arrangement. The option has an exercise price of $2.55 and vests over three years in equal monthly
installments beginning one month from the grant date. As of December 31, 2020, 3,192 shares were fully vested and exercisable. The option had an aggregate grant date
fair value of $236,519. On June 23, 2020, pursuant to our 2020 Stock Appreciation Rights Plan, we granted Mr. Ruport 60,094 Stock Appreciation Rights (“SAR’s). The
SAR’s have an exercise price of $2.63 and will vest and become exercisable in three equal installments on each of the first, second, and third anniversaries of the grant
date. The SAR’s had an aggregate grant date fair value of $127,987.
(10) On December 3, 2019, we granted Mr. Ruport (i) an option to purchase up to 10,000 shares of our common stock with an exercise price of $11.20, which fully vested and
became exercisable on January 3, 2020; and (ii) an option to purchase up to 40,000 shares of our common stock with an exercise price of $11.20, which will vest and
become exercisable in equal monthly installments over three years from the grant date. As of December 31, 2020, 14,053 shares were fully vested and exercisable. The
options had aggregate grant date fair values of $90,366 and $361,457, respectively.
(11) On May 28, 2020, we granted Mr. Fisher an option to purchase 23,331 shares of our common stock under our 2013 Equity Incentive Plan in connection with his
employment arrangement. The option has an exercise price of $2.50 and vests as follows: 25%, or 5,833 shares vested and became exercisable on June 15, 2020, and the
remaining 17,498 shares will vest in equal monthly installments over the next three years. As of December 31, 2020, 8,749 shares were fully vested and exercisable. The
option had an aggregate grant date fair value of $50,895. On June 23, 2020, pursuant to our 2020 Stock Appreciation Rights Plan, we granted Mr. Fisher 12,019 Stock
Appreciation Rights (“SAR’s). The SAR’s have an exercise price of $2.63 and will vest and become exercisable in three equal installments on each of the first, second, and
third anniversaries of the grant date. The SAR’s had an aggregate grant date fair value of $25,598.
(12) On January 10, 2019, we granted Mr. Fisher an option to purchase 1,184 shares of our common stock. The option has an exercise price equal to $20.20 per share and is
fully vested. On November 1, 2019, we granted Mr. Fisher an option to purchase 100 shares of our common stock. The option has an exercise price equal to $5.20 per
share and is fully vested. On November 26, 2019, we granted Mr. Fisher an option to purchase 100 shares of our common stock. The option has an exercise price equal to
$8.20 per share and is fully vested. On December 3, 2019, we granted Mr. Fisher an option to purchase 500 shares of our common stock. The option has an exercise price
equal to $11.20 per share and is fully vested. The options had aggregate grant date fair value of $18,271, $420, $661, and $4,518, respectively.
(13) On May 28, 2020, we granted Mr. Beckett an option to purchase 46,661 shares of our common stock under our 2013 Equity Incentive Plan in connection with his
employment arrangement. The option has an exercise price equal to $2.50 per share and vests as follows: 25%, or 11,665 shares vested and became exercisable on June 15,
2020, and the remaining 34,996 shares will vest in equal monthly installments over the next three years. As of December 31, 2020, 17,497 shares were fully vested and
exercisable. The option had an aggregate grant date fair value of $101,788. On June 23, 2020, pursuant to our 2020 Stock Appreciation Rights Plan, we granted Mr.
Beckett 24,038 Stock Appreciation Rights (“SAR’s). The SAR’s have an exercise price of $2.63 and will vest and become exercisable in three equal installments on each
of the first, second, and third anniversaries of the grant date. The SAR’s had an aggregate grant date fair value of $51,196.
(14) On January 1, 2019, we granted Mr. Beckett an option to purchase up to 375 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 $15.00. The option vests as follows: 94 shares vested and became exercisable on January 1,
2020; the remaining 281 shares will vest and become exercisable in equal installments on the second through the fourth anniversaries of the date of grant. As of December
31, 2020, 94 shares were fully vested and exercisable. On July 18, 2019, we granted Mr. Beckett an option to purchase up to 500 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 $12.40. The option vests and will become
exercisable in equal installments on the first through the fourth anniversaries of the date of grant. As of December 31, 2020, 125 shares were fully vested and exercisable.
On October 11, 2019, we granted Mr. Beckett an option to purchase up to 5,000 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 $6.70. The option is fully vested and exercisable. The options had aggregate grant date fair
values of $4,358, $4,885, and $26,857, respectively.
32
Named Executive Officer Employment Agreements
John Rice
Prior to April 30, 2020, Mr. Rice served as President, Chief Executive Officer, and principal executive officer of the Company at an annual base salary of $155,000.
On April 30, 2020, he resigned from such positions. Mr. Rice has remained a director on the Board of Directors and has continued to serve as Chairman of the Board. Mr. Rice
was compensated as a non-employee director (on a pro-rata basis for 2020 based on the partial year during which Mr. Rice served as a non-employee director) under the
Company’s director compensation program, as may be adjusted from to time for all non-employee directors. On May 1, 2020, we entered into a consulting agreement with Mr.
Rice, pursuant to which Mr. Rice was engaged to provide, among other services to be determined by the Company, advice regarding the structure of certain financial and other
strategic transactions involving the Company, on an as-needed basis. The consulting agreement expired on December 31, 2020.
Mark K Ruport
On December 3, 2019, we entered into an “at-will’ employment letter agreement with Mark Ruport, effective as of December 3, 2019 (the “effective date”), pursuant
to which Mr. Ruport agreed to serve as our Executive Chairman on an “at-will” basis. Additionally, Mr. Ruport was appointed to serve as a member of our Board of Directors,
effective as of December 3, 2019, with a term expiring at the 2021 annual meeting of stockholders. As of April 30, 2020, Mr. Ruport was appointed as President, Chief
Executive Officer, and principal executive officer of the Company, and no longer serves as Executive Chairman.
Under the employment letter agreement, Mr. Ruport is entitled to (i) an annual base salary of $155,000 (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 annual or special case assessments of Mr. Ruport’s performance and
other factors), and (ii) all benefits that we elect in our sole discretion to provide from time to time to our other executive officers, and received a grant of (1) a five-year stock
option to purchase up to 10,000 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 first month’s anniversary of the effective date, and (2) a five-year stock option to purchase up to 40,000 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 will vest and become
exercisable in equal (as closely as possible) monthly installments over three years from the effective date, provided, in each case, that Mr. Ruport remains an employee of the
Company through such vesting date.
Such options are on such other terms and provisions as are contained in the Company’s standard form nonqualified stock option agreement; provided, however, that (x)
upon the occurrence of a Change of Control (as defined in the employment letter agreement), any unvested portion of the options as of the date of such Change of Control will
immediately and automatically vest; provided, however, that, the options may be assumed or, in the discretion of the Board of Directors, an equivalent option may be
substituted by an applicable successor corporation or any subsidiary of the successor corporation in connection with a Change of Control), and (y) in the event that the Board of
Directors determines that Mr. Ruport is unable to perform his duties due to an accident, illness or other event or condition which physically or mentally incapacitates him for a
period of 45 consecutive days (“Disability”), if he ceases to be employed by the Company as a result of a Disability, the options will continue to vest and remain exercisable for
the 5-year term of the options in accordance with the terms of the option agreements.
33
Additionally, during the term of his employment, Mr. Ruport is eligible to receive one or more bonuses relating to each fiscal year in recognition of his achievement of
individual and Company goals established by the Board of Directors from time to time. However, the decision to provide any such bonuses and the amount and terms of any
such bonuses is in the sole discretion of the Board of Directors. On February 25, 2021, Mr. Ruport received a performance bonus of $50,000 for 2020.
Darren P. Beckett
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. On October 18, 2018, his 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 2,000 shares of common stock under the 2013 Plan at an exercise price of $12.10 per share. The option has a term of five years and
vests in equal annual installments 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. Under the agreement, Mr. Beckett 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 October 13, 2017, in connection with his employment, Mr. Beckett was granted an option to purchase up
to 1,500 shares of our common stock with an exercise price equal to $19.20 per share. Such option is vested and exercisable as to 675 shares at December 31, 2020, and the
remaining 825 shares will vest on October 23, 2021 provided Mr. Beckett is an employee of the Company on that date.
34
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, (i) a stock option to purchase up to 2,375 shares of common stock of the Company, at an exercise price equal to $118.00 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 is fully vested and exercisable. 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, and (ii) 125 shares of common stock of the
Company with a value equal to the closing price of our common stock on the date of grant and is on such other terms and provisions as are contained in Sigma Labs’ standard
form of restricted stock letter agreement under the Plan. Such shares are fully vested. Additionally, the Company granted Mr. Fisher under the 2013 Plan, effective as of August
11, 2016, a stock option to purchase up to 500 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 is fully vested and exercisable. Further, Mr. Fisher is eligible to participate in the Company’s 2013 Equity Incentive 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. 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 1,184 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 150 shares of
common stock under the 2013 Plan to Mr. Fisher connected with the satisfaction of a performance milestone.
35
Outstanding Equity Awards at 2020 Fiscal Year-End
The following tables set forth outstanding equity awards issued under our 2013 Equity Incentive Plan and 2020 Stock Appreciation Rights Plan as of December 31, 2020 that
are held by our named executive officers.
John Rice(2)
Name
Mark K. Ruport(3)
Ronald Fisher(4)
Darren Beckett(5)
Option Awards
Number of
securities
underlying
unexercised
options (#)
exercisable
Number of
securities
underlying
unexercised
options (#)
unexercisable
Option
exercise
price ($)
Option
expiration
date
2,000
2,000
2,000
2,000
2,000
2,000
2,000
6,875
2,292
2,292
2,292
2,292
2,292
2,292
2,292
2,292
2,292
16,044
10,000
14,053
43,744
—
3,192
691
1,183
100
100
500
8,749
—
2,375
500
675
400
94
125
5,000
17,497
—
300
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25,947
72,910
60,094
111,723
2,184
—
—
—
—
14,582
12,019
—
—
825
1,600
281
375
—
29,164
24,038
1,200
18.80
15.40
14.80
11.00
14.70
11.90
8.70
17.90
15.70
15.00
19.30
20.40
14.70
15.00
12.00
14.00
7.40
2.28
11.20
11.20
2.50
2.63
2.55
12.20
20.20
5.20
8.20
11.20
2.50
2.63
118.00
105.60
19.20
12.10
15.00
12.40
6.70
2.50
2.63
15.60
4/18/23
4/18/23
4/18/23
4/29/23
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1/1/24
2/1/24
3/1/24
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5/1/25
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6/14/25
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4/18/23
1/10/24
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12/3/24
6/14/25
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8/11/26
10/12/22
10/18/23
1/1/24
7/18/24
10/11/24
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2/26/28
(1) On June 23, 2020, we adopted the 2020 Stock Appreciation Rights Plan. The Plan only provides for incentive awards that are only made in the form of stock appreciation
rights (“SARs”) payable in cash. No shares of common stock were reserved in connection with the adoption of the Plan since no shares will be issued pursuant to the Plan.
(2) On April 19, 2018, we granted Mr. Rice three options (the “Options”) to purchase up to 2,000 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 $18.80, $15.40 and $14.80, respectively, and each is fully vested. The
Company also granted Mr. Rice an option to purchase up to 2,000 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 $11.00 $14.70, $11.90 and $8.70, respectively, and each is fully vested. On November 1, 2018 the Company granted Mr. Rice a fully vested
option to purchase up to 6,875 shares at an exercise price of $17.90. On December 1, 2018 the Company granted Mr. Rice a fully vested option to purchase up to 2,292 shares
at an exercise price of $15.70. On each of the first day of each month commencing January 1, 2019 and ending on August 1, 2019, we granted Mr. Rice an option to purchase
up to 2,292 shares of our common stock, under our 2013 Equity Incentive Plan in connection with his employment arrangement. The options are fully vested and have the
following exercise prices: $15.00, $19.30, $20.40, $14.70, $15.00, $12.00, $14.00, and $7.40. On May 1, 2020, we granted Mr. Rice an option to purchase up to 16,044 shares
of our common stock under our 2013 Equity Incentive Plan in connection with his employment arrangement. The option has an exercise price of $2.28 and is fully vested and
exercisable.
36
(3) On December 3, 2019, in conjunction with the hiring of Mark K. Ruport, the Company’s President and Chief Executive Officer, the Company granted to Mr. Ruport (i) an
option to purchase 10,000 shares of our common stock with an exercise price of $11.20, which fully vested and became exercisable on January 3,2020; and (ii) an option to
purchase up to 40,000 shares of our common stock, with an exercise price of $11.20, which will vest and become exercisable in equal monthly installments over three years
from the date of grant. On May 28, 2020, we granted Mr. Ruport an option to purchase 116,654 shares of our common stock under our 2013 Equity Incentive Plan in
connection with his employment arrangement. The option has an exercise price of $2.50 and vests as follows: 29,164 shares vested and became exercisable on June 15, 2020,
and the remaining 87,490 shares will vest in equal monthly installments over the next three years. As of December 31, 2020, a total of 43,744 shares were vested and
exercisable. On November 24, 2020, we granted Mr. Ruport an option to purchase up to 114,915 shares of our common stock. The option has an exercise price of $2.55 and
vests over three years in equal monthly installments beginning one month from the grant date. As of December 31, 2020, 3,192 shares were vested and exercisable. On June 23,
2020, pursuant to our 2020 Stock Appreciation Rights Plan, we granted Mr. Ruport 60,094 SARs. The SARs have an exercise price of $2.63 and will vest and become
exercisable in three equal installments on each of the first, second, and third anniversaries of the grant date.
(4) 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 2,375 shares of common stock of the Company, at an exercise price equal to $118.00 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 is fully vested. 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 500 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 is fully vested and exercisable. On April 19, 2018, we granted to Mr. Fisher an option to purchase 2,875 shares of our common stock. Such option
has a five-year term with an exercise price equal to the closing price of our common stock on the date of the grant. The option is vested as to 691 shares and the remaining
shares vest as follows: 683 shares will vest on April 19, 2021, and the remaining 1,501 shares will vest on April 19, 2022. On January 10, 2019, we granted Mr. Fisher an
option to purchase 1,183 shares of our common stock. The option has an exercise price per share equal to $20.20 and is fully vested. On November 1, 2019, we granted Mr.
Fisher an option to purchase 100 shares of our common stock. The option has an exercise price per share equal to $5.20 and is fully vested. On November 26, 2019, we granted
Mr. Fisher an option to purchase 100 shares of our common stock. The option has an exercise price per share equal to $8.20 and is fully vested. On December 3, 2019, we
granted Mr. Fisher an option to purchase 500 shares of our common stock. The option has an exercise price per share equal to $11.20 and is fully vested. On May 28, 2020, we
granted Mr. Fisher an option to purchase 23,331 shares of our common stock. The option has an exercise price per share equal to $2.50 and vests as follows: 5,833 shares
vested and became exercisable on June 15, 2020, and the remaining 17,498 shares will vest in equal monthly installments over the next three years. As of December 31, 2020, a
total of 8,749 shares were vested and exercisable. On June 23, 2020, pursuant to our 2020 Stock Appreciation Rights Plan, we granted Mr. Fisher 12,019 SARs. The SARs have
an exercise price of $2.63 and will vest and become exercisable in three equal installments on each of the first, second, and third anniversaries of the grant date.
(5) On February 26, 2018 we granted Mr. Beckett an option to purchase up to 1,500 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 $15.60 and is vested as to 300 shares. The remaining shares will vest as follows: 375 shares will
vest and become exercisable on February 26, 2021; and 825 shares will vest and become exercisable on February 26, 2022. On October 18, 2018, we granted Mr. Beckett an
option to purchase up to 2,000 shares of our common stock. The option has an exercise price per share equal to $12.10 and is vested as to 400 shares. The remaining shares vest
as follows: 500 shares will vest and become exercisable on September 16, 2021, and 1,100 shares will vest and become exercisable on September 16, 2022. On October 13,
2017, we granted Mr. Beckett an option to purchase up to 1,500 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 $19.20. The option is vested as to 675 shares and the remaining 825 shares will vest and become exercisable on
October 13, 2021. On January 1, 2019, we granted Mr. Beckett an option to purchase up to 375 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 $15.00. The option vests as follows: 94 shares vested and became exercisable on January
1, 2020; the remaining 281 shares will vest and become exercisable in equal installments on the second through the fourth anniversaries of the date of grant. On July 18, 2019,
we granted Mr. Beckett an option to purchase up to 500 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 $12.40. The option vests and will become exercisable in equal installments on the first through the fourth anniversaries of
the date of grant. As of December 31, 2020, the option was vested as to 125 shares. On October 11, 2019, we granted Mr. Beckett an option to purchase up to 5,000 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 $6.70 and is fully
vested and exercisable. On May 28, 2020, we granted Mr. Beckett an option to purchase 46,661 shares of our common stock. The option has an exercise price per share equal to
$2.50 and vests as follows: 11,665 shares vested and became exercisable on June 15, 2020, and the remaining 34,996 shares will vest in equal monthly installments over the
next three years. As of December 31, 2020, a total of 17,497 shares were vested and exercisable. On June 23, 2020, pursuant to our 2020 Stock Appreciation Rights Plan, we
granted Mr. Beckett 24,038 SARs. The SARs have an exercise price of $2.63 and will vest and become exercisable in three equal installments on each of the first, second, and
third anniversaries of the grant date.
Equity Awards
We offer stock options, stock appreciation rights, 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. Our stock appreciation rights allow employees to receive a cash payment for the difference between the market price of our
common stock on the date of exercise and the strike price. We sometimes also offer stock options, stock appreciation rights 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. Our stock appreciation rights allow consultants to receive a cash payment for the
difference between the market price of our common stock on the date of exercise and the strike price. Stock options, stock appreciation rights, 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 make safe harbor contributions to match 100% of each participant’s
contribution up to 3% of salary, and 50% of the next 2% of salary contributed. Safe harbor contributions are 100% vested. We may also elect, on an annual basis, to make a
discretionary contribution to the plan, but have not done so to date. Our elective 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.
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2013 Equity Incentive Plan
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 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 890,000 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.
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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.
39
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 $20.00 per share and there is a 2-for-1 stock split, the Option would be adjusted to be exercisable for 2,000 shares at $10.00 per share.
40
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 24, 2021, there were 880,319 shares previously issued or subject to outstanding awards under the 2013 Plan and 9,681 shares were available for future
issuance under the 2013 Plan.
2020 Stock Appreciation Rights Plan
On June 23, 2020, our Board of Directors adopted the Sigma Labs, Inc. 2020 Stock Appreciation Rights Plan (the “Plan”). The purposes of the Plan are to: (i) enable
the Company to attract and retain the types of employees, consultants, and directors (collectively, “Service Providers”) who will contribute to the Company’s long-range
success; (ii) provide incentives that align the interests of Service Providers with those of the shareholders of the Company; and (iii) promote the success of the Company’s
business. The Plan only provides for incentive awards that are only made in the form of stock appreciation rights payable in cash (“SARs”). No shares of common stock were
reserved in connection with the adoption of the Plan since no shares will be issued pursuant to the Plan.
Governance of the Plan
The Plan will be administered by the Compensation Committee of the Board or, in the Board’s sole discretion, by the Board. The Compensation Committee will have
the authority to, among other things, (i) construe and interpret the Plan and apply its provisions; (ii) promulgate, amend, and rescind rules and regulations relating to the
administration of the Plan; (iii) delegate its authority to one or more persons who is an officer of the Company within the meaning of Section 16 of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder with respect to SARs that do not involve “insiders” within the meaning of
Section 16 of the Exchange Act; (iv) determine when SARs are to be granted under the Plan and the applicable grant date; (v) prescribe the terms and conditions of each SAR,
including, without limitation, the exercise price and medium of payment and vesting provisions, and to specify the provisions of the SAR Agreement relating to such grant; (vi)
amend any outstanding SARs, subject, in certain cases, to the participant’s consent; and (vii) make all other determinations which may be necessary or advisable for the
administration of the Plan.
Eligible Participants
SARS may be granted only to persons who are Service Providers, and those persons whom the Committee determines are reasonably expected to become Service
Providers following the grant date. The Committee may from time to time designate those Service Providers, if any, to be granted SARs under the Plan, the number of SARs
which will be granted to each such person, and any other terms or conditions relating to SARs as it may deem appropriate to the extent consistent with the provisions of the
Plan. A participant who has been granted a SAR may, if otherwise eligible, be granted additional incentive awards at any time.
Grant. The Committee may grant SARs to any Service Provider. A SAR is the right to receive an amount equal to the Spread with respect to a share of the Company’s
common stock upon the exercise of the SAR. The “Spread” is the difference between the exercise price per share specified in a SAR agreement on the date of grant and the fair
market value per share on the date of exercise of the SAR.
41
General Provisions. The terms and conditions of each SAR will be evidenced by a SAR agreement. The exercise price per share will not be less than 100% of the fair
market value of a Share on the date of grant of the SAR. The term of the SAR will be determined by the Committee but may not be greater than ten years from the date of grant.
Exercise. SARs are exercisable subject to such terms and conditions as the Committee may specify in the SAR agreement for the SAR. A SAR may be exercised by
the delivery of a signed written notice of exercise to the Company, which must be received and accepted by the Company as of a date set by the Company in advance of the
effective date of the proposed exercise. The notice must set forth the number of SARs being exercised, together with any additional documents the Company may require.
Settlement. Upon exercise of a SAR, the Grantee will receive an amount equal to the Spread. The Spread, less applicable withholdings, will be payable only in cash. In
no event may any SAR be settled in any manner other than by delivery of a cash payment from the Company.
Form of SAR Agreement
Each participant to whom a SAR is granted will be required to enter into a SAR agreement with the Company, in such a form as is provided by the Committee. The
SAR agreement will contain specific terms as determined by the Committee, in its discretion, with respect to the participant’s particular SAR. Such terms need not be uniform
among all participants or any similarly situated participants. The SAR agreement may include, without limitation, vesting, forfeiture and other provisions particular to the
particular participant’s SAR, as well as, for example, provisions to the effect that the participant must abide by all the terms and conditions of the Plan and such other terms and
conditions as may be imposed by the Committee. A SAR will include such terms and conditions as are determined by the Committee, in its discretion, to be appropriate with
respect to any participant.
The Committee may specify in a SAR agreement that the participant’s rights, payments, and benefits with respect to a SAR will be subject to forfeiture upon the
occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of the incentive award. Such events may include, but are not
limited to, termination with cause or other conduct by the participant that is detrimental to the business or reputation of the Company.
Termination of Employment
Unless otherwise expressly provided in the participant’s SAR agreement, if the participant’s employment is terminated for any reason other than due to cause, death or
disability, any non-vested portion of any outstanding SAR at the time of such termination will automatically expire and terminate and no further vesting will occur after the
termination date. In such event, except as otherwise expressly provided in the SAR agreement, the participant will be entitled to exercise such participant’s rights only with
respect to the portion of the SAR that was vested as of the termination date for a period that will end on the earlier of (i) the expiration date set forth in the SAR agreement or
(ii) ninety days after the date of termination.
Termination for Cause
Unless otherwise expressly provided in the participant’s SAR agreement, in the event of the termination of a participant’s employment for cause, all vested and non-
vested SARs granted to such participant will immediately expire, and will not be exercisable to any extent.
Disability or Death
Unless otherwise expressly provided in the participant’s SAR agreement, upon termination of employment as a result of the participant’s disability or death, (i) any
non-vested portion of any outstanding SAR will immediately terminate upon termination and no further vesting will occur, and (ii) any vested SAR will expire on the earlier of
either (A) the expiration date set forth in the SAR agreement or (B) 12 months following the participant’s termination of employment.
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Continuation
Subject to the conditions and limitations of the Plan and applicable law, in the event that a participant ceases to be an employee, outside director or consultant, as
applicable, for whatever reason, the Committee and participant may mutually agree with respect to any outstanding SAR then held by the participant (i) for an acceleration or
other adjustment in any vesting schedule applicable to the SAR award; (ii) for a continuation of the exercise period following termination for a longer period than is otherwise
provided under such SAR; or (iii) to any other change in the terms and conditions of the SAR. In the event of any such change to an outstanding SAR, a written amendment to
the participant’s SAR agreement will be required. No amendment to a participant’s SAR will be made to the extent compensation payable pursuant thereto as a result of such
amendment would be considered deferred compensation that is not excepted from taxation or penalties under Code Section 409A, unless otherwise determined by the
Committee.
SARs granted under the Plan are not transferable other than to a designated beneficiary upon the Participant’s death or by will or the laws of descent and distribution.
Change in Control
Unless otherwise provided in a SAR Agreement, notwithstanding any contrary provision in the Plan, in the event of a Change in Control (as defined in the Plan), all
outstanding SARs will become 100% vested and immediately and fully exercisable.
Amendment
The Board at any time, and from time to time, may amend or terminate the Plan. The Committee at any time, and from time to time, may amend the terms of any one
or more SAR agreements, except that the Committee may not affect any amendment which would otherwise constitute an impairment of the rights under any SAR unless the
participant consents in writing.
As of March 24, 2021, there were 127,629 SARs previously issued under the 2020 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 for 2020, each non-employee director received annual compensation of $18,500, 2,500 shares of restricted common stock,
which is fully vested, and an option to purchase 25,000 shares of our common stock, which is also fully vested. Such grants were fully vested because the directors agreed to
defer the payment of their cash compensation for the first two quarters of 2020 as a cash saving measure. In addition, the Chairperson of the Audit Committee received a $2,500
annual retainer in cash. All cash fees are 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. In that regard, under our director compensation program for 2021, each non-employee director will
receive a quarterly cash payment of $2,500, and received a stock option to purchase 50,000 shares of our common stock, which option will vest ratably each month through
December 31, 2021 (26,000 of such shares will only be exercisable upon approval by the Company’s stockholders at the annual meeting of the Company’s stockholders of an
increase in the aggregate number of shares of the Company’s common stock that may be issued or issuable under the Plan).
The following table sets forth certain information concerning the compensation paid to non-employee directors in 2020 for their services as directors of the Company.
The compensation of Mr. Ruport, who serves as a director and serves as our President and Chief Executive Officer, is described in the Summary Compensation Table of
Executive Officers. Our non-employee directors do not receive fringe or other benefits.
Name
John Rice (1)
Salvatore Battinelli(2)
Dennis Duitch(3)
Frank Garofalo(4)
Kent Summers(5)
Fees
Earned or
Paid in
Cash ($)
9,500
18,500
21,000
4,500
18,500
Stock
Awards ($)(6)
Option
Awards ($)(6)
Total ($)
2,243
6,725
6,725
-
6,725
54,366
54,366
54,366
-
54,366
66,109
79,591
82,091
4,500
79,591
(1) The fees shown were paid to Mr. Rice for services as a non-employee director from May 1, 2020 through December 31, 2020. On July 31, 2020, the Company issued 834
shares of the Company’s common stock to Mr. Rice, pursuant to the Company’s 2013 Equity Incentive Plan, in connection with his service as a director, with such shares
immediately vested. Such shares were valued at $2,243 or $2.69 per share. Also on July 31, 2020, the Company granted Mr. Rice an option to purchase up to 25,000 shares
of the Company’s common stock in connection with his service as a director. The exercise price of the option is equal to $2.69 per share, is fully vested, and had a grant
date fair value of $54,366. The compensation of Mr. Rice for the period January 1, 2020 through April 30, 2020, during which time he served as President and Chief
Executive officer in addition to his service as a director, is described in the Summary Compensation Table of Executive Officers.
(2) The fees shown were paid to Mr. Battinelli for services as a director. On July 31, 2020, the Company issued 2,500 shares 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 immediately vested. Such shares were valued at
$6,725 or $2.69 per share. Also on July 31, 2020, the Company granted Mr. Battinelli an option to purchase up to 25,000 shares of the Company’s common stock in
connection with his service as a director. The exercise price of the option is equal to $2.69 per share, is fully vested, and had a grant date fair value of $54,366.
(3) The fees shown were paid to Mr. Duitch for services as a director, including $2,500 as a retainer for serving as the Chairman of the Audit Committee. On July 31, 2020, the
Company issued 2,500 shares 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 immediately vested. Such shares were valued at $6,725 or $2.69 per share. Also on July 31, 2020, the Company granted Mr. Duitch an option to
purchase up to 25,000 shares of the Company’s common stock in connection with his service as a director. The exercise price of the option is equal to $2.69 per share, is
fully vested, and had a grant date fair value of $54,366.
(4) The fees shown were paid to Mr. Garofalo for services as a director. Mr. Garofalo resigned from the Board of Directors on February 19, 2020.
(5) The fees shown were paid to Mr. Summers for services as a director. On July 31, 2020, the Company issued 2,500 shares of the Company’s common stock to Mr.
Summers, pursuant to the Company’s 2013 Equity Incentive Plan, in connection with his service as a director, with such shares immediately vested. Such shares were
valued at $6,725 or $2.69 per share. Also on July 31, 2020, the Company granted Mr. Summers an option to purchase up to 25,000 shares of the Company’s common stock
in connection with his service as a director. The exercise price of the option is equal to $2.69 per share, is fully vested, and had a grant date fair value of $54,366.
(6) These columns represent the aggregate grant date fair value of stock awards and stock options 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.
43
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 24, 2021 (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 8,302,098 shares of our common stock outstanding on March 24,
2021. 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 24, 2021 are
considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person.
As of March 24, 2021, there are no 5% or greater beneficial holders of our common shares. 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 of Beneficial Owner
Named Executive Officers and Directors
John Rice(1)
Mark K Ruport(2)
Ronald Fisher(3)
Darren Beckett(4)
Salvatore Battinelli(5)
Dennis Duitch(6)
Kent J. Summers(7)
All executive officers and directors as a group (8 persons)(8)
*Less than 1%.
Number of Shares Beneficially
Owned
Percentage of Shares
Beneficially Owned
91,905
116,494
18,637*
30,545*
51,877*
46,249*
45,500*
419,581
1.11%
1.40%
5.05%
(1) Includes 4,000 shares that may be acquired now or within 60 days of March 24, 2021 upon the exercise of outstanding stock options.
(2) Includes (a) 13,406 shares that may be acquired now or within 60 days of March 24, 2021 upon the exercise of outstanding stock options; (b) 6,166 shares that may be
acquired now or within 60 days of March 24, 2021 pursuant to the conversion of the shares of the Company’s Series E Preferred Stock; and (c) 4,855 shares that may be
acquired now or within 60 days of March 24, 2021 upon exercise of outstanding Class A Warrants.
(3) Includes 1,655 shares that may be acquired now or within 60 days of March 24, 2021 upon the exercise of outstanding stock options.
(4) Includes 1,944 shares that may be acquired now or within 60 days of March 24, 2021 upon the exercise of outstanding stock options.
(5) Includes (a) 4,000 shares that may be acquired now or within 60 days of March 24, 2021 upon the exercise of outstanding stock options, (b) 3,127 shares that may be
acquired now or within 60 days of March 24, 2021 pursuant to the conversion of shares of the Company’s Series E Preferred Stock, and (c) 2,428 shares that may be
acquired now or within 60 days of March 24, 2021 upon exercise of outstanding Class A Warrants.
(6) Includes 4,000 shares that may be acquired now or within 60 days of March 24, 2021 upon the exercise of outstanding stock options.
(7) Includes 4,000 shares that may be acquired now or within 60 days of March 24, 2021 upon the exercise of outstanding stock options.
(8)
Includes 34,463 shares that may be acquired now or within 60 days of March 24, 2021 upon the exercise of outstanding stock options and 9,293 shares that may be
acquired now or within 60 days of March 24, 2021 pursuant to the conversion of the shares of the Company’s Series E Preferred Stock.
44
Equity Compensation Plan Information
The following table provides certain information with respect to our equity compensation plans as of December 31, 2020.
Plan Category
(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))
2013 Equity Incentive Plan(1)
Equity compensation plans not approved by security holders(2)
713,010
-
$
$
5.15
2.61
152,753
-
(1) 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, 2020, the Company issued an
aggregate of 74,237 shares of the Company’s common stock, as well as options to purchase up to 713,010 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 June 15, 2020, 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 890,000.
(2) On June 23, 2020, our Board of Directors adopted the Sigma Labs, Inc. 2020 Stock Appreciation Rights Plan (the “Plan”). The purposes of the Plan are to: (i) enable the
Company to attract and retain the types of employees, consultants, and directors who will contribute to the Company’s long-range success; (ii) provide incentives that align the
interests of Service Providers with those of the shareholders of the Company; and (iii) promote the success of the Company’s business. The Plan only provides for incentive
awards that are only made in the form of stock appreciation rights payable in cash (“SARs”). No shares of common stock were reserved in connection with the adoption of the
Plan since no shares will be issued pursuant to the Plan. As of December 31, 2020, the Company issued an aggregate of 127,679 SARs pursuant to the Plan.
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 14,000 shares of common stock
at an exercise price of $14.70 per share and a Unit Purchase Option issued in June 2018 to acquire up to 19,120 Units, at an exercise price of $12.50 per Unit, consisting of
19,120 shares of common stock and warrants to purchase up to 5,736 shares of common stock at an exercise price of $10.80. In connection with our January 27, 2020 private
placement of equity securities, we issued Dawson James a warrant to purchase up to 17,004 shares of common stock at an initial exercise price of $11.30. During 2020, we
issued Dawson James additional warrants to purchase up to 21,870 shares of common stock at an exercise price of $11.70 per share in connection with the exercise of Series D
Preferred Warrants by certain institutional investors,
On January 8, 2021, we entered into an underwriting agreement with H.C. Wainwright & Co., for which compensation has been paid with equity securities that have
been previously disclosed in our filings with the SEC, including warrants issued in January 2021 to purchase up to 146,943 shares of common stock at an exercise price of
$3.75 per share.
On August 5, 2019 we entered into an agreement with MHZCI, LLC to provide investor relations services to the Company. Pursuant to the terms of the agreement, as
partial compensation for services to be rendered 5,000 shares of common stock of the Company were issued to MHZCI, LLC as follows (1) 2,500 shares on or before the 10th
day following the Effective Date of the agreement, and (2) 2,500 shares on or before the 10th day following the six-month anniversary of the agreement, if the agreement is still
then in effect. Accordingly, on August 15, 2019 the Company issued 2,500 shares of common stock to MHZCI, LLC, and on February 14, 2020 the Company issued an
additional 2,500 shares of common stock to MHZCI, LLC.
On November 18, 2019, we entered into a six-month consulting agreement with Iron Dome Ventures, LLC to provide certain investor relations related services to the
Company. Pursuant to the terms of the agreement, as partial compensation for services to be rendered we agreed to issue to Iron Dome Ventures LLC each month, beginning on
the Effective Date, and subsequently on the 18th of each month during the first three months of the agreement, a warrant to purchase 833 shares of the Company’s common
stock at an exercise price of $0.10. Effective November 18, 2020, we entered into a new six-month contract with Iron Dome Ventures, LLC in which we granted 13,500 Stock
Appreciation Rights, payable in cash only, with an exercise price of $2.47 per share.
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
45
We have entered into an “at will” employment agreement, effective as of July 1, 2019, with Frank Orzechowski under which he was engaged to serve as our Chief
Financial Officer, Treasurer, Principal Accounting Officer and Corporate Secretary of the Company. Under Mr. Orzechowski’s employment agreement, he was entitled to
receive an annual base salary of $135,000, which was increased to $155,000 effective March 1, 2020, and which was increased to $180,000 on January 1, 2021. Pursuant to the
employment agreement, Mr. Orzechowski was granted (1) a stock option to purchase up to 250 shares of common stock of the Company, at an exercise price equal to $14.00
per share, which was the closing market price of the Company’s common stock on July 1, 2019 (i.e., the Effective Date), and (2) to purchase up to 6,000 shares of common
stock of the Company, with an exercise price of $14.00, and will vest and become exercisable as follows: 387 shares vested and became exercisable on the one-year anniversary
of the Effective Date, 900 shares will vest and become exercisable on the second-year anniversary of the Effective Date, 1,413 shares will vest and become exercisable on the
third-year anniversary of the Effective Date, and 3,300 shares will vest and become exercisable on the fourth-year anniversary of the Effective Date, provided, in each case, that
Mr. Orzechowski remains an employee of the Company through such vesting dates. Further, Mr. Orzechowski is eligible to participate in the Company’s 2013 Equity Incentive
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 January 27, 2020, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain of its directors (Mark K. Ruport, Salvatore Battinelli and
Frank Garofalo, a former director) and Carl Schwartz, who was the Company’s largest shareholder. Pursuant to the SPA, the Company issued and sold 333.33 shares of the
Company’s Series E Convertible Preferred Stock (the “Series E Preferred Stock”), and Class A Warrants to purchase 48,544 shares of the Company’s Common Stock (the
“Common Warrants”) for a total gross purchase price of $500,000. The Series E Preferred Stock is initially convertible into 48,544 shares of Common Stock (61,651 shares of
common stock including the “make-whole dividend), and the Class A Warrants have an initial exercise price of $11.30 per share.
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
Audit Fees
The following is a summary of the fees billed to the Company by Haynie & Company for professional services rendered with respect to the years ended December 31,
2020 and 2019:
Audit Fees
Audit Related Fees
Tax Fees
$
$
2020
2019
73,500 $
23,300
2,500
99,300 $
71,300
34,600
2,500
108,400
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 review of the interim financial statements included in quarterly reports, 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, 2020, 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 Haynie & Company.
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.
46
Exhibit
Number
1.1
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
10.1
Description
Underwriting Agreement, dated January 8, 2021, by and among Sigma Labs, Inc. and H.C. Wainwright & Co., LLC, as the representative for the underwriters
named therein (filed as Exhibit 1.1 to the Company’s Current Report on Form 8-K filed January 12, 2021, 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 Change Pursuant to NRS 78.209. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed February 28, 2020, 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).
Certificate of Designations (Series D Convertible Preferred Stock) (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 30,
2020 and incorporated herein by reference).
Certificate of Designations (Series E Convertible Preferred Stock) (filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed January 30, 2020
and incorporated herein by reference).
Amended and Restated Bylaws of the Company, as amended.**
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).
Form of Common Stock Purchase Warrant.(filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed May 8, 2019, and incorporated herein by
reference).
Form of Placement Agent Warrant (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed May 8, 2019, and incorporated herein by reference).
Form of Institutional Common Warrant (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed January 30, 2020, and incorporated herein by
reference).
Form of Class A Warrant(filed as Exhibit 10.8 to the Company’s Current Report on Form 8-K, filed January 30, 2020, and incorporated herein by reference).
Form of Common Stock Purchase Warrants (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed April 3, 2020, and incorporated herein by
reference).
Form of Underwriter Common Stock Purchase Warrant (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 12, 2021, and
incorporated herein by reference).
Form of Warrant to Purchase Common Stock (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed January 12, 2021, and incorporated herein
by reference).
Description of Securities. **
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).
47
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Form of Nonqualified Stock Option Agreement for the Plan (previously filed by the Company as Exhibit 10.4 to the Company’s Form 10-K, filed on April 1,
2019, and incorporated herein by reference
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 Plan (previously filed by the Company as Exhibit 10.6 to the Company’s Form 10-K, filed on April 1, 2019, and
incorporated herein by reference).
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).*
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).*
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).*
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).
10.10
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,
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
filed on November 14, 2018, for the period ended September 30, 2018, and incorporated herein by reference).*
Securities Purchase Agreement, dated as of May 7, 2019, between the Company and the Purchaser (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed May 8, 2019, and incorporated herein by reference).
Employment letter agreement, effective as of July 1, 2019, between the Company and Frank D. Orzechowski. (filed as Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q filed August 14, 2019, and incorporated herein by reference) *
Sigma Labs, Inc. 2013 Equity Incentive Plan, as Amended (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 19, 2020 and
incorporated herein by reference). *
Employment letter agreement, effective as of December 3, 2020, between the Company and Mark Ruport (filed by the Company as Exhibit 10.15 to the
Company’s Form 10-K, filed on March 24, 2020, and incorporated herein by reference).*
Securities Purchase Agreement (Institutional Investors) (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed January 27, 2020, and
incorporated herein by reference).
Registration Rights Agreement (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed January 27, 2020, and incorporated herein by
reference).
Securities Purchase Agreement (Other Investors) (filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K, filed January 27, 2020, and incorporated
herein by reference).
Private Placement Agreement (filed as Exhibit 10.9 to the Company’s Current Report on Form 8-K, filed January 27, 2020, and incorporated herein by
reference).
Securities Purchase Agreement, dated as of April 2, 2020, between the Company and Purchasers (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed April 3, 2020, and incorporated herein by reference).
Sigma Labs, Inc. 2020 Stock Appreciation Rights Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 29, 2020 and
incorporated herein by reference).*
Form of Stock Appreciation Rights Agreement (Employees; 2020 Stock Appreciation Rights Plan) (filed as Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed June 29, 2020 and incorporated herein by reference).*
Form of Stock Appreciation Rights Agreement (Non-employee Directors; 2020 Stock Appreciation Rights Plan) (filed as Exhibit 10.3 to the Company’s Current
Report on Form 8-K filed June 29, 2020 and incorporated herein by reference).
Form of Waiver (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 12, 2021, and incorporated herein by reference).
48
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
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
XBRL Taxonomy Extension Label Linkbase Document.
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.
We may voluntarily include a summary of information required by Form 10-K under this Item 16. We have elected not to include such summary information.
49
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
March 24, 2021
March 24, 2021
SIGMA LABS, INC.
By:
By:
/s/ Mark K. Ruport
Mark K. Ruport
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Frank Orzechowski
Frank Orzechowski
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/ Mark K. Ruport
Mark K. Ruport
/s/ Frank Orzechowski
Frank Orzechowski
/s/ John Rice
John Rice
/s/ Salvatore Battinelli
Salvatore Battinelli
/s/ Dennis Duitch
Dennis Duitch
/s/ Kent Summers
Kent Summers
Title
President and Chief Executive Officer
(Principal Executive Officer) and Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
Chairman, Director
Director
Director
Director
50
Date
March 24, 2021
March 24, 2021
March 24, 2021
March 24, 2021
March 24, 2021
March 24, 2021
Financial Statements:
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statement of Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
Index 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, 2020 and 2019, and the related statements of operations,
stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, 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, 2020 and 2019, and the
results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be
communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we
are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition – Multiple Deliverables in Revenue Contracts
Description of the Matter:
As discussed in Note 1 to the financial statements, Sigma Labs, Inc.’s revenue is derived primarily from the sale of software, the related hardware suite, and
engineering services. The Company’s contracts with customers typically include the promise to transfer multiple goods and/or services to the customer. Management
must assess whether each promised good or service is distinct for the purpose of identifying the performance obligations within the contract and must then determine
and allocate the transaction price to the performance obligations. This assessment can be subjective and requires management to make judgments about the individual
promised goods or services and whether such goods or services are separable and distinct from the other aspects of the contractual relationship.
Auditing management’s assessment and recognition of revenue can be complex, involves judgment, and is based on a thorough understanding of the Company’s
offerings.
How we Addressed the Matter in Our Audit:
We obtained a thorough understanding of the controls the Company has in place to perform this assessment including walk-throughs of the key controls and analysis of
whether the controls are designed and operating effectively. To evaluate Sigma Labs Inc.’s assessment of performance obligations and allocation of price, our audit
procedures included, among others, reading and evaluating management’s assumptions used to determine the distinct performance obligations and price allocations.
We compared the stand-alone price for each performance obligation to the allocated prices to ensure the allocation was reasonable. We also obtained confirmations
from customers verifying the terms of the contracts.
/s/ Haynie & Company
Haynie & Company
Salt Lake City, Utah
March 24, 2021
We have served as the Company’s auditor since 2018.
F-2
Sigma Labs, Inc.
Balance Sheets
ASSETS
December 31, 2020
December 31, 2019
Current Assets:
Cash
Accounts Receivable, net
Inventory
Prepaid Assets
Total Current Assets
Other Assets:
Property and Equipment, net
Intangible Assets, net
Investment in Joint Venture
Long-Term Prepaid Asset
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
Stock Appreciation Rights
CARES Act Deferred Payroll Taxes
Total Long-Term Liabilities
TOTAL LIABILITIES
Stockholders’ Equity
Preferred Stock, $0.001 par; 10,000,000 shares authorized; 715 and 0 issued and outstanding,
respectively
Common Stock, $0.001 par; 12,000,000 authorized; 5,995,320 and 1,403,759 issued and outstanding,
respectively
Additional Paid-In Capital
Accumulated Deficit
Total Stockholders’ Equity
$
$
$
$
$
$
3,700,814
331,562
659,651
90,735
4,782,762
138,626
753,122
-
26,000
917,748
5,700,510
128,937
-
77,957
243,815
450,709
48,341
37,728
86,069
536,778
1
5,995
38,262,744
(33,105,008)
5,163,732
86,919
55,540
598,718
199,727
940,904
128,723
569,341
500
52,000
750,564
1,691,468
727,114
50,000
139,447
122,658
1,039,219
-
-
-
1,039,219
-
1,404
26,746,439
(26,095,594)
652,249
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
5,700,510
$
1,691,468
See accompanying notes to financial statements
F-3
REVENUES
COST OF REVENUE
GROSS PROFIT (LOSS)
EXPENSES:
Salaries & Benefits
Stock-Based Compensation
Operating R&D Costs
Investor & Public Relations
Organizational Costs
Legal & Professional Service Fees
Office Expenses
Depreciation & Amortization
Other Operating Expenses
Total Operating Expenses
LOSS FROM OPERATIONS
OTHER INCOME (EXPENSE)
Interest Income
State Incentives
Bad Debt Expense
Exchange Rate Gain (Loss)
Other Income
Interest Expense
Loss on Dissolution of Joint Venture
Total Other Income (Expense)
Sigma Labs, Inc.
Statements of Operations
Years Ended
December 31, 2020
December 31, 2019
$
807,488
$
591,957
215,531
2,622,162
596,842
351,404
434,852
425,847
676,142
416,580
105,175
285,295
5,914,299
402,446
574,301
(171,855)
2,354,329
497,240
647,994
417,750
530,958
664,403
747,881
192,569
158,706
6,211,830
(5,698,768)
(6,383,685)
1,058
151,657
-
(1,677)
361,700
(13,908)
(201)
498,629
18,760
51,877
(2,500)
(4,879)
8,263
(8,685)
-
62,836
LOSS BEFORE PROVISION FOR INCOME TAXES
(5,200,139)
(6,320,849)
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
$
$
$
-
-
(5,200,139)
$
(6,320,849)
1,809,275
(7,009,414)
(1.83)
3,829,716
$
$
-
(6,320,849)
(5.37)
1,176,278
See accompanying notes to financial statements
F-4
Sigma Labs, Inc.
Statement of Stockholders’ Equity
For The Years Ended December 31, 2020 and 2019
Preferred
Shares
Outstanding
Preferred
Stock
Common
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Balances, December 31, 2018
- $
-
877,663 $
Shares and Warrants Issued in Public Offering
Shares Issued for Exercise of Warrants
UPO Proceeds in Public Offering
Shares Issued for Cashless Exchange of UPO’s
Shares Sold in Private Placement
Shares Issued to Directors for Services
Securities Issued for Third Party Services
Securities Awarded to Employees
Offering Costs
Net Loss
Balances, December 31, 2019
Common Shares Sold in Public Offering
Preferred Shares Sold in Public Offering
Preferred Stock Dividends
Common Shares Issued for Conversion of Preferred Shares
Common Shares Issued for Conversion of Series D Prefunded
Warrants
Preferred Shares issued for Exercise of Preferred Warrants
Securities Issued to Directors for Services
Securities Issued for Third Party Services
Securities Awarded to Employees
Offering Costs
Issuance of Fractional Shares from Reverse Split
Net Loss
Balances, December 31, 2020
-
-
-
-
-
-
-
-
-
- $
-
1,973
-
(7,404)
-
6,146
-
-
-
-
-
-
715 $
-
-
-
-
-
-
-
-
-
-
447,580
7,023
8,843
40,000
20,000
2,500
150
-
-
1,403,759 $
7
878 $ 21,509,306 $ (19,774,745) $ 1,735,439
-
- 4,466,121
75,848
-
100
-
515,000
300,000
32,679
497,240
(649,329)
(6,320,849) (6,320,849)
652,249
447 4,465,674
75,841
100
(9)
514,960
299,980
32,676
497,240
(649,329)
-
1,404 $ 26,746,439 $ (26,095,594) $
9
40
20
3
-
-
-
-
-
-
-
-
-
-
2
-
(7)
493,027
-
774,940
3,272,048
493 1,499,507
- 2,099,998
775 1,808,500
(3,265)
3,272
- 1,500,000
- 2,100,000
-
-
(1,809,275)
-
-
6
-
-
-
-
-
-
1
22,438
-
8,334
6,000
11,517
-
3,257
-
5,995,320 $
22
(22)
- 5,992,344
239,875
8
102,769
6
596,830
12
(820,228)
-
(3)
3
-
-
-
-
- 5,992,350
239,883
-
102,775
-
596,842
-
(820,228)
-
-
-
(5,200,139) (5,200,139)
5,995 $ 38,262,744 $ (33,105,008) $ 5,163,732
See accompanying notes to financial statements
F-5
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 - Employees
Stock Based Compensation - Third Party Services
Stock Based Compensation - Directors
Change in assets and liabilities:
Accounts Receivable
Inventory
Prepaid Assets
Accounts Payable
Deferred Revenue
Accrued Expenses
Long-term portion of Stock Appreciation Rights
Long Term portion of Deferred Payroll Taxes under the CARES Act
NET CASH USED IN OPERATING ACTIVITIES
INVESTING ACTIVITIES
Purchase of Property and Equipment
Purchase of Intangible Assets
Payment Received from Notes Receivable
Dissolution of Joint Venture
NET CASH USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
Gross Proceeds from Public and Private Issuances of Securities
Less Offering Costs
Payment of Note Payable
Proceeds from Exercise of Warrants
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:
Issuance of Common Shares for Preferred Dividends
Disclosure of Cash Received for:
Issuance of Preferred Stock for Exercise of Preferred Warrants
Other noncash operating activities disclosure:
Issuance of Securities for services
Disclosure of cash paid for:
Interest
Income Taxes
Years Ended
December 31, 2020
December 31, 2019
$
(5,200,139)
$
(6,320,849)
105,175
596,842
102,775
239,883
(276,022)
(60,932)
134,991
(598,177)
(61,490)
121,157
48,341
37,728
(4,809,868)
(88,074)
(210,785)
-
500
(298,359)
3,600,000
(820,228)
(50,000)
5,992,350
8,722,122
3,613,895
86,919
3,700,814
1,809,275
5,992,350
342,657
13,908
-
$
$
$
$
$
$
192,569
497,240
32,679
300,000
(16,740)
(358,632)
(184,472)
509,626
87,949
(254,175 )
-
-
(5,514,805)
(33,487)
(174,224)
121,913
-
(85,798)
4,981,221
(649,329)
-
75,848
4,407,740
(1,192,863)
1,279,782
86,919
-
-
335,679
5,069
-
$
$
$
$
$
$
See accompanying notes to financial statements
F-6
SIGMA LABS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
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.
Reverse Stock Split - Effective February 27, 2020, 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-10 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.
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, 2020 and 2019 and for the periods then ended have been made.
Continuing Operations – The Company has sustained losses and had negative cash flows from operating activities since its inception. Commencing in 2017, the company
committed itself to a focused initiative to transition its product and its company culture from research and development into an enterprise with a commercial industrial product
and a business-oriented operation culture.
In 2020, the Company relied on both public and private offerings to finance the commencement of commercialization by entering test and evaluation programs with large
potential customers, both end-users and OEMs. In January 2020, we completed two private placements consisting of shares of our newly created Series D and Series E
Preferred Stock, warrants to purchase additional shares of Series D Preferred Stock and warrants to purchase shares of our Common Stock resulting in net cash proceeds to us
of approximately $1,711,124. On March 27, 2020, pursuant to the terms of the Agreement, we forced the exercise of a portion of the warrants to purchase our Series D
Preferred Stock which resulted in net cash proceeds to the Company of $460,000. On April 6, 2020, the Company closed an offering of equity securities in which the Company
sold and issued to certain institutional investors (a) 493,027 shares of the Company’s common stock (the “Common Shares”) and pre-funded warrants (the “Pre-funded
Warrants”) to purchase up to 22,438 shares of the Company’s common stock, and (b) Series A Warrants (the “Private Warrants”) to purchase an aggregate of 515,465 shares of
the Company’s common stock pursuant to a private placement resulting in net proceeds of approximately $1,230,000. On April 14, 2020 we were granted a loan from BOKF,
NA dba Bank of Oklahoma in the aggregate amount of $361,700, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid,
Relief and Economic Security Act (the “CARES Act”), which was enacted March 27, 2020. The Company used the entire loan proceeds to fund payroll expenses, and as such,
the loan was forgiven in full on January 13, 2021. During 2020, 6,146 Series D Preferred Warrants were exercised by institutional investors, resulting in net proceeds to the
company of 5,820,998. In January 2021, the Company closed a public offering of our common stock resulting in net proceeds of approximately $4,532,444 after deducting
underwriting discounts and commissions and other offering expenses payable by the Company.
The continuing operations of the Company are no longer solely dependent upon financing the cost of product development in the absence of revenues, but rather upon our
abilities to finance our efforts to successfully ramp up commercialization, thus earning the product validation of both customer licensing and purchases and creating a dynamic
in which public and private offerings facilitate the growth of revenues.
As a result, the Company currently has sufficient cash and working capital to fund operations through the end of 2021 and is anticipating that contracts may be closed during
fiscal 2021 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; however, the Company is unable to predict the extent to which the novel coronavirus may affect the financial markets and the
Company’s access to such markets. 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.
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, 2020 and 2019, the Company had the following common shares underlying these instruments:
Warrants
Preferred Stock Warrants
Stock Options
Preferred Stock
Convertible Note Payable
Total Underlying Common Shares
Year Ended December 31,
2020
2019
1,881,429
4,748
713,010
243,024
-
2,842,211
363,728
-
180,903
-
2,500
547,131
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.
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, 2020 and 2019 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,
2020 and 2019, the Company recognized no interest and penalties. All tax years starting with 2017 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, 2020 or 2019.
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 patents were written off in 2020, and $23,909
of patents related to PrintRite3D® Contour were written off in December of 2019.
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.
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 consist of raw materials used in the production of customized parts, work-in-process and finished goods components which will be sold to customers.
Inventories are valued at the lower of cost or net realizable value, 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, 2020 and
2019 were $351,404 and $647,994, respectively.
NOTE 2 - Inventory
At December 31, 2020 and December 31, 2019, the Company’s inventory was comprised of:
Raw Materials
Work in Process
Finished Goods
Total Inventory
December 31
2020
December 31,
2019
$
$
309,305 $
175,884
174,462
659,651 $
173,102
92,493
333,123
598,718
F-10
NOTE 3 – Property and Equipment
The following is a summary of property and equipment, less accumulated depreciation, as of December 31, 2020 and 2019:
Property and Equipment
Less: Accumulated Depreciation
Net Property and Equipment
Year Ended December 31,
2020
2019
$
$
1,196,450 $
(1,057,824)
138,626 $
1,108,375
(979,652)
128,723
Depreciation expense on property and equipment was $78,172 and $182,708 for the years ended December 31, 2020 and 2019, respectively.
NOTE 4 – 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 2020, $70,175 of costs related to patents issued to us during 2020 were 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, 2020 and 2019, respectively:
Provisional Patent Applications
Patents
Less: Accumulated Amortization
Net Intangible Assets
Year Ended December 31,
2020
2019
$
$
585,152 $
209,110
(41,140)
753,122 $
448,714
138,936
(18,309)
569,341
Amortization expense on intangible assets was $27,003 and $9,861 for the years ended December 31, 2020 and 2019, respectively.
The estimated aggregate amortization expense for each of the succeeding years ending December 31 is as follows:
2021
2022
2023
2024
Thereafter
$
12,301
12,301
12,301
12,301
118,766
$
167,970
F-11
NOTE 5 - Notes Payable
On January 31, 2020, the Company paid off its Secured Convertible Promissory Note in full in the amount of $56,458, including accrued interest of $1,458 and a late fee
penalty of $5,000.
NOTE 6 – Paycheck Protection Plan Loan
On April 14, 2020, the Company was granted a loan from BOKF, NA dba Bank of Oklahoma in the aggregate amount of $361,700, pursuant to the Paycheck Protection
Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted March 27, 2020. Under the
terms of the PPP, PPP loans and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll,
benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the
forgiveness period.
As of December 31, 2020, the Company has used the entire loan proceeds to fund its payroll expenses. As a result, the Company believes that it has met the PPP eligibility
criteria for forgiveness and has concluded that the loan represents, in substance, a government grant that is expected to be forgiven. As such, the Company has recognized the
entire loan amount as Other Income at December 31, 2020.
In January 2021, the Company received notice from the lender that the entire amount of the loan had been forgiven.
NOTE 7 – Deferral of Social Security Tax Payments
Pursuant to sections 2302(a)(1) and (a)(2) of the CARES Act, the Company has elected to defer payments of its share of Social Security tax due during the “payroll tax deferral
period”. The payroll tax deferral period began on March 27, 2020 and ended on December 31, 2020. At December 31, 2020 the total amount of such deferral was $75,455. Per
the terms of the deferral program, 50% of the deferred amount is due on December 31, 2021, and the remaining 50% is due on December 31, 2022 at 0% interest.
F-12
NOTE 8 – Stockholders’ Equity
Common Stock
Effective February 27, 2020, 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-10 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.
On March 27, 2020, at a special shareholders’ meeting, our authorized shares of common stock were increased from 2,250,000 to 8,000,000. At our annual shareholders’
meeting held on June 15, 2020, our authorized shares of common stock were increased from 8,000,000 to 12,000,000.
On April 6, 2020, the Company closed a public offering of equity securities in which it issued 493,027 shares of common stock and pre-funded warrants to purchase up to
22,438 shares of the Company’s common stock. The Company also issued Series A Warrants to purchase an aggregate of 515,465 shares of the Company’s common stock
pursuant to a private placement. In connection with this offering, the Company issued Dawson James Securities, Inc., its Placement Agent, a warrant to purchase an aggregate
of 41,237 shares of the Company’s Common Stock (which amount is based on the number of Common Shares and shares underlying the Pre-Funded Warrants) at an exercise
price of $3.64 per share. Net proceeds to the Company after deducting offering expenses were approximately $1,230,000. On December 4, 2020, the Company issued 22,438
shares of common stock for the exercise of the pre-funded warrants.
In the twelve months ended December 31, 2020, the Company issued 3,272,048 shares of common stock in exchange for the conversion of 7,404 shares of Series D Convertible
Preferred stock, and 774,940 shares of common stock as in-kind payment of preferred stock dividends.
In the twelve months ended December 31, 2020, the Company issued 25,851 shares of common stock for services.
In January 2019, the Company issued 20,000 shares of common stock to directors valued at $15.00 per share, or $300,000, with such shares vesting ratably over four quarterly
installments.
Also in January 2019, the Company issued 8,843 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 7,023 shares of common stock upon the exercise of 7,023 warrants having an exercise price of $10.80 resulting in
gross cash proceeds of $75,848.
In March 2019, the Company issued 150 shares of common stock valued at $20.00 per share to the Company’s Vice President of Business Development in connection with his
achievement of performance milestones, with such shares vesting immediately.
Also in March 2019, the Company closed a public offering of equity securities in which it issued 140,080 shares of common stock and warrants to purchase a total of 42,024
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.
In May 2019, the Company closed a private placement of equity securities in which it issued 40,000 shares of common stock and warrants to purchase a total of 22,000 shares
of common stock resulting in net proceeds of approximately $515,000, after deducting placement agent commissions and other offering expenses payable by the Company.
On August 2, 2019, the Company closed a public offering of equity securities in which it issued 287,500 shares of common stock resulting in net proceeds of approximately
$1,971,000, after deducting commissions and other offering expenses payable by the Company.
On August 15, 2019, the Company issued 2,500 shares of common stock valued at $6.84 per share to MHZCI, LLC, an investor relations firm engaged by the Company, as
partial compensation for services to be rendered.
On September 13, 2019, Aegis Capital Corp. partially exercised its over-allotment option granted by the Company in the foregoing August 2019 public offering by purchasing
an additional 20,000 shares of common stock, resulting in net proceeds of $148,800 after deducting commissions.
F-13
Deferred Compensation
In 2020 and 2019, 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 2020 and 2019, $77,187 and $303,000, respectively, of the unvested compensation cost related to these issues was
recognized.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, $0.001 par value. 715 and 0 shares of preferred stock were issued and outstanding at December 31,
2020 and 2019, respectively.
In January 2020, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain institutional investors (the “Institutional Private Placement”). Pursuant to
the SPA, the Company issued and sold 1,640 shares of the Company’s newly created Series D Convertible Preferred Stock (the “Series D Preferred Stock”). Under the
Certificate of Designations for the Series D Preferred Stock, the Series D Preferred Stock has an initial stated value of $1,000 per share (the “Stated Value”). Dividends accrue
at a dividend rate of 9% per annum (subject to increase upon the occurrence (and during the continuance) of certain triggering events described therein) and, on a monthly
basis, shall be payable in kind by the increase of the Stated Value of the Series D Preferred Shares by said amount. The holders of the Series D Preferred Shares will have the
right at any time to convert all or a portion of the Series D Preferred Shares (including, without limitation, accrued and unpaid dividends and make-whole dividends through the
third anniversary of the closing date) into shares of the Company’s Common Stock at the conversion price then in effect, which is $2.50 (subject to adjustment for stock splits,
dividends, recapitalizations and similar events and full ratchet price protection). In addition, a holder may at any time, alternatively, convert all, or any part, of its Series D
Preferred Shares at an alternative conversion price, which equals the lower of the applicable conversion price then in effect, and the greater of (x) $1.80 and (y) 85% of the
average volume weighted average price (“VWAP”) of the Common Stock for a five (5) trading day period prior to such conversion. Upon the occurrence of certain triggering
events, described in the Certificate of Designations, including, but not limited to payment defaults, breaches of transaction documents, failure to maintain listing on the Nasdaq
Capital Market, and other defaults set forth therein, the Series D Preferred Shares would become subject to redemption, at the option of a holder, at a 125% premium to the
underlying value of the Series D Preferred Shares being redeemed.
At December 31, 2020 there were 382 shares of Series D Convertible Preferred stock outstanding, which if converted as of December 31, 2020, including the make-whole
dividends, would have resulted in the issuance of 181,374 shares of common stock.
Concurrent with the Institutional Private Placement, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain of its directors and the Company’s
largest shareholder (the “Other Private Placement”). Pursuant to the SPA, the Company issued and sold 333 shares of the Company’s newly created Series E Convertible
Preferred Stock (the “Series E Preferred Stock”). Dividends accrue at a dividend rate of 9% per annum and, on a monthly basis, shall be payable in kind by the increase of the
Stated Value of the Series E Preferred Shares by said amount. The Series E Preferred Stock is initially convertible into 48,544 shares of Common Stock.
At December 31, 2020, all of the issued Series E Convertible Preferred Stock were outstanding, which if converted as of December 31, 2020, including the make-whole
dividends, would have resulted in the issuance of 61,651 shares of common stock.
F-14
Stock Options
On June 15, 2020, 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 650,000 shares of our common stock to a total of 890,000 shares. As of December 31,
2020, there were 152,753 shares available for issuance under the 2013 Plan.
During 2020, the Company granted a total of 579,998 options to 19 employees, 4 directors, and 5 consultants with vesting periods ranging from immediately upon issue to three
years beginning May 1, 2020. In 2020, 294,373 options vested and $854,217 of compensation cost was recognized during the year. As of December 31, 2020, there were
options to purchase 663,010 shares issued and outstanding under the 2013 Plan. Of this amount, there are vested options exercisable for 349,642 shares of common stock. No
options were exercised during the year ended December 31, 2020.
During 2019, the Company granted a total of 100,326 options to 22 employees and 2 consultants with vesting periods ranging from immediately upon issue to 4 years
beginning January 1, 2019. In 2019, 38,143 options vested and $494,240 of compensation cost was recognized during the year. As of December 31, 2019, there were options to
purchase 180,903 shares issued and outstanding under the 2013 Plan. Of this amount, there are vested options exercisable for 88,163 shares of common stock. No options were
exercised during the year ended December 31, 2019.
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 statements of operations for the years ended December 31, 2020 and 2019 is $596,842, of which $573,232 is related to
stock options, and $497,240, of which $ 494,740 is related to stock options, respectively. There was no capitalized share-based compensation cost as of December 31, 2020 and
2019, and there were no recognized tax benefits during the years ended December 31, 2020 and 2019.
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, 2020 and 2019:
F-15
Assumptions:
Dividend yield
Risk-free interest rate
Expected volatility
Expected life (in years)
2020
0.00%
0.19-0.50%
116.0 – 117.0%
5
2019
0.00%
1.42-2.53%
105.2-112.1%
5-10
Option activity for the year ended December 31, 2020 and 2019 was as follows:
Weighted Average Weighted Average
Exercise
Price
($)
Remaining
Contractual
Life (Yrs.)
Aggregate
Intrinsic
Value ($)
Options
Options outstanding at December 31, 2018
Granted
Exercised
Forfeited or cancelled
Options outstanding at December 31, 2019
Granted
Exercised
Forfeited or cancelled
Options outstanding at December 31, 2020
Options expected to vest in the future as of December
31, 2020
Options exercisable at December 31, 2020
Options vested, exercisable, and options expected to vest
at December 31, 2020
82,629
100,333
-
(2,050)
180,912
579,998
-
(47,900)
713,010
363,368
349,642
713,010
2.49
1.25
-
1.68
1.81
2.55
-
22.62
5.15
3.92
6.43
5.15
6.47
4.79
-
-
5.09
4.57
-
-
4.40
4.53
4.27
4.40
60,090
-
-
-
25,988
477,802
-
-
477,802
-
-
477,802
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 $3.38 closing price of our Common Stock on December 31, 2020. All of the 2020 option grants have an exercise price currently
below $3.38.
At December 31, 2020, there was $1,029,056 of unrecognized share-based compensation expense related to unvested share options with a weighted average remaining
recognition period of 2.90 years.
Stock Appreciation Rights
On June 23, 2020, the board of directors (the “Board”) of the Company adopted the Sigma Labs, Inc. 2020 Stock Appreciation Rights Plan (the “Plan”). The purposes of the
Plan are to: (i) enable the Company to attract and retain the types of employees, consultants, and directors (collectively, “Service Providers”) who will contribute to the
Company’s long-range success; (ii) provide incentives that align the interests of Service Providers with those of the shareholders of the Company; and (iii) promote the success
of the Company’s business. The Plan provides for incentive awards that are only made in the form of stock appreciation rights payable in cash (“SARs”). No shares of common
stock were reserved in connection with the adoption of the Plan since no shares will be issued pursuant to the Plan.
SARs may be granted to any Service Provider. A SAR is the right to receive an amount equal to the Spread with respect to a share of the Company’s common stock (“Share”)
upon the exercise of the SAR. The “Spread” is the difference between the exercise price per share specified in a SAR agreement on the date of grant and the fair market value
per share on the date of exercise of the SAR. The exercise price per share will not be less than 100% of the fair market value of a Share on the date of grant of the SAR. The
administrator of the Plan will have the authority to, among other things, prescribe the terms and conditions of each SAR, including, without limitation, the exercise price and
medium of payment and vesting provisions, and to specify the provisions of the SAR Agreement relating to such grant.
On June 23, 2020, the Company granted, pursuant to the Plan, (i) 60,094 SARs to its President and Chief Executive Officer, (ii) 12,019 SARs to its Vice President of Business
Development, (iii) 24,038 SARs to its Chief Technology Officer, and (iv) 18,028 SARs to its Chief Financial Officer. The exercise price of each such SAR is $2.63, which was
the closing price of the Company’s common stock on the date of grant. Such SARs expire on the fifth anniversary of the grant date and may be settled only in cash.
Additionally, each such SAR will vest and become exercisable in three equal (as closely as possible) installments on each of the first, second and third anniversaries of the grant
date, subject, in each case, to the applicable SAR holder being in the continuous employ of the Company on the applicable vesting date, and, in the event of a Change in
Control (as defined in the Plan), will become immediately vested and exercisable as long as the applicable holder is in the Company’s employ immediately prior to the Change
in Control, and will otherwise be on such other terms set forth in the form of Stock Appreciation Rights Agreement. On November 19, 2020, we granted 13,500 SARs to a
consultant as partial compensation for services pursuant to the consulting agreement.
F-16
The Company recognizes compensation expense and a corresponding liability for the fair value of the SARs over the requisite service period for each SAR award. The SAR’s
are revalued at each reporting date in accordance with ASC 718 “Compensation-Stock Compensation”, and any changes in fair value are reflected in income as of the
applicable reporting date.
The fair value of SAR awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the twelve months ended December 31,
2020:
Assumptions:
Dividend yield
Risk-free interest rate
Expected volatility
Expected life (in years)
SARs activity for the twelve months ended December 31, 2020 was as follows:
2020
0.00%
0.22%
116.8%
5
SARs outstanding at December 31, 2019
Granted
Exercised
Forfeited or cancelled
SARs outstanding December 31, 2020
SARs expected to vest in the future as of December 31, 2020
SARs exercisable at December 31, 2020
SARs vested, exercisable, and options expected to vest at December 31,
2020
Weighted Average Weighted Average
Exercise
Price
($)
Remaining
Contractual
Life (Yrs.)
Aggregate
Intrinsic
Value ($)
SARs
-
127,679
-
-
127,679
125,429
2,250
127,679
-
2.61
-
-
2.61
2.62
2.47
2.61
-
4.52
-
-
4.52
4.51
4.89
4.52
-
97,919
-
-
97,919
95,872
2,047
97,919
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 $3.38 closing price of our common stock on December 31, 2020. All of the 2020 SARs grants have an exercise price currently below
$3.38.
At December 31, 2020, there was $216,149 of unrecognized share-based compensation expense related to unvested SARs with a weighted average remaining recognition
period of 2.48 years.
Warrants
At December 31, 2020, the Company had outstanding warrants to purchase a total of 1,881,429 shares of common stock. The warrants have exercise prices that range from
$0.10 to $40.00, which if not exercised, will expire between February 21, 2022 and December 9, 2025.
Warrant activity for the year ended December 31, 2020 and 2019 was as follows:
Warrants outstanding at December 31, 2018
Granted
Exercised
Forfeited or cancelled
Warrants outstanding at December 31, 2019
Granted
Exercised
Forfeited or cancelled
Warrants outstanding at December 31, 2020
Weighted Average
Exercise
Price
($)
Warrants
Weighted
Average
Remaining
Contractual
Life (Yrs.)
305,060
65,690
(7,023)
-
363,728
1,540,139
(22,438)
-
1,881,429
27.50
15.60
10.80
-
25.60
3.19
-
-
7.57
3.86
4.39
-
-
3.12
4.64
-
-
4.16
In connection with its January 2020 private placement, the Company issued 6,156 warrants to purchase its Series D Preferred Stock (the Preferred Warrants”). As of December
31, 2020, there were 10 Preferred Warrants outstanding, which if exercised would result in the issuance of 10 shares of Series D Convertible Preferred Stock. The Series D
Convertible Preferred stock, including make-whole dividends, was convertible into 4,748 shares of common stock on December 31, 2020.
F-17
NOTE 9 – 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, 2017 through 2019.
The Company has available at December 31, 2020, unused operating loss carryforwards of approximately $19,925,769 which may be applied against future taxable income and
which expire in various years through 2040. 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 $4,170,100 and $3,037,800 at December 31, 2020 and 2019, 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
2020
2019
$
$
4,184,400 $
(14,300)
(4,170,100)
- $
3,038,600
(800)
(3,037,800)
-
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 years ended December 31,
2020 and 2019 is as follows:
Book Loss
Depreciation
Meals & Entertainment
Stock Compensation
Change in valuation allowance
Provision for Income Taxes
$
$
2020
2019
(1,472,000) $
13,500
200
177,333
1,280,967
- $
(1,327,400)
19,000
167,420
1,900
1,139,080
-
F-18
NOTE 10 – 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, 2020 and 2019:
Loss from continuing Operations available to Common stockholders (numerator)
$
(7,009,414) $
(6,320,849)
Weighted average number of common shares Outstanding used in loss per share during the
Period (denominator)
3,829,716
1,176,278
Year Ended December 31
2020
2019
Dilutive loss per share was not presented as the Company’s outstanding common and preferred warrants, stock options and preferred stock common equivalent shares for the
periods presented would have had an anti-dilutive effect. At December 31, 2020, the Company had outstanding 1,881,429 common warrants which could be converted to
1,881,429 shares of common stock, and 713,010 stock options exercisable for 713,010 shares of common stock, 10 Series D Preferred Warrants exercisable for 10 shares of
Series D Preferred Stock, which in turn, are convertible into 4,748 shares of common stock, and 715 shares of preferred stock, which could be converted into 243,024 shares of
common stock, resulting in a potential total additional 2,842,211 common stock shares outstanding in the future. At December 31, 2019, the Company had outstanding 363,728
warrants which could be converted to 363,728 shares of common stock, a $50,000 note payable convertible into 2,500 shares of common stock, and 180,903 stock options
exercisable for 180,903 shares of common stock resulting in a potential total additional 547,131 common stock shares outstanding in the future.
NOTE 11 – Commitments and Contingencies
Operating Leases – The Company leases office and laboratory space under operating leases. Expense relating to these operating leases was $76,394 and $73,255 for the years
ended December 31, 2020 and 2019, respectively. The future minimum lease payments required under non-cancellable operating leases at December 31, 2020 were $6,115. The
future minimum lease payments are due during the year 2021.
NOTE 12 – Concentrations
Revenues – During the years ended December 31, 2020 and 2019, 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
H
I
2020
2019
22.31%
16.78%
16.72%
15.26%
10.53%
-
-
-
-
-
-
-
-
-
27.42%
21.20%
20.34%
11.83%
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, 2020 and 2019, respectively.
Customer
A
B
C
D
E
F-19
2020
2019
45.88%
25.94%
22.62%
-
-
-
-
-
76.46%
23.54%
NOTE 13 - 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. The Company and Arete terminated the Joint Venture in 2020 and distributed the remaining cash to the former
partners.
NOTE 14 - 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 makes a Safe Harbor
contribution match of 100% of each participant’s contribution up to 3% of salary, and 50% of the next 2% of salary contributed. The costs of matching contributions were
$55,321 in 2020 and $45,080 in 2019.
NOTE 15 – Related Party Transactions
As of December 31, 2020, there are no related party transactions.
NOTE 16 – Subsequent Events
In February and March of 2021, the Company issued 454,404 shares of common stock upon the exercise of warrants with an exercise price of $2.50 per share,
resulting in net cash proceeds to the Company of $1,136,010.
In March of 2021, the Company issued 119,000 shares of common stock pursuant to the conversion of 250 Series D Preferred shares.
On January 13, 2021, we were notified by our bank, BOKF, NA dba Bank of Oklahoma, that the SBA had forgiven 100% of our PPP loan of $361,700.
On January 8, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with H.C. Wainwright & Co. (the “Underwriter”), which
provided for the issuance and sale by the Company in an underwritten public offering and the purchase by the Underwriter of 1,488,507 shares of the Company’s common
stock, $0.001 par value per share. The offering closed on January 12, 2021.
Subject to the terms and conditions contained in the Underwriting Agreement, the shares were sold to the Underwriter at a public offering price of $3.00 per share, less
underwriting discounts and commissions. The Company also granted the Underwriters a 30-day option to purchase up to 223,276 additional shares of the Company’s common
stock on the same terms and conditions. The Underwriter fully exercised such option to purchase up to 223,276 additional shares of the Company’s common stock, for an
aggregate of 1,711,783 shares of Common Stock. Pursuant to the Underwriting Agreement, we have also issued to the Underwriter or its designee warrants to purchase a
number of shares equal to 8% of the aggregate number of shares of common stock sold in the Offering, including shares issued upon exercise of the option to purchase
additional shares (the “Underwriter Warrants”). The Underwriter Warrants have a term of five years from the commencement of sales in the Offering and an exercise price of
$3.75 per share. The net offering proceeds to the Company from the Offering are approximately $3,919,552 (or approximately $4,532,444 taking into account the Underwriter’s
exercise of its option to purchase additional shares in full), after deducting underwriting discounts and commissions and other estimated offering expenses.
On January 8, 2021, the Company obtained a waiver (“Waiver”) from certain investors (“Investors”) with respect to certain anti-dilution adjustment provisions of a
January 2020 warrant and an April 2020 warrant issued to the Investors. As consideration for the Waiver, the Company issued an additional warrant (“Warrant”) to the
Investors to purchase an aggregate of 100,000 shares of common stock, each exercisable after six months for a five-year period with an exercise price equal to 115% of the
closing price of the Company’s stock on the date of the waiver.
F-20
Exhibit 3.1
CERTIFICATE OF DESIGNATIONS OF
SERIES D CONVERTIBLE PREFERRED STOCK OF
SIGMA LABS, INC.
I, John Rice, hereby certify that I am the Chief Executive Officer of Sigma Labs, Inc (the “Company”), a corporation organized and existing under the D Chapter 78
of the Nevada Revised Statues (the “NRS”), and further do hereby certify:
That pursuant to the authority expressly conferred upon the Board of Directors of the Company (the “Board”) by the Company’s Articles of Incorporation, as
amended (the “Articles of Incorporation”), and Section 78.195 of Chapter 78 of the NRS, the Board on January 24, 2020 adopted the following resolution determining it
desirable and in the best interests of the Company and its shareholders for the Company to create a series of Seven Thousand, Seven Hundred and Ninety Six (7,796) shares of
preferred stock designated as “Series D Convertible Preferred Stock”, none of which shares have been issued:
RESOLVED, that pursuant to the authority vested in the Board this Company, in accordance with the provisions of the Articles of Incorporation, a series of preferred
stock, par value $0.001 per share, of the Company be and hereby is created, and that the designation and number of shares thereof and the voting and other powers, preferences
and relative, participating, optional or other rights of the shares of such series and the qualifications, limitations and restrictions thereof are as follows:
TERMS OF SERIES D CONVERTIBLE PREFERRED STOCK
1. Designation and Number of Shares. There shall hereby be created and established a series of preferred stock of the Company designated as “Series D Convertible
Preferred Stock” (the “Preferred Shares”). The authorized number of Preferred Shares shall be 7,796 shares. Each Preferred Share shall have a par value of $0.001.
Capitalized terms not defined herein shall have the meaning as set forth in Section 31 below.
2. Ranking. Except to the extent that the holders of at least a majority of the outstanding Preferred Shares (the “Required Holders”) expressly consent to the creation
of Parity Stock (as defined below) or Senior Preferred Stock (as defined below) in accordance with Section 16, all shares of capital stock of the Company (including the Series
E Preferred Stock to be issued on or prior to the Initial Issuance Date (as defined below)) shall be junior in rank to all Preferred Shares with respect to the preferences as to
dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company (such junior stock is referred to herein collectively as “Junior Stock”).
The rights of all such shares of capital stock of the Company shall be subject to the rights, powers, preferences and privileges of the Preferred Shares. Without limiting any
other provision of this Certificate of Designations, without the prior express consent of the Required Holders, voting separate as a single class, the Company shall not hereafter
authorize or issue any additional or other shares of capital stock that is (i) of senior rank to the Preferred Shares in respect of the preferences as to dividends, distributions and
payments upon the liquidation, dissolution and winding up of the Company (collectively, the “Senior Preferred Stock”), (ii) of pari passu rank to the Preferred Shares in
respect of the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company (collectively, the “Parity Stock”) or
(iii) any Junior Stock having a maturity date or any other date requiring redemption or repayment of such shares of Junior Stock prior to such time as no Preferred Shares
remain outstanding. In the event of the merger or consolidation of the Company with or into another corporation, the Preferred Shares shall maintain their relative rights,
powers, designations, privileges and preferences provided for herein and no such merger or consolidation shall result inconsistent therewith.
3. Dividends.
(a) From and after January 28, 2020 (the “Initial Issuance Date”), each holder of a Preferred Share (each, a “Holder” and collectively, the “Holders”) shall be
entitled to receive dividends (“Dividends”), which Dividends shall be computed on the basis of a 360-day year and twelve 30-day months and shall increase the Stated Value of
the Preferred Shares on each Dividend Date (each, a “Capitalized Dividend”).
(b) Prior to the capitalization of Dividends on an Dividend Date, Dividends on the Preferred Shares shall accrue at the Dividend Rate and be payable by way of
inclusion of the Dividends in the Conversion Amount on each Conversion Date in accordance with Section 4(c)(i) or upon any redemption in accordance with Section 11 or
upon any required payment upon any Bankruptcy Triggering Event. From and after the occurrence and during the continuance of any Triggering Event, the Dividend Rate shall
automatically be increased to fifteen percent (15.0%) per annum (the “Default Rate”). In the event that such Triggering Event is subsequently cured (and no other Triggering
Event then exists), the adjustment referred to in the preceding sentence shall cease to be effective as of the calendar day immediately following the date of such cure; provided
that the Dividends as calculated and unpaid at such increased rate during the continuance of such Triggering Event shall continue to apply to the extent relating to the days after
the occurrence of such Triggering Event through and including the date of such cure of such Triggering Event.
4. Conversion. At any time after the Initial Issuance Date, each Preferred Share shall be convertible into validly issued, fully paid and non-assessable shares of
Common Stock (as defined below), on the terms and conditions set forth in this Section 4.
(a) Holder’s Conversion Right. Subject to the provisions of Section 4(d), at any time or times on or after the Initial Issuance Date, each Holder shall be entitled to
convert any portion of the outstanding Preferred Shares held by such Holder into validly issued, fully paid and non-assessable shares of Common Stock in accordance with
Section 4(c) at the Conversion Rate (as defined below). The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would
result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up to the nearest whole share. The
Company shall pay any and all transfer, stamp, issuance and similar taxes, costs and expenses (including, without limitation, fees and expenses of the Transfer Agent (as
defined below)) that may be payable with respect to the issuance and delivery of Common Stock upon conversion of any Preferred Shares.
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(b) Conversion Rate. The number of shares of Common Stock issuable upon conversion of any Preferred Share pursuant to Section 4(a) shall be determined by
dividing (x) the Conversion Amount of such Preferred Share by (y) the Conversion Price (the “Conversion Rate”):
(i) “Conversion Amount” means, with respect to each Preferred Share, as of the applicable date of determination, the sum of (A) the Stated Value thereof plus (B) the
Additional Amount thereon, plus (C) any accrued and unpaid Late Charges (as defined below in Section 24(c)) with respect to such Stated Value and Additional Amount as of
such date of determination, plus (D) the Make-Whole Amount.
(ii) “Conversion Price” means, with respect to each Preferred Share, as of any Conversion Date or other date of determination, $1.00, subject to adjustment as
provided herein.
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(c) Mechanics of Conversion. The conversion of each Preferred Share shall be conducted in the following manner:
(i) Optional Conversion. To convert a Preferred Share into shares of Common Stock on any date (a “Conversion Date”), a Holder shall deliver (whether via facsimile,
electronic mail or otherwise), for receipt on or prior to 11:59 p.m., New York time, on such date, a copy of an executed notice of conversion of the share(s) of Preferred Shares
subject to such conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the Company. If required by Section 4(c)(iii), within two (2) Trading Days
following a conversion of any such Preferred Shares as aforesaid, such Holder shall surrender to a nationally recognized overnight delivery service for delivery to the Company
the original certificates, if any, representing the Preferred Shares (the “Preferred Share Certificates”) so converted as aforesaid (or an indemnification undertaking with
respect to the Preferred Shares in the case of its loss, theft or destruction as contemplated by Section 18(b)). On the date of receipt of a Conversion Notice, the Company shall
transmit by facsimile or electronic mail an acknowledgment of confirmation and representation as to whether such shares of Common Stock may then be resold pursuant to
Rule 144 or an effective and available registration statement, in the form attached hereto as Exhibit II, of receipt of such Conversion Notice to such Holder and the Company’s
transfer agent (the “Transfer Agent”), which confirmation shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms
herein. On or before the second (2nd) Trading Day following each date on which the Company has received a Conversion Notice (or such earlier date as required pursuant to
the 1934 Act or other applicable law, rule or regulation for the settlement of a trade initiated on the applicable Conversion Date of such shares of Common Stock issuable
pursuant to such Conversion Notice) (the “Share Delivery Deadline”), the Company shall (1) provided that the Transfer Agent is participating in The Depository Trust
Company’s (“DTC”) Fast Automated Securities Transfer Program and such shares of Common Stock are eligible to be resold pursuant to Rule 144 or an effective registration
statement, credit such aggregate number of shares of Common Stock to which such Holder shall be entitled pursuant to such conversion to such Holder’s or its designee’s
balance account with DTC through its Deposit/Withdrawal at Custodian system, or (2) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer
Program or such shares of Common Stock are not eligible to be resold pursuant to Rule 144 or an effective registration statement, upon the request of such Holder, issue and
deliver (via reputable overnight courier) to the address as specified in such Conversion Notice, a certificate, registered in the name of such Holder or its designee, for the
number of shares of Common Stock to which such Holder shall be entitled. If the number of Preferred Shares represented by the Preferred Share Certificate(s) submitted for
conversion pursuant to Section 4(c)(iii) is greater than the number of Preferred Shares being converted, then the Company shall, as soon as practicable and in no event later than
two (2) Trading Days after receipt of the Preferred Share Certificate(s) and at its own expense, issue and deliver to such Holder (or its designee) a new Preferred Share
Certificate (in accordance with Section 18(d)) representing the number of Preferred Shares not converted. The Person or Persons entitled to receive the shares of Common
Stock issuable upon a conversion of Preferred Shares shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.
Notwithstanding anything to the contrary contained in this Certificate of Designations or the Registration Rights Agreement, after the effective date of a Registration Statement
(as defined in the Registration Rights Agreement) and prior to a Holder’s receipt of the notice of a Grace Period (as defined in the Registration Rights Agreement), the
Company shall cause the Transfer Agent to deliver unlegended shares of Common Stock to such Holder (or its designee) in connection with any sale of Registrable Securities
(as defined in the Registration Rights Agreement) with respect to which such Holder has entered into a contract for sale, and delivered a copy of the prospectus included as part
of the particular Registration Statement to the extent applicable, and for which such Holder has not yet settled. Notwithstanding the foregoing, prior to the earlier to occur of (x)
the Share Increase Shareholder Approval Date (as defined in the Securities Purchase Agreement) and (y) the Shareholder Meeting Deadline (as defined in the Securities
Purchase Agreement), no Holder shall be permitted to convert Preferred Shares hereunder (or exercise Common Warrants of such Holder, as applicable) to the extent that after
such conversion such Holder shall have received, whether upon conversion of Preferred Shares and/or exercise of Common Warrants, as applicable, more than such Holder’s
Authorized Share Allocation (as defined below). For the avoidance of doubt, no ink original Conversion Notices, other notices or medallion guarantees will be required by any
Holder to convert any Preferred Shares or for such Holder take any other action in connection herewith.
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(ii) Company’s Failure to Timely Convert. If the Company shall fail, for any reason or for no reason, on or prior to the applicable Share Delivery Deadline, either (I) if
the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program or the applicable shares are not eligible to be resold pursuant to Rule 144 or an
effective registration statement, to issue and deliver to such Holder (or its designee) a certificate for the number of shares of Common Stock to which such Holder is entitled
and register such shares of Common Stock on the Company’s share register or, if the Transfer Agent is participating in the DTC Fast Automated Securities Transfer Program
and such shares are eligible to be resold pursuant to Rule 144 or an effective registration statement, to credit such Holder’s or its designee’s balance account with DTC for such
number of shares of Common Stock to which such Holder is entitled upon such Holder’s conversion of any Conversion Amount (as the case may be) or (II) if an effective
Registration Statement covering the resale of the applicable shares of Common Stock that are the subject of the Conversion Notice (the “Unavailable Conversion Shares”) is
not available for the resale of such Unavailable Conversion Shares (solely to the extent such Unavailable Conversion Shares were ever available pursuant to such Registration
Statement) and the Company fails to promptly, but in no event later than as required pursuant to the Registration Rights Agreement (x) notify such Holder and (y) deliver the
shares of Common Stock electronically without any restrictive legend by crediting such aggregate number of shares of Common Stock to which such Holder is entitled
pursuant to such exercise to the Holder’s or its designee’s balance account with DTC through its Deposit/Withdrawal At Custodian system (the event described in the
immediately foregoing clause (II) is hereinafter referred as a “Notice Failure” and together with the event described in clause (I) above, a “Conversion Failure”), then, in
addition to all other remedies available to such Holder, (X) the Company shall pay in cash to such Holder on each day after the Share Delivery Deadline that the issuance of
such shares of Common Stock is not timed effected an amount equal to 2% of the product of (A) the sum of the number of shares of Common Stock not issued to such Holder
on or prior to the Share Delivery Deadline and to which such Holder is entitled, multiplied by (B) any trading price of the Common Stock selected by such Holder in writing as
in effect at any time during the period beginning on the applicable Conversion Date and ending on the applicable Share Delivery Deadline, and (Y) such Holder, upon written
notice to the Company, may void its Conversion Notice with respect to, and retain or have returned, as the case may be, all, or any portion, of such Preferred Shares that has not
been converted pursuant to such Conversion Notice; provided that the voiding of an Conversion Notice shall not affect the Company’s obligations to make any payments which
have accrued prior to the date of such notice pursuant to this Section 4(c)(ii) or otherwise. In addition to the foregoing, if on or prior to the Share Delivery Deadline either (A)
the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program or such Warrant Common Shares are not eligible to be resold pursuant to Rule
144 or an effective registration statement, the Company shall fail to issue and deliver to such Holder (or its designee) a certificate and register such shares of Common Stock on
the Company’s share register or, if the Transfer Agent is participating in the DTC Fast Automated Securities Transfer Program and such Warrant Common Shares are eligible to
be resold pursuant to Rule 144 or an effective registration statement, the Transfer Agent shall fail to credit the balance account of such Holder or such Holder’s designee, as
applicable, with DTC for the number of shares of Common Stock to which such Holder is entitled upon such Holder’s conversion hereunder or pursuant to the Company’s
obligation pursuant to clause (ii) below or (B) a Notice Failure occurs, and if on or after such Share Delivery Deadline such Holder purchases (in an open market transaction or
otherwise) shares of Common Stock corresponding to all or any portion of the number of shares of Common Stock issuable upon such conversion that such Holder is entitled to
receive from the Company and has not received from the Company in connection with such Conversion Failure or Notice Failure, as applicable (a “Buy-In”), then, in addition
to all other remedies available to such Holder, the Company shall, within two (2) Business Days after receipt of such Holder’s request and in such Holder’s discretion, either: (I)
pay cash to such Holder in an amount equal to such Holder’s total purchase price (including brokerage commissions and other out-of-pocket expenses, if any) for the shares of
Common Stock so purchased (including, without limitation, by any other Person in respect, or on behalf, of such Holder) (the “Buy-In Price”), at which point the Company’s
obligation to so issue and deliver such certificate (and to issue such shares of Common Stock) or credit to the balance account of such Holder or such Holder’s designee, as
applicable, with DTC for the number of shares of Common Stock to which such Holder is entitled upon such Holder’s conversion hereunder (as the case may be) (and to issue
such shares of Common Stock) shall terminate, or (II) promptly honor its obligation to so issue and deliver to such Holder a certificate or certificates representing such shares
of Common Stock or credit the balance account of such Holder or such Holder’s designee, as applicable, with DTC for the number of shares of Common Stock to which such
Holder is entitled upon such Holder’s conversion hereunder (as the case may be) and pay cash to such Holder in an amount equal to the excess (if any) of the Buy-In Price over
the product of (x) such number of shares of Common Stock multiplied by (y) the lowest Closing Sale Price of the Common Stock on any Trading Day during the period
commencing on the date of the applicable Conversion Notice and ending on the date of such issuance and payment under this clause (II) (the “Buy-In Payment Amount”).
Nothing herein shall limit the Holder’s right to pursue any other remedies available to it hereunder, at law or in equity, including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock (or to electronically deliver such
shares of Common Stock) upon the conversion of Preferred Shares as required pursuant to the terms hereof.
5
(iii) Registration; Book-Entry. At the time of issuance of any Preferred Shares hereunder, the applicable Holder may, by written request (including by electronic-mail)
to the Company, elect to receive such Preferred Shares in the form of one or more Preferred Share Certificates or in Book-Entry form. The Company (or the Transfer Agent, as
custodian for the Preferred Shares) shall maintain a register (the “Register”) for the recordation of the names and addresses of the Holders of each Preferred Share and the
Stated Value of the Preferred Shares and whether the Preferred Shares are held by such Holder in Preferred Share Certificates or in Book-Entry form (the “Registered
Preferred Shares”). The entries in the Register shall be conclusive and binding for all purposes absent manifest error. The Company and each Holder of the Preferred Shares
shall treat each Person whose name is recorded in the Register as the owner of a Preferred Share for all purposes (including, without limitation, the right to receive payments
and Dividends hereunder) notwithstanding notice to the contrary. A Registered Preferred Share may be assigned, transferred or sold only by registration of such assignment or
sale on the Register. Upon its receipt of a written request to assign, transfer or sell one or more Registered Preferred Shares by such Holder thereof, the Company shall record
the information contained therein in the Register and issue one or more new Registered Preferred Shares in the same aggregate Stated Value as the Stated Value of the
surrendered Registered Preferred Shares to the designated assignee or transferee pursuant to Section 18, provided that if the Company does not so record an assignment,
transfer or sale (as the case may be) of such Registered Preferred Shares within two (2) Business Days of such a request, then the Register shall be automatically deemed
updated to reflect such assignment, transfer or sale (as the case may be). Notwithstanding anything to the contrary set forth in this Section 4, following conversion of any
Preferred Shares in accordance with the terms hereof, the applicable Holder shall not be required to physically surrender such Preferred Shares held in the form of a Preferred
Share Certificate to the Company unless (A) the full or remaining number of Preferred Shares represented by the applicable Preferred Share Certificate are being converted (in
which event such certificate(s) shall be delivered to the Company as contemplated by this Section 4(c)(iii)) or (B) such Holder has provided the Company with prior written
notice (which notice may be included in a Conversion Notice) requesting reissuance of Preferred Shares upon physical surrender of the applicable Preferred Share Certificate.
Each Holder and the Company shall maintain records showing the Stated Value, Dividends and Late Charges converted and/or paid (as the case may be) and the dates of such
conversions and/or payments (as the case may be) or shall use such other method, reasonably satisfactory to such Holder and the Company, so as not to require physical
surrender of a Preferred Share Certificate upon conversion. If the Company does not update the Register to record such Stated Value, Dividends and Late Charges converted
and/or paid (as the case may be) and the dates of such conversions and/or payments (as the case may be) within two (2) Business Days of such occurrence, then the Register
shall be automatically deemed updated to reflect such occurrence. In the event of any dispute or discrepancy, such records of such Holder establishing the number of Preferred
Shares to which the record holder is entitled shall be controlling and determinative in the absence of manifest error. A Holder and any transferee or assignee, by acceptance of a
certificate, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of any Preferred Shares, the number of Preferred Shares represented
by such certificate may be less than the number of Preferred Shares stated on the face thereof. Each Preferred Share Certificate shall bear the following legend:
ANY TRANSFEREE OR ASSIGNEE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE TERMS OF THE CORPORATION’S CERTIFICATE OF
DESIGNATIONS RELATING TO THE SHARES OF SERIES D PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE, INCLUDING SECTION 4(c)(iii)
THEREOF. THE NUMBER OF SHARES OF SERIES D PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER OF
SHARES OF SERIES D PREFERRED STOCK STATED ON THE FACE HEREOF PURSUANT TO SECTION 4(c)(iii) OF THE CERTIFICATE OF DESIGNATIONS
RELATING TO THE SHARES OF SERIES D PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE.
6
(iv) Pro Rata Conversion; Disputes. In the event that the Company receives a Conversion Notice from more than one Holder for the same Conversion Date and the
Company can convert some, but not all, of such Preferred Shares submitted for conversion, the Company shall convert from each Holder electing to have Preferred Shares
converted on such date a pro rata amount of such Holder’s Preferred Shares submitted for conversion on such date based on the number of Preferred Shares submitted for
conversion on such date by such Holder relative to the aggregate number of Preferred Shares submitted for conversion on such date. In the event of a dispute as to the number
of shares of Common Stock issuable to a Holder in connection with a conversion of Preferred Shares, the Company shall issue to such Holder the number of shares of Common
Stock not in dispute and resolve such dispute in accordance with Section 23.
(d) Limitation on Beneficial Ownership.
(i) Beneficial Ownership. The Company shall not effect the conversion of any of the Preferred Shares held by a Holder, and such Holder shall not have the right to
convert any of the Preferred Shares held by such Holder pursuant to the terms and conditions of this Certificate of Designations and any such conversion shall be null and void
and treated as if never made, to the extent that after giving effect to such conversion, such Holder together with the other Attribution Parties collectively would beneficially own
in excess of 4.99% (the “Maximum Percentage”) of the shares of Common Stock outstanding immediately after giving effect to such conversion. For purposes of the
foregoing sentence, the aggregate number of shares of Common Stock beneficially owned by such Holder and the other Attribution Parties shall include the number of shares of
Common Stock held by such Holder and all other Attribution Parties plus the number of shares of Common Stock issuable upon conversion of the Preferred Shares with respect
to which the determination of such sentence is being made, but shall exclude shares of Common Stock which would be issuable upon (A) conversion of the remaining,
nonconverted Preferred Shares beneficially owned by such Holder or any of the other Attribution Parties and (B) exercise or conversion of the unexercised or nonconverted
portion of any other securities of the Company (including, without limitation, any convertible notes, convertible preferred stock or warrants, including the Preferred Shares, the
Preferred Warrants and the Common Warrants) beneficially owned by such Holder or any other Attribution Party subject to a limitation on conversion or exercise analogous to
the limitation contained in this Section 4(d)(i). For purposes of this Section 4(d)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of the 1934 Act.
For purposes of determining the number of outstanding shares of Common Stock a Holder may acquire upon the conversion of such Preferred Shares without exceeding the
Maximum Percentage, such Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Annual Report on Form 10-
K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other public filing with the SEC, as the case may be, (y) a more recent public announcement by the
Company or (z) any other written notice by the Company or the Transfer Agent, if any, setting forth the number of shares of Common Stock outstanding (the “Reported
Outstanding Share Number”). If the Company receives a Conversion Notice from a Holder at a time when the actual number of outstanding shares of Common Stock is less
than the Reported Outstanding Share Number, the Company shall notify such Holder in writing of the number of shares of Common Stock then outstanding and, to the extent
that such Conversion Notice would otherwise cause such Holder’s beneficial ownership, as determined pursuant to this Section 4(d)(i), to exceed the Maximum Percentage,
such Holder must notify the Company of a reduced number of shares of Common Stock to be purchased pursuant to such Conversion Notice. For any reason at any time, upon
the written or oral request of any Holder, the Company shall within one (1) Business Day confirm orally and in writing or by electronic mail to such Holder the number of
shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise
of securities of the Company, including such Preferred Shares, by such Holder and any other Attribution Party since the date as of which the Reported Outstanding Share
Number was reported. In the event that the issuance of shares of Common Stock to a Holder upon conversion of such Preferred Shares results in such Holder and the other
Attribution Parties being deemed to beneficially own, in the aggregate, more than the Maximum Percentage of the number of outstanding shares of Common Stock (as
determined under Section 13(d) of the 1934 Act), the number of shares so issued by which such Holder’s and the other Attribution Parties’ aggregate beneficial ownership
exceeds the Maximum Percentage (the “Excess Shares”) shall be deemed null and void and shall be cancelled ab initio, and such Holder shall not have the power to vote or to
transfer the Excess Shares. Upon delivery of a written notice to the Company, any Holder may from time to time increase (with such increase not effective until the sixty-first
(61st) day after delivery of such notice) or decrease the Maximum Percentage of such Holder to any other percentage not in excess of 9.99% as specified in such notice;
provided that (i) any such increase in the Maximum Percentage will not be effective until the sixty-first (61st) day after such notice is delivered to the Company and (ii) any
such increase or decrease will apply only to such Holder and the other Attribution Parties and not to any other Holder that is not an Attribution Party of such Holder. For
purposes of clarity, the shares of Common Stock issuable to a Holder pursuant to the terms of this Certificate of Designations in excess of the Maximum Percentage shall not be
deemed to be beneficially owned by such Holder for any purpose including for purposes of Section 13(d) or Rule 16a-1(a)(1) of the 1934 Act. No prior inability to convert such
Preferred Shares pursuant to this paragraph shall have any effect on the applicability of the provisions of this paragraph with respect to any subsequent determination of
convertibility. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 4(d)(i) to the
extent necessary to correct this paragraph (or any portion of this paragraph) which may be defective or inconsistent with the intended beneficial ownership limitation contained
in this Section 4(d)(i) or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitation contained in this paragraph may not be
waived and shall apply to a successor holder of such Preferred Shares.
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(ii) Principal Market Regulation. The Company shall not issue any shares of Common Stock upon conversion of any Preferred Shares or otherwise pursuant to the
terms of this Certificate of Designations if the issuance of such shares of Common Stock would exceed the aggregate number of shares of Common Stock which the Company
may issue upon conversion of the Preferred Shares without breaching the Company’s obligations under the rules and regulations the listing rules of the Principal Market (the
number of shares which may be issued without violating such rules and regulations, including rules related to the aggregate offerings under NASDAQ Listing Rule 5635(d), the
“Exchange Cap”), except that such limitation shall not apply in the event that the Company (A) obtains the approval of its shareholders as required by the applicable rules and
regulations of the Principal Market for issuances of shares of Common Stock in excess of such amount or (B) obtains a written opinion from outside counsel to the Company
that such approval is not required, which opinion shall be reasonably satisfactory to the Required Holders. Until such approval or such written opinion is obtained, no Holder
shall be issued in the aggregate, upon conversion of any Preferred Shares in an amount greater than the product of (i) the Exchange Cap as of the Initial Issuance Date
multiplied by (ii) the quotient of (1) the aggregate number of Preferred Shares issued to such Holder on the Initial Issuance Date divided by (2) the aggregate number of
Preferred Shares issued to the Holders on the Initial Issuance Date (with respect to each Holder, the “Exchange Cap Allocation”). In the event that any Holder shall sell or
otherwise transfer any of such Holder’s Preferred Shares, the transferee shall be allocated a pro rata portion of such Holder’s Exchange Cap Allocation with respect to such
portion of such Preferred Shares so transferred, and the restrictions of the prior sentence shall apply to such transferee with respect to the portion of the Exchange Cap
Allocation so allocated to such transferee. Upon conversion in full of a holder’s Preferred Shares, the difference (if any) between such holder’s Exchange Cap Allocation and
the number of shares of Common Stock actually issued to such holder upon such holder’s conversion in full of such Preferred Shares shall be allocated, to the respective
Exchange Cap Allocations of the remaining holders of Preferred Shares on a pro rata basis in proportion to the shares of Common Stock underlying the Preferred Shares then
held by each such holder of Preferred Shares. In the event that after the Shareholder Meeting Deadline (as defined in the Securities Purchase Agreement) the Company is
prohibited from issuing any shares of Common Stock pursuant to this Section 4(d)(ii)(the “Exchange Cap Shares”) to a Holder, the Company shall pay cash to such Holder in
exchange for the redemption of such number of Preferred Shares held by such Holder that are not convertible into such Exchange Cap Shares at a price equal to the sum of (i)
the product of (x) such number of Exchange Cap Shares and (y) the greatest Closing Sale Price of the Common Stock on any Trading Day during the period commencing on
the date such Holder delivers the applicable Conversion Notice with respect to such Exchange Cap Shares to the Company and ending on the date of such issuance and payment
under this Section 4(d)(ii) and (ii) to the extent of any Buy-In related thereto, any Buy-In Payment Amount, any brokerage commissions and other out-of-pocket expenses, if
any, of such Holder incurred in connection therewith.
(e) Right of Alternate Conversion.
(i) General. Subject to Section 4(d), at any time, such Holder may, at such Holder’s option, by delivery of a Conversion Notice to the Company (the date of any such
Conversion Notice, each an “Alternate Conversion Date”), convert all, or any number of Preferred Shares (such Conversion Amount of the Preferred Shares to be converted
pursuant to this Section 4(e)(ii), each, an “Alternate Conversion Amount”) into shares of Common Stock at the Alternate Conversion Price (each an “Alternate
Conversion”).
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(ii) Mechanics of Alternate Conversion. On any Alternate Conversion Date, a Holder may voluntarily convert any Alternate Conversion Amount of Preferred Shares
pursuant to Section 4(c) (with “Alternate Conversion Price” replacing “Conversion Price” for all purposes hereunder with respect to such Alternate Conversion and, if such
Conversion Notice is delivered during a Triggering Event Redemption Right Period (as defined below), with “Redemption Premium of the Conversion Amount” replacing
“Conversion Amount” in clause (x) of the definition of Conversion Rate above with respect to such Alternate Conversion) by designating in the Conversion Notice delivered
pursuant to this Section 4(e) of this Certificate of Designations that such Holder is electing to use the Alternate Conversion Price for such conversion; provided that in the event
of the Conversion Floor Price Condition, on the applicable Alternate Conversion Date the Company shall also deliver to the Holder the applicable Alternate Conversion Floor
Amount. Notwithstanding anything to the contrary in this Section 4(e), but subject to Section 4(d), until the Company delivers shares of Common Stock representing the
applicable Alternate Conversion Amount of Preferred Shares to such Holder, such Preferred Shares may be converted by such Holder into shares of Common Stock pursuant to
Section 4(c) without regard to this Section 4(e).
5. Triggering Event Redemptions.
(a) Triggering Event. Each of the following events shall constitute a “Triggering Event” and each of the events in clauses (x), (xi) and (xii) shall constitute a
“Bankruptcy Triggering Event”:
(i) the failure of the applicable Registration Statement (as defined in the Registration Rights Agreement) to be filed with the SEC on or prior to the date that is five (5)
days after the applicable Filing Deadline (as defined in the Registration Rights Agreement) or the failure of the applicable Registration Statement to be declared effective by the
SEC on or prior to the date that is five (5) days after the applicable Effectiveness Deadline (as defined in the Registration Rights Agreement);
(ii) while the applicable Registration Statement is required to be maintained effective pursuant to the terms of the Registration Rights Agreement, the effectiveness of
the applicable Registration Statement lapses for any reason (including, without limitation, the issuance of a stop order) or such Registration Statement (or the prospectus
contained therein) is unavailable to any holder of Registrable Securities (as defined in the Registration Rights Agreement) for sale of all of such holder’s Registrable Securities
in accordance with the terms of the Registration Rights Agreement, and such lapse or unavailability continues for a period of five (5) consecutive days or for more than an
aggregate of ten (10) days in any 365-day period (excluding days during an Allowable Grace Period (as defined in the Registration Rights Agreement));
(iii) the suspension from trading or the failure of the Common Stock to be trading or listed (as applicable) on an Eligible Market for a period of five (5) consecutive
Trading Days;
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(iv) the Company’s (A) failure to cure a Conversion Failure (as defined herein) or a Delivery Failure (as defined in the Common Warrants) by delivery of the required
number of shares of Common Stock within five (5) Trading Days after the applicable Conversion Date or exercise date (as the case may be) or (B) notice, written or oral, to any
holder of Preferred Shares, Preferred Warrants or Common Warrants, including, without limitation, by way of public announcement or through any of its agents, at any time, of
its intention not to comply, as required, with a request for exercise of any Common Warrants for Warrant Common Shares in accordance with the provisions of the Common
Warrants or a request for conversion of any Preferred Shares into shares of Common Stock that is requested in accordance with the provisions of this Certificate of
Designations, other than pursuant to Section 4(d) hereof or a request for conversion of any Preferred Warrants into Preferred Shares that is requested in accordance with the
provisions of this Certificate of Designations;
(v) except to the extent the Company is in compliance with Section 10(b) below, at any time after the earlier to occur of (x) the Share Increase Shareholder Approval
Date and (y) the Shareholder Meeting Deadline, and following the tenth (10th) consecutive day that a Holder’s Authorized Share Allocation (as defined in Section 10(a) below)
is less than the sum of (A) 200% of the number of shares of Common Stock that such Holder would be entitled to receive upon a conversion, in full, of all of the Preferred
Shares then held by such Holder at the Alternate Conversion Price then in effect (without regard to any limitations on conversion set forth in this Certificate of Designations)
(B) 100% of the number of Preferred Shares that such Holder would be entitled to receive upon exercise, in full, of all of such Holder’s Preferred Warrants and (C) 150% of the
number of shares of Common Stock that such Holder would then be entitled to receive upon exercise in full of all of such Holder’s Common Warrants (without regard to any
limitations on exercise set forth in the Common Warrants);
(vi) the Company’s failure to capitalize any Dividend on any Dividend Date (whether or not declared by the Board);
(vii) the Company’s failure to pay any amount when and as due under this Certificate of Designations (including, without limitation, the Company’s failure to pay any
redemption payments or amounts hereunder), the Securities Purchase Agreement or any other Transaction Document or any other agreement, document, certificate or other
instrument delivered in connection with the transactions contemplated hereby and thereby (in each case, whether or not permitted pursuant to the NRS), solely to the extent
such failure remains uncured for a period of at least five (5) Trading Days;
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(viii) the Company fails to remove any restrictive legend on any certificate or any shares of Common Stock issued to the applicable Holder upon conversion or
exercise (as the case may be) of any Securities (as defined in the Securities Purchase Agreement) acquired by such Holder under the Securities Purchase Agreement as and
when required by such Securities or the Securities Purchase Agreement, unless otherwise then prohibited by applicable federal securities laws, and any such failure remains
uncured for at least five (5) days;;
(ix) the occurrence of any default under, redemption of or acceleration prior to maturity of at least an aggregate of $$125,000 of Indebtedness (as defined in the
Securities Purchase Agreement) of the Company or any of its Subsidiaries;
(x) bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for the relief of debtors shall be instituted by or against the Company or any
Subsidiary and, if instituted against the Company or any Subsidiary by a third party, shall not be dismissed within thirty (30) days of their initiation;
(xi) the commencement by the Company or any Subsidiary of a voluntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree, order, judgment or
other similar document in respect of the Company or any Subsidiary in an involuntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable federal, state or foreign law, or the consent by it to the filing of such petition or to the appointment of or taking possession
by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Subsidiary or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the execution of a composition of debts, or the occurrence of any other similar federal, state or foreign proceeding,
or the admission by it in writing of its inability to pay its debts generally as they become due, the taking of corporate action by the Company or any Subsidiary in furtherance of
any such action or the taking of any action by any Person to commence a Uniform Commercial Code foreclosure sale or any other similar action under federal, state or foreign
law;
(xii) the entry by a court of (i) a decree, order, judgment or other similar document in respect of the Company or any Subsidiary of a voluntary or involuntary case or
proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or (ii) a decree, order, judgment or other similar document
adjudging the Company or any Subsidiary as bankrupt or insolvent, or approving as properly filed a petition seeking liquidation, reorganization, arrangement, adjustment or
composition of or in respect of the Company or any Subsidiary under any applicable federal, state or foreign law or (iii) a decree, order, judgment or other similar document
appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Subsidiary or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the continuance of any such decree, order, judgment or other similar document or any such other decree, order,
judgment or other similar document unstayed and in effect for a period of thirty (30) consecutive days;
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(xiii) a final judgment or judgments for the payment of money aggregating in excess of $$125,000 are rendered against the Company and/or any of its Subsidiaries and
which judgments are not, within thirty (30) days after the entry thereof, bonded, discharged, settled or stayed pending appeal, or are not discharged within thirty (30) days after
the expiration of such stay; provided, however, any judgment which is covered by insurance or an indemnity from a credit worthy party shall not be included in calculating the
$$125,000 amount set forth above so long as the Company provides each Holder a written statement from such insurer or indemnity provider (which written statement shall be
reasonably satisfactory to each Holder) to the effect that such judgment is covered by insurance or an indemnity and the Company or such Subsidiary (as the case may be) will
receive the proceeds of such insurance or indemnity within thirty (30) days of the issuance of such judgment;
(xiv) the Company and/or any Subsidiary, individually or in the aggregate, either (i) fails to pay, when due, or within any applicable grace period, any payment with
respect to any Indebtedness in excess of $$125,000 due to any third party (other than, with respect to unsecured Indebtedness only, payments contested by the Company and/or
such Subsidiary (as the case may be) in good faith by proper proceedings and with respect to which adequate reserves have been set aside for the payment thereof in accordance
with GAAP) or is otherwise in breach or violation of any agreement for monies owed or owing in an amount in excess of $$125,000, which breach or violation permits the
other party thereto to declare a default or otherwise accelerate amounts due thereunder, or (ii) suffer to exist any other circumstance or event that would, with or without the
passage of time or the giving of notice, result in a default or event of default under any agreement binding the Company or any Subsidiary, which default or event of default
would or is likely to have a material adverse effect on the business, assets, operations (including results thereof), liabilities, properties, condition (including financial condition)
or prospects of the Company or any of its Subsidiaries, individually or in the aggregate;
(xv) other than as specifically set forth in another clause of this Section 5(a), the Company or any Subsidiary breaches any representation or warranty in any material
respect (other than the representations or warranties subject to material adverse effect on materiality limitation, which may not be breached in any respect) or any covenant or
other term or condition of any Transaction Document, except, in the case of a breach of a covenant or other term or condition that is curable, only if such breach remains
uncured for a period of five (5) consecutive Trading Days;
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(xvi) a false or inaccurate certification (including a false or inaccurate deemed certification) by the Company as to whether any Triggering Event has occurred;
(xvii) if neither John Rice or Mark Ruport is the chief executive officer of the Company and a qualified replacement, acceptable to the Holder, in its sole discretion, is
not appointed in either case within fifteen (15) Business Days;
(xviii) any breach or failure in any respect by the Company or any Subsidiary to comply with any provision of Section 13(m) of this Certificate of Designations;
(xix) any Material Adverse Effect (as defined in the Securities Purchase Agreement) occurs; or
(xx) any provision of any Transaction Document shall at any time for any reason (other than pursuant to the express terms thereof) cease to be valid and binding on or
enforceable against the parties thereto, or the validity or enforceability thereof shall be contested, directly or indirectly, by the Company or any Subsidiary, or a proceeding shall
be commenced by the Company or any Subsidiary or any governmental authority having jurisdiction over any of them, seeking to establish the invalidity or unenforceability
thereof or the Company or any of its Subsidiaries shall deny in writing that it has any liability or obligation purported to be created under one or more Transaction Documents.
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(b) Notice of a Triggering Event; Redemption Right. Upon the occurrence of a Triggering Event with respect to the Preferred Shares, the Company shall within one (1)
Business Day deliver written notice thereof via facsimile or electronic mail and overnight courier (with next day delivery specified) (an “Triggering Event Notice”) to each
Holder. At any time after the earlier of a Holder’s receipt of a Triggering Event Notice and such Holder becoming aware of a Triggering Event (such earlier date, the
“Triggering Event Right Commencement Date”) and ending (such ending date, the “Triggering Event Right Expiration Date”, and each such period, an “Triggering
Event Redemption Right Period”) on the sixtieth (60th) Trading Day after the later of (x) the date such Triggering Event is cured and (y) such Holder’s receipt of a Triggering
Event Notice that includes (I) a reasonable description of the applicable Triggering Event, (II) a certification as to whether, in the opinion of the Company, such Triggering
Event is capable of being cured and, if applicable, a reasonable description of any existing plans of the Company to cure such Triggering Event and (III) a certification as to the
date the Triggering Event occurred and, if cured on or prior to the date of such Triggering Event Notice, the applicable Triggering Event Right Expiration Date, such Holder
may require the Company to redeem (regardless of whether such Triggering Event has been cured on or prior to the Triggering Event Right Expiration Date) all or any of the
Preferred Shares by delivering written notice thereof (the “Triggering Event Redemption Notice”) to the Company, which Triggering Event Redemption Notice shall indicate
the number of the Preferred Shares such Holder is electing to redeem. Each of the Preferred Shares subject to redemption by the Company pursuant to this Section 5(b) shall be
redeemed by the Company at a price equal to the greater of (i) the product of (A) the Conversion Amount to be redeemed multiplied by (B) the Redemption Premium and (ii)
the product of (X) the Conversion Rate (with “Alternate Conversion Price” replacing “Conversion Price” for all purposes hereunder with respect thereto and with “Redemption
Premium of the Conversion Amount” replacing “Conversion Amount” in clause (x) of the definition of Conversion Rate above with respect thereto) with respect to the
Conversion Amount in effect at such time as such Holder delivers a Triggering Event Redemption Notice multiplied by (Y) the product of (1) the Redemption Premium
multiplied by (2) the greatest Closing Sale Price of the Common Stock on any Trading Day during the period commencing on the date immediately preceding such Triggering
Event and ending on the date the Company makes the entire payment required to be made under this Section 5(b) (the “Triggering Event Redemption Price”). Redemptions
required by this Section 5(b) shall be made in accordance with the provisions of Section 11. To the extent redemptions required by this Section 5(b) are deemed or determined
by a court of competent jurisdiction to be prepayments of the Preferred Shares by the Company, such redemptions shall be deemed to be voluntary prepayments.
Notwithstanding anything to the contrary in this Section 5(b), but subject to Section 4(d), until the Triggering Event Redemption Price (together with any Late Charges thereon)
is paid in full, the Conversion Amount submitted for redemption under this Section 5(b) (together with any Late Charges thereon) may be converted, in whole or in part, by
such Holder into Common Stock pursuant to the terms of this Certificate of Designations. In the event of the Company’s redemption of any of the Preferred Shares under this
Section 5(b), a Holder’s damages would be uncertain and difficult to estimate because of the parties’ inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for such Holder. Accordingly, any redemption premium due under this Section 5(b) is intended by the parties to be,
and shall be deemed, a reasonable estimate of such Holder’s actual loss of its investment opportunity and not as a penalty. Any redemption upon a Triggering Event shall not
constitute an election of remedies by the applicable Holder or any other Holder, and all other rights and remedies of each Holder shall be preserved.
(c) Mandatory Redemption upon Bankruptcy Triggering Event. Notwithstanding anything to the contrary herein, and notwithstanding any conversion that is then
required or in process, upon any Bankruptcy Triggering Event, the Company shall immediately redeem, in cash, each of the Preferred Shares then outstanding at a redemption
price equal to the applicable Triggering Event Redemption Price (calculated as if such Holder shall have delivered the Triggering Event Redemption Notice immediately prior
to the occurrence of such Bankruptcy Triggering Event), without the requirement for any notice or demand or other action by any Holder or any other person or entity, provided
that a Holder may, in its sole discretion, waive such right to receive payment upon a Bankruptcy Triggering Event, in whole or in part, and any such waiver shall not affect any
other rights of such Holder or any other Holder hereunder, including any other rights in respect of such Bankruptcy Triggering Event, any right to conversion, and any right to
payment of such Triggering Event Redemption Price or any other Redemption Price, as applicable.
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6. Rights Upon Fundamental Transactions.
(a) Assumption. The Company shall not enter into or be party to a Fundamental Transaction unless (i) the Successor Entity assumes in writing all of the obligations of
the Company under this Certificate of Designations and the other Transaction Documents in accordance with the provisions of this Section 6(a) pursuant to written agreements
in form and substance satisfactory to the Required Holders and approved by the Required Holders prior to such Fundamental Transaction, including agreements to deliver to
each holder of Preferred Shares in exchange for such Preferred Shares a security of the Successor Entity evidenced by a written instrument substantially similar in form and
substance to this Certificate of Designations, including, without limitation, having a stated value and dividend rate equal to the stated value and dividend rate of the Preferred
Shares held by the Holders and having similar ranking to the Preferred Shares, and satisfactory to the Required Holders and (ii) the Successor Entity (including its Parent
Entity) is a publicly traded corporation whose shares of common stock are quoted on or listed for trading on an Eligible Market. Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Certificate of
Designations and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the
Company and shall assume all of the obligations of the Company under this Certificate of Designations and the other Transaction Documents with the same effect as if such
Successor Entity had been named as the Company herein and therein. In addition to the foregoing, upon consummation of a Fundamental Transaction, the Successor Entity
shall deliver to each Holder confirmation that there shall be issued upon conversion or redemption of the Preferred Shares at any time after the consummation of such
Fundamental Transaction, in lieu of the shares of Common Stock (or other securities, cash, assets or other property (except such items still issuable under Sections 7 and 15,
which shall continue to be receivable thereafter)) issuable upon the conversion or redemption of the Preferred Shares prior to such Fundamental Transaction, such shares of the
publicly traded common stock (or their equivalent) of the Successor Entity (including its Parent Entity) which each Holder would have been entitled to receive upon the
happening of such Fundamental Transaction had all the Preferred Shares held by each Holder been converted immediately prior to such Fundamental Transaction (without
regard to any limitations on the conversion of the Preferred Shares contained in this Certificate of Designations), as adjusted in accordance with the provisions of this
Certificate of Designations. Notwithstanding the foregoing, such Holder may elect, at its sole option, by delivery of written notice to the Company to waive this Section 6(a) to
permit the Fundamental Transaction without the assumption of the Preferred Shares. The provisions of this Section 6 shall apply similarly and equally to successive
Fundamental Transactions and shall be applied without regard to any limitations on the conversion or redemption of the Preferred Shares.
15
(b) Notice of a Change of Control Redemption Right. No sooner than twenty (20) Trading Days nor later than ten (10) Trading Days prior to the consummation of a
Change of Control (the “Change of Control Date”), but not prior to the public announcement of such Change of Control, the Company shall deliver written notice thereof via
facsimile or electronic mail and overnight courier to each Holder (a “Change of Control Notice”). At any time during the period beginning after a Holder’s receipt of a Change
of Control Notice or such Holder becoming aware of a Change of Control if a Change of Control Notice is not delivered to such Holder in accordance with the immediately
preceding sentence (as applicable) and ending on twenty (20) Trading Days after the later of (A) the date of consummation of such Change of Control or (B) the date of receipt
of such Change of Control Notice or (C) the date of the announcement of such Change of Control, such Holder may require the Company to redeem all or any portion of such
Holder’s Preferred Shares by delivering written notice thereof (“Change of Control Redemption Notice”) to the Company, which Change of Control Redemption Notice shall
indicate the number of Preferred Shares such Holder is electing to have the Company redeem. Each Preferred Share subject to redemption pursuant to this Section 6(b) shall be
redeemed by the Company in cash at a price equal to the greatest of (i) the product of (w) the Change of Control Redemption Premium multiplied by (y) the Conversion
Amount of the Preferred Shares being redeemed, (ii) the product of (x) the Change of Control Redemption Premium multiplied by (y) the product of (A) the Conversion
Amount of the Preferred Shares being redeemed multiplied by (B) the quotient determined by dividing (I) the greatest Closing Sale Price of the shares of Common Stock during
the period beginning on the date immediately preceding the earlier to occur of (1) the consummation of the applicable Change of Control and (2) the public announcement of
such Change of Control and ending on the date such Holder delivers the Change of Control Redemption Notice by (II) the Conversion Price then in effect and (iii) the product
of (y) the Change of Control Redemption Premium multiplied by (z) the product of (A) the Conversion Amount of the Preferred Shares being redeemed multiplied by (B) the
quotient of (I) the aggregate cash consideration and the aggregate cash value of any non-cash consideration per share of Common Stock to be paid to such holders of the shares
of Common Stock upon consummation of such Change of Control (any such non-cash consideration constituting publicly-traded securities shall be valued at the highest of the
Closing Sale Price of such securities as of the Trading Day immediately prior to the consummation of such Change of Control, the Closing Sale Price of such securities on the
Trading Day immediately following the public announcement of such proposed Change of Control and the Closing Sale Price of such securities on the Trading Day
immediately prior to the public announcement of such proposed Change of Control) divided by (II) the Conversion Price then in effect (the “Change of Control Redemption
Price”). Redemptions required by this Section 6(b) shall have priority to payments to all other shareholders of the Company in connection with such Change of Control. To the
extent redemptions required by this Section 6(b) are deemed or determined by a court of competent jurisdiction to be prepayments of the Preferred Shares by the Company,
such redemptions shall be deemed to be voluntary prepayments. Notwithstanding anything to the contrary in this Section 6(b), but subject to Section 4(d), until the applicable
Change of Control Redemption Price (together with any Late Charges thereon) is paid in full to the applicable Holder, the Preferred Shares submitted by such Holder for
redemption under this Section 6(b) may be converted, in whole or in part, by such Holder into Common Stock pursuant to Section 4(c) or in the event the Conversion Date is
after the consummation of such Change of Control, stock or equity interests of the Successor Entity substantially equivalent to the Company’s shares of Common Stock
pursuant to Section 4(c). In the event of the Company’s redemption of any of the Preferred Shares under this Section 6(b), such Holder’s damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for a
Holder. Accordingly, any redemption premium due under this Section 6(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of such Holder’s actual
loss of its investment opportunity and not as a penalty. The Company shall make payment of the applicable Change of Control Redemption Price concurrently with the
consummation of such Change of Control if a Change of Control Redemption Notice is received prior to the consummation of such Change of Control and within two (2)
Trading Days after the Company’s receipt of such notice otherwise (the “Change of Control Redemption Date”). Redemptions required by this Section 6 shall be made in
accordance with the provisions of Section 11.
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7. Rights Upon Issuance of Purchase Rights and Other Corporate Events.
(a) Purchase Rights. In addition to any adjustments pursuant to Section 8 and Section 15 below, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to all or substantially all of the record holders of any class of Common Stock
(the “Purchase Rights”), then each Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder
could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of all the Preferred Shares (without taking into
account any limitations or restrictions on the convertibility of the Preferred Shares and assuming for such purpose that all the Preferred Shares were converted at the Alternate
Conversion Price as of the applicable record date) held by such Holder immediately prior to the date on which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights, provided, however, to the extent that such Holder’s right to participate in any such Purchase Right would result in such Holder and the other Attribution Parties
exceeding the Maximum Percentage, then such Holder shall not be entitled to participate in such Purchase Right to such extent of the Maximum Percentage (and shall not be
entitled to beneficial ownership of such shares of Common Stock as a result of such Purchase Right (and beneficial ownership) to such extent of any such excess) and such
Purchase Right to such extent shall be held in abeyance (and, if such Purchase Right has an expiration date, maturity date or other similar provision, such term shall be extended
by such number of days held in abeyance, if applicable) for the benefit of such Holder until such time or times, if ever, as its right thereto would not result in such Holder and
the other Attribution Parties exceeding the Maximum Percentage, at which time or times such Holder shall be granted such right (and any Purchase Right granted, issued or
sold on such initial Purchase Right or on any subsequent Purchase Right held similarly in abeyance (and, if such Purchase Right has an expiration date, maturity date or other
similar provision, such term shall be extended by such number of days held in abeyance, if applicable)) to the same extent as if there had been no such limitation.
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(b) Other Corporate Events. In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant
to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a “Corporate
Event”), the Company shall make appropriate provision to ensure that each Holder will thereafter have the right, at such Holder’s option, to receive upon a conversion of all the
Preferred Shares held by such Holder (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which such Holder
would have been entitled with respect to such shares of Common Stock had such shares of Common Stock been held by such Holder upon the consummation of such Corporate
Event (without taking into account any limitations or restrictions on the convertibility of the Preferred Shares set forth in this Certificate of Designations) or (ii) in lieu of the
shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of shares of Common Stock in connection with the
consummation of such Corporate Event in such amounts as such Holder would have been entitled to receive had the Preferred Shares held by such Holder initially been issued
with conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate. Provision made pursuant the preceding sentence shall be in a form and substance satisfactory to the Required Holders. The provisions of this Section 7 shall
apply similarly and equally to successive Corporate Events and shall be applied without regard to any limitations on the conversion or redemption of the Preferred Shares set
forth in this Certificate of Designations.
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8. Rights Upon Issuance of Other Securities.
(a) Adjustment of Conversion Price upon Issuance of Common Stock. If and whenever on or after the Subscription Date the Company grants, issues or sells (or enter
into any agreement to grant, issue or sell), or in accordance with this Section 8(a) is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale
of shares of Common Stock owned or held by or for the account of the Company, but excluding any Excluded Securities issued or sold or deemed to have been issued or sold)
for a consideration per share (the “New Issuance Price”) less than a price equal to the Conversion Price in effect immediately prior to such issuance or sale or deemed issuance
or sale (such Conversion Price then in effect is referred to herein as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then, immediately after such Dilutive
Issuance, the Conversion Price then in effect shall be reduced to an amount equal to the New Issuance Price. For all purposes of the foregoing (including, without limitation,
determining the adjusted Conversion Price and the New Issuance Price under this Section 8(a)), the following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants, issues or sells (or enters into any agreement to grant, issue or sell) any Options and the lowest price per
share for which one share of Common Stock is at any time issuable upon the exercise of any such Option or upon conversion, exercise or exchange of any Convertible
Securities issuable upon exercise of any such Option or otherwise pursuant to the terms thereof is less than the Applicable Price, then such share of Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this
Section 8(a)(i), the “lowest price per share for which one share of Common Stock is at any time issuable upon the exercise of any such Option or upon conversion, exercise or
exchange of any Convertible Securities issuable upon exercise of any such Option or otherwise pursuant to the terms thereof” shall be equal to (1) the lower of (x) the sum of
the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the granting, issuance or sale of such
Option, upon exercise of such Option and upon conversion, exercise or exchange of any Convertible Security issuable upon exercise of such Option or otherwise pursuant to
the terms thereof and (y) the lowest exercise price set forth in such Option for which one share of Common Stock is issuable (or may become issuable assuming all possible
market conditions) upon the exercise of any such Options or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option or
otherwise pursuant to the terms thereof minus (2) the sum of all amounts paid or payable to the holder of such Option (or any other Person) with respect to nay one share of
Common Stock upon the granting, issuance or sale of such Option, upon exercise of such Option and upon conversion, exercise or exchange of any Convertible Security
issuable upon exercise of such Option or otherwise pursuant to the terms thereof plus the value of any other consideration consisting of cash, debt forgiveness, assets or any
other property received or receivable by, or benefit conferred on, the holder of such Option (or any other Person). Except as contemplated below, no further adjustment of the
Conversion Price shall be made upon the actual issuance of such shares of Common Stock or of such Convertible Securities upon the exercise of such Options or otherwise
pursuant to the terms thereof or upon the actual issuance of such shares of Common Stock upon conversion, exercise or exchange of such Convertible Securities.
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(ii) Issuance of Convertible Securities. If the Company in any manner issues or sells (or enters in to any agreement to issue or sell) any Convertible Securities and the
lowest price per share for which one share of Common Stock is at any time issuable (or may become issuable assuming all possible market conditions) upon the conversion,
exercise or exchange thereof or otherwise pursuant to the terms thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding
and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share. For purposes of this Section 8(a)(ii),
the “lowest price per share for which one share of Common Stock is at any time issuable (or may become issuable assuming all possible market conditions) upon the
conversion, exercise or exchange thereof or otherwise pursuant to the terms thereof” shall be equal to (1) the lower of (x) the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to one share of Common Stock upon the issuance or sale of the Convertible Security and upon conversion, exercise or
exchange of such Convertible Security or otherwise pursuant to the terms thereof and (y) the lowest conversion price set forth in such Convertible Security for which one share
of Common Stock is issuable (or may become issuable assuming all possible market conditions) upon conversion, exercise or exchange thereof or otherwise pursuant to the
terms thereof minus (2) the sum of all amounts paid or payable to the holder of such Convertible Security (or any other Person) with respect to any one share of Common Stock
upon the issuance or sale of such Convertible Security plus the value of any other consideration received or receivable consisting of cash, debt forgiveness, assets or other
property by, or benefit conferred on, the holder of such Convertible Security (or any other Person). Except as contemplated below, no further adjustment of the Conversion
Price shall be made upon the actual issuance of such shares of Common Stock upon conversion, exercise or exchange of such Convertible Securities or otherwise pursuant to
the terms thereof, and if any such issuance or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price has been
or is to be made pursuant to other provisions of this Section 8(a), except as contemplated below, no further adjustment of the Conversion Price shall be made by reason of such
issuance or sale.
(iii) Change in Option Price or Rate of Conversion. If the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the
issue, conversion, exercise or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exercisable or exchangeable for
shares of Common Stock increases or decreases at any time (other than proportional changes in conversion or exercise prices, as applicable, in connection with an event
referred to in Section 8(b) below), the Conversion Price in effect at the time of such increase or decrease shall be adjusted to the Conversion Price which would have been in
effect at such time had such Options or Convertible Securities provided for such increased or decreased purchase price, additional consideration or increased or decreased
conversion rate (as the case may be) at the time initially granted, issued or sold. For purposes of this Section 8(a)(iii), if the terms of any Option or Convertible Security that
was outstanding as of the Subscription Date are increased or decreased in the manner described in the immediately preceding sentence, then such Option or Convertible
Security and the shares of Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such increase or
decrease. No adjustment pursuant to this Section 8(a) shall be made if such adjustment would result in an increase of the Conversion Price then in effect.
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(iv) Calculation of Consideration Received. If any Option and/or Convertible Security and/or Adjustment Right is issued in connection with the issuance or sale or
deemed issuance or sale of any other securities of the Company (as determined by the Required Holders, the “Primary Security”, and such Option and/or Convertible Security
and/or Adjustment Right, the “Secondary Securities”), together comprising one integrated transaction (or one or more transactions if such issuances or sales or deemed
issuances or sales of securities of the Company either (A) have at least one investor or purchaser in common, (B) are consummated in reasonable proximity to each other and/or
(C) are consummated under the same plan of financing), the consideration per share of Common Stock with respect to such Primary Security shall be deemed to be equal to the
difference of (x) the lowest price per share for which one share of Common Stock was issued (or was deemed to be issued pursuant to Section 8(a)(i) or 8(a)(ii) above, as
applicable) in such integrated transaction solely with respect to such Primary Security, minus (y) with respect to such Secondary Securities, the sum of (A) the Black Scholes
Consideration Value of each such Option, if any, (B) the fair market value (as determined by the Required Holders in good faith) or the Black Scholes Consideration Value, as
applicable, of such Adjustment Right, if any, and (C) the fair market value (as determined by the Required Holder) of such Convertible Security, if any, in each case, as
determined on a per share basis in accordance with this Section 8(a)(iv). If any shares of Common Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor (for the purpose of determining the consideration paid for such Common Stock, Option or Convertible Security,
but not for the purpose of the calculation of the Black Scholes Consideration Value) will be deemed to be the net amount of consideration received by the Company therefor. If
any shares of Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of such consideration received by the
Company (for the purpose of determining the consideration paid for such Common Stock, Option or Convertible Security, but not for the purpose of the calculation of the Black
Scholes Consideration Value), will be the fair value of such consideration, except where such consideration consists of publicly traded securities, in which case the amount of
consideration received by the Company for such securities will be the arithmetic average of the VWAPs of such security for each of the five (5) Trading Days immediately
preceding the date of receipt. If any shares of Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any
merger in which the Company is the surviving entity, the amount of consideration therefor (for the purpose of determining the consideration paid for such Common Stock,
Option or Convertible Security, but not for the purpose of the calculation of the Black Scholes Consideration Value), will be deemed to be the fair value of such portion of the
net assets and business of the non-surviving entity as is attributable to such shares of Common Stock, Options or Convertible Securities (as the case may be). The fair value of
any consideration other than cash or publicly traded securities will be determined jointly by the Company and the Required Holders. If such parties are unable to reach
agreement within ten (10) days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such consideration will be determined within five
(5) Trading Days after the tenth (10th) day following such Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Required Holders.
The determination of such appraiser shall be final and binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.
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(v) Record Date. If the Company takes a record of the holders of shares of Common Stock for the purpose of entitling them (A) to receive a dividend or other
distribution payable in shares of Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase shares of Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issuance or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase (as the case may be).
(b) Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. Without limiting any provision of Section 6 or Section 8(a), if the Company
at any time on or after the Subscription Date subdivides (by any stock split, stock dividend, stock combination, recapitalization or other similar transaction) one or more classes
of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately
reduced. Without limiting any provision of Section 6 or Section 8(a), if the Company at any time on or after the Subscription Date combines (by any stock split, stock dividend,
stock combination, recapitalization or other similar transaction) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion
Price in effect immediately prior to such combination will be proportionately increased. Any adjustment pursuant to this Section 8(b) shall become effective immediately after
the effective date of such subdivision or combination. If any event requiring an adjustment under this Section 8(b) occurs during the period that a Conversion Price is calculated
hereunder, then the calculation of such Conversion Price shall be adjusted appropriately to reflect such event.
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(c) Holder’s Right of Adjusted Conversion Price. In addition to and not in limitation of the other provisions of this Section 8(b), if the Company in any manner issues
or sells or enters into (whether initially or pursuant to any subsequent amendment thereof) any agreement to issue or sell, any Common Stock, Options or Convertible Securities
(any such securities, “Variable Price Securities”) after the Subscription Date that are issuable pursuant to such agreement or convertible into or exchangeable or exercisable
for shares of Common Stock at a price which varies or may vary with the market price of the shares of Common Stock, including by way of one or more reset(s) to a fixed
price, but exclusive of such formulations reflecting customary anti-dilution provisions (such as share splits, share combinations, share dividends and similar transactions) (each
of the formulations for such variable price being herein referred to as, the “Variable Price”), the Company shall provide written notice thereof via facsimile or electronic mail
and overnight courier to each Holder on the date of such agreement and/or the issuance of such shares of Common Stock, Convertible Securities or Options, as applicable.
From and after the date the Company enters into such agreement or issues any such Variable Price Securities, each Holder shall have the right, but not the obligation, in its sole
discretion to substitute the Variable Price for the Conversion Price upon conversion of the Preferred Shares by designating in the Conversion Notice delivered upon any
conversion of Preferred Shares that solely for purposes of such conversion such Holder is relying on the Variable Price rather than the Conversion Price then in effect. A
Holder’s election to rely on a Variable Price for a particular conversion of Preferred Shares shall not obligate such Holder to rely on a Variable Price for any future conversions
of Preferred Shares.
(d) Stock Combination Event Adjustments. If at any time and from time to time on or after the Subscription Date there occurs any stock split, stock dividend, stock
combination recapitalization or other similar transaction involving the Common Stock (each, a “Stock Combination Event”, and such date thereof, the “Stock Combination
Event Date”) and the Event Market Price is less than the Conversion Price then in effect (after giving effect to the adjustment in Section 8(b) above), then on the sixteenth
(16th) Trading Day immediately following such Stock Combination Event Date, the Conversion Price then in effect on such sixteenth (16th) Trading Day (after giving effect to
the adjustment in Section 88(b) above) shall be reduced (but in no event increased) to the Event Market Price. For the avoidance of doubt, if the adjustment in the immediately
preceding sentence would otherwise result in an increase in the Conversion Price hereunder, no adjustment shall be made.
(e) Other Events. In the event that the Company (or any Subsidiary) shall take any action to which the provisions hereof are not strictly applicable, or, if applicable,
would not operate to protect any Holder from dilution (other than with respect to Excluded Securities) or if any event occurs of the type contemplated by the provisions of this
Section 8 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with
equity features), then the Board shall in good faith determine and implement an appropriate adjustment in the Conversion Price so as to protect the rights of such Holder,
provided that no such adjustment pursuant to this Section 8(b) will increase the Conversion Price as otherwise determined pursuant to this Section 8, provided further that if
such Holder does not accept such adjustments as appropriately protecting its interests hereunder against such dilution, then the Board and such Holder shall agree, in good faith,
upon an independent investment bank of nationally recognized standing to make such appropriate adjustments, whose determination shall be final and binding absent manifest
error and whose fees and expenses shall be borne by the Company.
(f) Calculations. All calculations under this Section 8 shall be made by rounding to the nearest cent or the nearest 1/100th of a share, as applicable. The number of
shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares
shall be considered an issue or sale of Common Stock.
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(g) Voluntary Adjustment by Company. Subject to the rules and regulations of the Principal Market, the Company may at any time any Preferred Shares remain
outstanding, with the prior written consent of the Required Holders, reduce the then current Conversion Price to any amount and for any period of time deemed appropriate by
the Board.
9. Noncircumvention. The Company hereby covenants and agrees that the Company will not, by amendment of its Articles of Incorporation, Bylaws (as defined in the
Securities Purchase Agreement) or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Certificate of Designations, and will at all times in good faith carry out
all the provisions of this Certificate of Designations and take all action as may be required to protect the rights of the Holders hereunder. Without limiting the generality of the
foregoing or any other provision of this Certificate of Designations or the other Transaction Documents, the Company (a) shall not increase the par value of any shares of
Common Stock receivable upon the conversion of any Preferred Shares above the Conversion Price then in effect, (b) shall take all such actions as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock upon the conversion of Preferred Shares and (c)
shall, so long as any Preferred Shares are outstanding, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock, solely
for the purpose of effecting the conversion of the Preferred Shares, the maximum number of shares of Common Stock as shall from time to time be necessary to effect the
conversion of the Preferred Shares then outstanding (without regard to any limitations on conversion contained herein). Notwithstanding anything herein to the contrary, if after
the sixty (60) calendar day anniversary of the Initial Issuance Date, each Holder is not permitted to convert such Holder’s Preferred Shares in full for any reason (other than
pursuant to restrictions set forth in Section 4(d)(i) hereof), the Company shall use its reasonable best efforts to promptly remedy such failure, including, without limitation,
obtaining such consents or approvals as necessary to effect such conversion into shares of Common Stock.
10. Authorized Shares.
(a) Reservation. So long as any Preferred Shares remain outstanding, the Company shall (i) on or prior to the Share Increase Shareholder Approval Date (as defined in
the Securities Purchase Agreement), reserve 3,852,879 shares of Common Stock (the “Initial Reserve Amount”) for issuance pursuant to this Certificate of Designations
(and/or the Common Warrants, as designated from time to time in writing by a Holder with respect to such Holder’s Authorized Share Allocation (as defined below) and not
with respect to any other Holder’s Authorized Share Allocation) and (ii) after the Share Increase Shareholder Approval Date, at all times reserve at least 200% of the number of
shares of Common Stock as shall from time to time be necessary to effect the conversion, including without limitation, Alternate Conversions of all of the Preferred Shares then
outstanding (without regard to any limitations on conversions) (the “Subsequent Reserve Amount”, and together with the Initial Reserve Amount, as applicable, the
“Required Reserve Amount”). The Required Reserve Amount (including, without limitation, each increase in the number of shares so reserved) shall be allocated pro rata
among the Holders based on the number of the Preferred Shares held by each Holder on the Initial Issuance Date or increase in the number of reserved shares, as the case may
be (the “Authorized Share Allocation”). In the event that a Holder shall sell or otherwise transfer any of such Holder’s Preferred Shares, each transferee shall be allocated a
pro rata portion of such Holder’s Authorized Share Allocation. Any shares of Common Stock reserved and allocated to any Person which ceases to hold any Preferred Shares
shall be allocated to the remaining Holders of Preferred Shares, pro rata based on the number of the Preferred Shares then held by the Holders.
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(b) Insufficient Authorized Shares. If, notwithstanding Section 10(a) and not in limitation thereof, at any time while any of the Preferred Shares remain outstanding the
Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon conversion of the
Preferred Shares at least a number of shares of Common Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then the Company shall immediately
take all action necessary to increase the Company’s authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the Required Reserve Amount
for the Preferred Shares then outstanding (or deemed outstanding pursuant to Section 10(a) above). Without limiting the generality of the foregoing sentence, as soon as
practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than ninety (90) days after the occurrence of such Authorized Share Failure, the
Company shall hold a meeting of its shareholders for the approval of an increase in the number of authorized shares of Common Stock. In connection with such meeting, the
Company shall provide each shareholder with a proxy statement and shall use its reasonable best efforts to solicit its shareholders’ approval of such increase in authorized
shares of Common Stock and to cause its board of directors to recommend to the shareholders that they approve such proposal (or, if a majority of the voting power then in
effect of the capital stock of the Company consents to such increase, in lieu of such proxy statement, deliver to the shareholders of the Company an information statement that
has been filed with (and either approved by or not subject to comments from) the SEC with respect thereto). In the event that the Company is prohibited from issuing shares of
Common Stock to a Holder upon any conversion due to the failure by the Company to have sufficient shares of Common Stock available out of the authorized but unissued
shares of Common Stock (such unavailable number of shares of Common Stock, the “Authorized Failure Shares”), in lieu of delivering such Authorized Failure Shares to
such Holder, the Company shall pay cash in exchange for the redemption of such portion of the Conversion Amount of the Preferred Shares convertible into such Authorized
Failure Shares at a price equal to the sum of (i) the product of (x) such number of Authorized Failure Shares and (y) the greatest Closing Sale Price of the Common Stock on
any Trading Day during the period commencing on the date such Holder delivers the applicable Conversion Notice with respect to such Authorized Failure Shares to the
Company and ending on the date of such issuance and payment under this Section 10(a); and (ii) to the extent such Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of Authorized Failure Shares, any brokerage commissions and other out-of-pocket
expenses, if any, of such Holder incurred in connection therewith. Nothing contained in Section 10(a) or this Section 10(b) shall limit any obligations of the Company under
any provision of the Securities Purchase Agreement.
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11. Redemptions.
(a) General. If a Holder has submitted a Triggering Event Redemption Notice in accordance with Section 5(b), the Company shall deliver the applicable Triggering
Event Redemption Price to such Holder in cash within five (5) Business Days after the Company’s receipt of such Holder’s Triggering Event Redemption Notice. If a Holder
has submitted a Change of Control Redemption Notice in accordance with Section 6(b), the Company shall deliver the applicable Change of Control Redemption Price to such
Holder in cash concurrently with the consummation of such Change of Control if such notice is received prior to the consummation of such Change of Control and within five
(5) Business Days after the Company’s receipt of such notice otherwise. Notwithstanding anything herein to the contrary, in connection with any redemption hereunder at a
time a Holder is entitled to receive a cash payment under any of the other Transaction Documents, at the option of such Holder delivered in writing to the Company, the
applicable Redemption Price hereunder shall be increased by the amount of such cash payment owed to such Holder under such other Transaction Document and, upon
payment in full or conversion in accordance herewith, shall satisfy the Company’s payment obligation under such other Transaction Document. In the event of a redemption of
less than all of the Preferred Shares, the Company shall promptly cause to be issued and delivered to such Holder a new Preferred Share Certificate (in accordance with Section
18) (or evidence of the creation of a new Book-Entry) representing the number of Preferred Shares which have not been redeemed. In the event that the Company does not pay
the applicable Redemption Price to a Holder within the time period required for any reason (including, without limitation, to the extent such payment is prohibited pursuant to
the NRS), at any time thereafter and until the Company pays such unpaid Redemption Price in full, such Holder shall have the option, in lieu of redemption, to require the
Company to promptly return to such Holder all or any of the Preferred Shares that were submitted for redemption and for which the applicable Redemption Price (together with
any Late Charges thereon) has not been paid. Upon the Company’s receipt of such notice, (x) the applicable Redemption Notice shall be null and void with respect to such
Preferred Shares, (y) the Company shall immediately return the applicable Preferred Share Certificate, or issue a new Preferred Share Certificate (in accordance with Section
18(d)), to such Holder (unless the Preferred Shares are held in Book-Entry form, in which case the Company shall deliver evidence to such Holder that a Book-Entry for such
Preferred Shares then exists), and in each case the Additional Amount of such Preferred Shares shall be increased by an amount equal to the difference between (1) the
applicable Redemption Price (as the case may be, and as adjusted pursuant to this Section 11, if applicable) minus (2) the Stated Value portion of the Conversion Amount
submitted for redemption and (z) the Conversion Price of such Preferred Shares shall be automatically adjusted with respect to each conversion effected thereafter by such
Holder to the lowest of (A) the Conversion Price as in effect on the date on which the applicable Redemption Notice is voided, (B) the greater of (x) the Floor Price and (y)
75% of the lowest Closing Bid Price of the Common Stock during the period beginning on and including the date on which the applicable Redemption Notice is delivered to
the Company and ending on and including the date on which the applicable Redemption Notice is voided and (C) the greater of (x) the Floor Price and (y) 75% of the quotient
of (I) the sum of the five (5) lowest VWAPs of the Common Stock during the twenty (20) consecutive Trading Day period ending and including the applicable Conversion Date
divided by (II) five (5) (it being understood and agreed that all such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during such period); provided that in the event of the Conversion Floor Price Condition, on the applicable Conversion Date in connection herewith the
Company shall also deliver to the Holder the applicable Redemption Conversion Floor Amount in cash on the applicable Conversion Date. A Holder’s delivery of a notice
voiding a Redemption Notice and exercise of its rights following such notice shall not affect the Company’s obligations to make any payments of Late Charges which have
accrued prior to the date of such notice with respect to the Preferred Shares subject to such notice.
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(b) Redemption by Multiple Holders. Upon the Company’s receipt of a Redemption Notice from any Holder for redemption or repayment as a result of an event or
occurrence substantially similar to the events or occurrences described in Section 5(b) or Section 6(b), the Company shall immediately, but no later than one (1) Business Day
of its receipt thereof, forward to each other Holder by facsimile or electronic mail a copy of such notice. If the Company receives one or more Redemption Notices, during the
seven (7) Business Day period beginning on and including the date which is two (2) Business Days prior to the Company’s receipt of the initial Redemption Notice and ending
on and including the date which is two (2) Business Days after the Company’s receipt of the initial Redemption Notice and the Company is unable to redeem all of the
Conversion Amount of such Preferred Shares designated in such initial Redemption Notice and such other Redemption Notices received during such seven (7) Business Day
period, then the Company shall redeem a pro rata amount from each Holder based on the Stated Value of the Preferred Shares submitted for redemption pursuant to such
Redemption Notices received by the Company during such seven (7) Business Day period.
12. Voting Rights. Holders of Preferred Shares shall have no voting rights, except as required by law (including without limitation, the NRS) and as expressly provided
in this Certificate of Designations. To the extent that under the NRS the vote of the holders of the Preferred Shares, voting separately as a class or series, as applicable, is
required to authorize a given action of the Company, the affirmative vote or consent of the Required Holders of the shares of the Preferred Shares, voting together in the
aggregate and not in separate series unless required under the NRS, represented at a duly held meeting at which a quorum is presented or by written consent of the Required
Holders (except as otherwise may be required under the NRS), voting together in the aggregate and not in separate series unless required under the NRS, shall constitute the
approval of such action by both the class or the series, as applicable. Subject to Section 4(d)(i), to the extent that under the NRS holders of the Preferred Shares are entitled to
vote on a matter with holders of shares of Common Stock, voting together as one class, each Preferred Share shall entitle the holder thereof to cast that number of votes per
share as is equal to the number of shares of Common Stock into which it is then convertible (subject to the ownership limitations specified in Section 4(d)(i) hereof) using the
record date for determining the stockholders of the Company eligible to vote on such matters as the date as of which the Conversion Price is calculated. Holders of the Preferred
Shares shall be entitled to written notice of all stockholder meetings or written consents (and copies of proxy materials and other information sent to stockholders) with respect
to which they would be entitled to vote, which notice would be provided pursuant to the Company’s bylaws and the NRS.
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13. Covenants.
(a) Incurrence of Indebtedness. So long as the Minimum Ownership Condition (as defined in the Securities Purchase Agreement) exists, the Company shall not, and
the Company shall cause each of its Subsidiaries to not, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness (other than Permitted
Indebtedness).
(b) Existence of Liens. So long as the Minimum Ownership Condition exists, the Company shall not, and the Company shall cause each of its Subsidiaries to not,
directly or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts
and contract rights) owned by the Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted Liens.
(c) Restricted Payments. The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, redeem, defease, repurchase, repay
or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by way of open market purchases, tender offers, private
transactions or otherwise), all or any portion of any Indebtedness (other than any amounts payable pursuant to this Certificate of Designations) whether by way of payment in
respect of principal of (or premium, if any) or interest on, such Indebtedness if at the time such payment is due or is otherwise made or, after giving effect to such payment, (i)
an event constituting a Triggering Event has occurred and is continuing or (ii) an event that with the passage of time and without being cured would constitute a Triggering
Event has occurred and is continuing.
(d) Restriction on Redemption and Cash Dividends. The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, redeem,
repurchase or declare or pay any cash dividend or distribution on any of its capital stock (other than as required by the Certificate of Designations).
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(e) Restriction on Transfer of Assets. The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, sell, lease, license,
assign, transfer, spin-off, split-off, close, convey or otherwise dispose of any assets or rights of the Company or any Subsidiary owned or hereafter acquired whether in a single
transaction or a series of related transactions, other than (i) sales, leases, licenses, assignments, transfers, conveyances and other dispositions of such assets or rights by the
Company and its Subsidiaries in the ordinary course of business consistent with its past practice and (ii) sales of inventory and product in the ordinary course of business.
(f) Maturity of Indebtedness. The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, permit any Indebtedness of the
Company or any of its Subsidiaries to mature or accelerate prior to the third anniversary of the Initial Issuance Date.
(g) Change in Nature of Business. The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, engage in any material
line of business substantially different from those lines of business conducted by or publicly contemplated to be conducted by the Company and each of its Subsidiaries on the
Subscription Date or any business substantially related or incidental thereto. The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or
indirectly, modify its or their corporate structure or purpose.
(h) Preservation of Existence, Etc. The Company shall maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, its existence, rights and
privileges, and become or remain, and cause each of its Subsidiaries to become or remain, duly qualified and in good standing in each jurisdiction in which the character of the
properties owned or leased by it or in which the transaction of its business makes such qualification necessary.
(i) Maintenance of Properties, Etc. The Company shall maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, all of its properties which
are necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted, and comply, and cause each of its
Subsidiaries to comply, at all times with the provisions of all leases to which it is a party as lessee or under which it occupies property, so as to prevent any loss or forfeiture
thereof or thereunder.
(j) Maintenance of Intellectual Property. The Company will, and will cause each of its Subsidiaries to, take all action necessary or advisable to maintain all of the
Intellectual Property Rights of the Company and/or any of its Subsidiaries that are necessary or material to the conduct of its business in full force and effect.
(k) Maintenance of Insurance. The Company shall maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance
companies or associations (including, without limitation, comprehensive general liability, hazard, rent and business interruption insurance) with respect to its properties
(including all real properties leased or owned by it) and business, in such amounts and covering such risks as is required by any governmental authority having jurisdiction with
respect thereto or as is carried generally in accordance with sound business practice by companies in similar businesses similarly situated.
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(l) Transactions with Affiliates. Other than the Insider Financing (as defined in the Securities Purchase Agreement) and the transactions described on Schedule 13(l)
attached hereto, the Company shall not, nor shall it permit any of its Subsidiaries to, enter into, renew, extend or be a party to, any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease, transfer or exchange of property or assets of any kind or the rendering of services of any kind) with any affiliate, except
transactions in the ordinary course of business in a manner and to an extent consistent with past practice and necessary or desirable for the prudent operation of its business, for
fair consideration and on terms no less favorable to it or its Subsidiaries than would be obtainable in a comparable arm’s length transaction with a Person that is not an affiliate
thereof.
(m) Restricted Issuances. The Company shall not, directly or indirectly, without the prior written consent of the Required Holders, (i) issue any Preferred Shares (other
than as contemplated by the Securities Purchase Agreement and this Certificate of Designations) or (ii) issue any other securities that would cause a breach or default under this
Certificate of Designations, the Preferred Warrants or the Common Warrants.
(n) Independent Investigation. At the request of any Holder either (x) at any time when a Triggering Event has occurred and is continuing, (y) upon the occurrence of
an event that with the passage of time or giving of notice would constitute a Triggering Event or (z) at any time such Holder reasonably believes a Triggering Event may have
occurred or be continuing, the Company shall hire an independent, reputable investment bank selected by the Company and approved by such Holder to investigate as to
whether any breach of the Certificate of Designations has occurred (the “Independent Investigator”). If the Independent Investigator determines that such breach of the
Certificate of Designations has occurred, the Independent Investigator shall notify the Company of such breach and the Company shall deliver written notice to each Holder of
such breach. In connection with such investigation, the Independent Investigator may, during normal business hours, inspect all contracts, books, records, personnel, offices and
other facilities and properties of the Company and its Subsidiaries and, to the extent available to the Company after the Company uses reasonable efforts to obtain them, the
records of its legal advisors and accountants (including the accountants’ work papers) and any books of account, records, reports and other papers not contractually required of
the Company to be confidential or secret, or subject to attorney-client or other evidentiary privilege, and the Independent Investigator may make such copies and inspections
thereof as the Independent Investigator may reasonably request. The Company shall furnish the Independent Investigator with such financial and operating data and other
information with respect to the business and properties of the Company as the Independent Investigator may reasonably request. The Company shall permit the Independent
Investigator to discuss the affairs, finances and accounts of the Company with, and to make proposals and furnish advice with respect thereto to, the Company’s officers,
directors, key employees and independent public accountants or any of them (and by this provision the Company authorizes said accountants to discuss with such Independent
Investigator the finances and affairs of the Company and any Subsidiaries), all at such reasonable times, upon reasonable notice, and as often as may be reasonably requested.
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14. Liquidation, Dissolution, Winding-Up. In the event of a Liquidation Event, the Holders shall be entitled to receive in cash out of the assets of the Company,
whether from capital or from earnings available for distribution to its shareholders (the “Liquidation Funds”), before any amount shall be paid to the holders of any of shares
of Junior Stock, but pari passu with any Parity Stock then outstanding, an amount per Preferred Share equal to the greater of (A) 125% of the Conversion Amount of such
Preferred Share on the date of such payment and (B) the amount per share such Holder would receive if such Holder converted such Preferred Share into Common Stock
immediately prior to the date of such payment, provided that if the Liquidation Funds are insufficient to pay the full amount due to the Holders and holders of shares of Parity
Stock, then each Holder and each holder of Parity Stock shall receive a percentage of the Liquidation Funds equal to the full amount of Liquidation Funds payable to such
Holder and such holder of Parity Stock as a liquidation preference, in accordance with their respective certificate of designations (or equivalent), as a percentage of the full
amount of Liquidation Funds payable to all holders of Preferred Shares and all holders of shares of Parity Stock. To the extent necessary, the Company shall cause such actions
to be taken by each of its Subsidiaries so as to enable, to the maximum extent permitted by law, the proceeds of a Liquidation Event to be distributed to the Holders in
accordance with this Section 14. All the preferential amounts to be paid to the Holders under this Section 14 shall be paid or set apart for payment before the payment or setting
apart for payment of any amount for, or the distribution of any Liquidation Funds of the Company to the holders of shares of Junior Stock in connection with a Liquidation
Event as to which this Section 14 applies.
15. Distribution of Assets. In addition to any adjustments pursuant to Section 7(a) and Section 8, if the Company shall declare or make any dividend or other
distributions of its assets (or rights to acquire its assets) to any or all holders of shares of Common Stock, by way of return of capital or otherwise (including without limitation,
any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction) (the “Distributions”), then each Holder, as holders of Preferred Shares, will be entitled to such Distributions as if such Holder had held the number of
shares of Common Stock acquirable upon complete conversion of the Preferred Shares (without taking into account any limitations or restrictions on the convertibility of the
Preferred Shares and assuming for such purpose that the Preferred Share was converted at the Alternate Conversion Price as of the applicable record date) immediately prior to
the date on which a record is taken for such Distribution or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for such
Distributions (provided, however, that to the extent that such Holder’s right to participate in any such Distribution would result in such Holder and the other Attribution Parties
exceeding the Maximum Percentage, then such Holder shall not be entitled to participate in such Distribution to such extent of the Maximum Percentage (and shall not be
entitled to beneficial ownership of such shares of Common Stock as a result of such Distribution (and beneficial ownership) to such extent of any such excess) and the portion
of such Distribution shall be held in abeyance for the benefit of such Holder until such time or times as its right thereto would not result in such Holder and the other Attribution
Parties exceeding the Maximum Percentage, at which time or times, if any, such Holder shall be granted such Distribution (and any Distributions declared or made on such
initial Distribution or on any subsequent Distribution held similarly in abeyance) to the same extent as if there had been no such limitation).
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16. Vote to Change the Terms of or Issue Preferred Shares. In addition to any other rights provided by law, except where the vote or written consent of the holders of a
greater number of shares is required by law or by another provision of the Articles of Incorporation, without first obtaining the affirmative vote at a meeting duly called for such
purpose or the written consent without a meeting of the Required Holders, voting together as a single class, the Company shall not: (a) amend or repeal any provision of, or add
any provision to, its Articles of Incorporation or bylaws, or file any certificate of designations or articles of amendment of any series of shares of preferred stock, if such action
would adversely alter or change in any respect the preferences, rights, privileges or powers, or restrictions provided for the benefit of the Preferred Shares hereunder, regardless
of whether any such action shall be by means of amendment to the Articles of Incorporation or by merger, consolidation or otherwise; (b) increase or decrease (other than by
conversion) the authorized number of Preferred Shares; (c) without limiting any provision of Section 2, create or authorize (by reclassification or otherwise) any new class or
series of Senior Preferred Stock or Parity Stock; (d) purchase, repurchase or redeem any shares of Junior Stock (other than pursuant to the terms of the Company’s equity
incentive plans and options and other equity awards granted under such plans (that have in good faith been approved by the Board)); (e) without limiting any provision of
Section 2, pay dividends or make any other distribution on any shares of any Junior Stock; (f) issue any Preferred Shares other than as contemplated hereby or pursuant to the
Securities Purchase Agreement; or (g) without limiting any provision of Section 9, whether or not prohibited by the terms of the Preferred Shares, circumvent a right of the
Preferred Shares hereunder.
17. Transfer of Preferred Shares. A Holder may transfer some or all of its Preferred Shares without the consent of the Company.
18. Reissuance of Preferred Share Certificates and Book Entries.
(a) Transfer. If any Preferred Shares are to be transferred, the applicable Holder shall surrender the applicable Preferred Share Certificate to the Company (or, if the
Preferred Shares are held in Book-Entry form, a written instruction letter to the Company), whereupon the Company will forthwith issue and deliver upon the order of such
Holder a new Preferred Share Certificate (in accordance with Section 18(d)) (or evidence of the transfer of such Book-Entry), registered as such Holder may request,
representing the outstanding number of Preferred Shares being transferred by such Holder and, if less than the entire outstanding number of Preferred Shares is being
transferred, a new Preferred Share Certificate (in accordance with Section 18(d)) to such Holder representing the outstanding number of Preferred Shares not being transferred
(or evidence of such remaining Preferred Shares in a Book-Entry for such Holder). Such Holder and any assignee, by acceptance of the Preferred Share Certificate or evidence
of Book-Entry issuance, as applicable, acknowledge and agree that, by reason of the provisions of Section 4(c)(i) following conversion or redemption of any of the Preferred
Shares, the outstanding number of Preferred Shares represented by the Preferred Shares may be less than the number of Preferred Shares stated on the face of the Preferred
Shares.
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(b) Lost, Stolen or Mutilated Preferred Share Certificate. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of a Preferred Share Certificate (as to which a written certification and the indemnification contemplated below shall suffice as such evidence), and, in
the case of loss, theft or destruction, of any indemnification undertaking by the applicable Holder to the Company in customary and reasonable form and, in the case of
mutilation, upon surrender and cancellation of such Preferred Share Certificate, the Company shall execute and deliver to such Holder a new Preferred Share Certificate (in
accordance with Section 18(d)) representing the applicable outstanding number of Preferred Shares.
(c) Preferred Share Certificate and Book-Entries Exchangeable for Different Denominations and Forms. Each Preferred Share Certificate is exchangeable, upon the
surrender hereof by the applicable Holder at the principal office of the Company, for a new Preferred Share Certificate or Preferred Share Certificate(s) or new Book-Entry (in
accordance with Section 18(d)) representing, in the aggregate, the outstanding number of the Preferred Shares in the original Preferred Share Certificate, and each such new
Preferred Share Certificate and/or new Book-Entry, as applicable, will represent such portion of such outstanding number of Preferred Shares from the original Preferred Share
Certificate as is designated in writing by such Holder at the time of such surrender. Each Book-Entry may be exchanged into one or more new Preferred Share Certificates or
split by the applicable Holder by delivery of a written notice to the Company into two or more new Book-Entries (in accordance with Section 18(d)) representing, in the
aggregate, the outstanding number of the Preferred Shares in the original Book-Entry, and each such new Book-Entry and/or new Preferred Share Certificate, as applicable, will
represent such portion of such outstanding number of Preferred Shares from the original Book-Entry as is designated in writing by such Holder at the time of such surrender.
(d) Issuance of New Preferred Share Certificate or Book-Entry. Whenever the Company is required to issue a new Preferred Share Certificate or a new Book-Entry
pursuant to the terms of this Certificate of Designations, such new Preferred Share Certificate or new Book-Entry (i) shall represent, as indicated on the face of such Preferred
Share Certificate or in such Book-Entry, as applicable, the number of Preferred Shares remaining outstanding (or in the case of a new Preferred Share Certificate or new Book-
Entry being issued pursuant to Section 18(a) or Section 18(c), the number of Preferred Shares designated by such Holder) which, when added to the number of Preferred Shares
represented by the other new Preferred Share Certificates or other new Book-Entry, as applicable, issued in connection with such issuance, does not exceed the number of
Preferred Shares remaining outstanding under the original Preferred Share Certificate or original Book-Entry, as applicable, immediately prior to such issuance of new
Preferred Share Certificate or new Book-Entry, as applicable, and (ii) shall have an issuance date, as indicated on the face of such new Preferred Share Certificate or in such
new Book-Entry, as applicable, which is the same as the issuance date of the original Preferred Share Certificate or in such original Book-Entry, as applicable.
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19. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Certificate of Designations shall be cumulative and
in addition to all other remedies available under this Certificate of Designations and any of the other Transaction Documents, at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit any Holder’s right to pursue actual and consequential damages for any failure by the Company to
comply with the terms of this Certificate of Designations. The Company covenants to each Holder that there shall be no characterization concerning this instrument other than
as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to
be received by a Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). No failure on the
part of a Holder to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by such
Holder of any right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. In addition, the exercise of any right or
remedy of any Holder at law or equity or under Preferred Shares or any of the documents shall not be deemed to be an election of such Holder’s rights or remedies under such
documents or at law or equity. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holders and that the remedy at law
for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, each Holder shall be entitled, in addition to all
other available remedies, to specific performance and/or temporary, preliminary and permanent injunctive or other equitable relief from any court of competent jurisdiction in
any such case without the necessity of proving actual damages and without posting a bond or other security. The Company shall provide all information and documentation to a
Holder that is requested by such Holder to enable such Holder to confirm the Company’s compliance with the terms and conditions of this Certificate of Designations.
20. Payment of Collection, Enforcement and Other Costs. If (a) any Preferred Shares are placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or a Holder otherwise takes action to collect amounts due under this Certificate of Designations with respect to the Preferred Shares or
to enforce the provisions of this Certificate of Designations or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting
Company creditors’ rights and involving a claim under this Certificate of Designations, then the Company shall pay the costs incurred by such Holder for such collection,
enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, without limitation, attorneys’ fees and disbursements.
The Company expressly acknowledges and agrees that no amounts due under this Certificate of Designations with respect to any Preferred Shares shall be affected, or limited,
by the fact that the purchase price paid for each Preferred Share was less than the original Stated Value thereof.
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21. Construction; Headings. This Certificate of Designations shall be deemed to be jointly drafted by the Company and the Holders and shall not be construed against
any such Person as the drafter hereof. The headings of this Certificate of Designations are for convenience of reference and shall not form part of, or affect the interpretation of,
this Certificate of Designations. Unless the context clearly indicates otherwise, each pronoun herein shall be deemed to include the masculine, feminine, neuter, singular and
plural forms thereof. The terms “including,” “includes,” “include” and words of like import shall be construed broadly as if followed by the words “without limitation.” The
terms “herein,” “hereunder,” “hereof” and words of like import refer to this entire Certificate of Designations instead of just the provision in which they are found. Unless
expressly indicated otherwise, all section references are to sections of this Certificate of Designations. Terms used in this Certificate of Designations and not otherwise defined
herein, but defined in the other Transaction Documents, shall have the meanings ascribed to such terms on the Initial Issuance Date in such other Transaction Documents unless
otherwise consented to in writing by the Required Holders.
22. Failure or Indulgence Not Waiver. No failure or delay on the part of a Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. No
waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party. This Certificate of Designations shall be deemed to be jointly
drafted by the Company and all Holders and shall not be construed against any Person as the drafter hereof. Notwithstanding the foregoing, nothing contained in this Section 22
shall permit any waiver of any provision of Section 4(d).
23. Dispute Resolution.
(a) Submission to Dispute Resolution.
(i) In the case of a dispute relating to a Closing Bid Price, a Closing Sale Price, a Conversion Price, a Black Scholes Consideration Value, an Alternate Conversion
Price, an Alternate Conversion Floor Amount, a Redemption Conversion Floor Amount, a VWAP or a fair market value or the arithmetic calculation of a Conversion Rate, or
the applicable Redemption Price (as the case may be) (including, without limitation, a dispute relating to the determination of any of the foregoing), the Company or the
applicable Holder (as the case may be) shall submit the dispute to the other party via facsimile or electronic mail (A) if by the Company, within two (2) Business Days after the
occurrence of the circumstances giving rise to such dispute or (B) if by such Holder at any time after such Holder learned of the circumstances giving rise to such dispute. If
such Holder and the Company are unable to promptly resolve such dispute relating to such Closing Bid Price, such Closing Sale Price, such Conversion Price, such Black
Scholes Consideration Value, such Alternate Conversion Price, such Alternate Conversion Floor Amount, such Redemption Conversion Floor Amount, such VWAP or such fair
market value, or the arithmetic calculation of such Conversion Rate or such applicable Redemption Price (as the case may be), at any time after the second (2nd) Business Day
following such initial notice by the Company or such Holder (as the case may be) of such dispute to the Company or such Holder (as the case may be), then such Holder may,
at its sole option, select an independent, reputable investment bank to resolve such dispute.
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(ii) Such Holder and the Company shall each deliver to such investment bank (A) a copy of the initial dispute submission so delivered in accordance with the first
sentence of this Section 23 and (B) written documentation supporting its position with respect to such dispute, in each case, no later than 5:00 p.m. (New York time) by the fifth
(5th) Business Day immediately following the date on which such Holder selected such investment bank (the “Dispute Submission Deadline”) (the documents referred to in
the immediately preceding clauses (A) and (B) are collectively referred to herein as the “Required Dispute Documentation”) (it being understood and agreed that if either
such Holder or the Company fails to so deliver all of the Required Dispute Documentation by the Dispute Submission Deadline, then the party who fails to so submit all of the
Required Dispute Documentation shall no longer be entitled to (and hereby waives its right to) deliver or submit any written documentation or other support to such investment
bank with respect to such dispute and such investment bank shall resolve such dispute based solely on the Required Dispute Documentation that was delivered to such
investment bank prior to the Dispute Submission Deadline). Unless otherwise agreed to in writing by both the Company and such Holder or otherwise requested by such
investment bank, neither the Company nor such Holder shall be entitled to deliver or submit any written documentation or other support to such investment bank in connection
with such dispute (other than the Required Dispute Documentation).
(iii) The Company and such Holder shall cause such investment bank to determine the resolution of such dispute and notify the Company and such Holder of such
resolution no later than ten (10) Business Days immediately following the Dispute Submission Deadline. The fees and expenses of such investment bank shall be borne solely
by the Company, and such investment bank’s resolution of such dispute shall be final and binding upon all parties absent manifest error.
(b) Miscellaneous. The Company expressly acknowledges and agrees that (i) this Section 23 constitutes an agreement to arbitrate between the Company and each
Holder (and constitutes an arbitration agreement) under § 7501, et seq. of the New York Civil Practice Law and Rules (“CPLR”) and that any Holder is authorized to apply for
an order to compel arbitration pursuant to CPLR § 7503(a) in order to compel compliance with this Section 23, (ii) a dispute relating to a Conversion Price includes, without
limitation, disputes as to (A) whether an issuance or sale or deemed issuance or sale of Common Stock occurred under Section 8(a), (B) the consideration per share at which an
issuance or deemed issuance of Common Stock occurred, (C) whether any issuance or sale or deemed issuance or sale of Common Stock was an issuance or sale or deemed
issuance or sale of Excluded Securities, (D) whether an agreement, instrument, security or the like constitutes and Option or Convertible Security and (E) whether a Dilutive
Issuance occurred, (iii) the terms of this Certificate of Designations and each other applicable Transaction Document shall serve as the basis for the selected investment bank’s
resolution of the applicable dispute, such investment bank shall be entitled (and is hereby expressly authorized) to make all findings, determinations and the like that such
investment bank determines are required to be made by such investment bank in connection with its resolution of such dispute and in resolving such dispute such investment
bank shall apply such findings, determinations and the like to the terms of this Certificate of Designations and any other applicable Transaction Documents, (iv) the applicable
Holder (and only such Holder with respect to disputes solely relating to such Holder), in its sole discretion, shall have the right to submit any dispute described in this Section
23 to any state or federal court sitting in The City of New York, Borough of Manhattan in lieu of utilizing the procedures set forth in this Section 23 and (v) nothing in this
Section 23 shall limit such Holder from obtaining any injunctive relief or other equitable remedies (including, without limitation, with respect to any matters described in this
Section 23).
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24. Notices; Currency; Payments.
(a) Notices. The Company shall provide each Holder of Preferred Shares with prompt written notice of all actions taken pursuant to the terms of this Certificate of
Designations, including in reasonable detail a description of such action and the reason therefor. Whenever notice is required to be given under this Certificate of Designations,
unless otherwise provided herein, such notice must be in writing and shall be given in accordance with Section 9(f) of the Securities Purchase Agreement. The Company shall
provide each Holder with prompt written notice of all actions taken pursuant to this Certificate of Designations, including in reasonable detail a description of such action and
the reason therefore. Without limiting the generality of the foregoing, the Company shall give written notice to each Holder (i) immediately upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least fifteen (15) days prior to the date on which the Company
closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any grant, issuances, or sales of any Options,
Convertible Securities or rights to purchase stock, warrants, securities or other property to holders of shares of Common Stock or (C) for determining rights to vote with respect
to any Fundamental Transaction, dissolution or liquidation, provided in each case that such information shall be made known to the public prior to or in conjunction with such
notice being provided to such Holder.
(b) Currency. All dollar amounts referred to in this Certificate of Designations are in United States Dollars (“U.S. Dollars”), and all amounts owing under this
Certificate of Designations shall be paid in U.S. Dollars. All amounts denominated in other currencies (if any) shall be converted into the U.S. Dollar equivalent amount in
accordance with the Exchange Rate on the date of calculation. “Exchange Rate” means, in relation to any amount of currency to be converted into U.S. Dollars pursuant to this
Certificate of Designations, the U.S. Dollar exchange rate as published in the Wall Street Journal on the relevant date of calculation (it being understood and agreed that where
an amount is calculated with reference to, or over, a period of time, the date of calculation shall be the final date of such period of time).
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(c) Payments. Whenever any payment of cash is to be made by the Company to any Person pursuant to this Certificate of Designations, unless otherwise expressly set
forth herein, such payment shall be made in lawful money of the United States of America by wire transfer of immediately available funds pursuant to wire transfer instructions
that Holder shall provide to the Company in writing from time to time. Whenever any amount expressed to be due by the terms of this Certificate of Designations is due on any
day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day. Any amount due under the Transaction Documents which
is not paid when due shall result in a late charge being incurred and payable by the Company in an amount equal to interest on such amount at the rate of fifteen percent (15%)
per annum from the date such amount was due until the same is paid in full (“Late Charge”).
25. Waiver of Notice. To the extent permitted by law, the Company hereby irrevocably waives demand, notice, presentment, protest and all other demands and notices
in connection with the delivery, acceptance, performance, default or enforcement of this Certificate of Designations and the Securities Purchase Agreement.
26. Governing Law. This Certificate of Designations shall be construed and enforced in accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Certificate of Designations shall be governed by, the internal laws of the State of Nevada, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of Nevada or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State
of Nevada. Except as otherwise required by Section 23 above, the Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The
City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court,
that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Nothing contained herein shall be
deemed to limit in any way any right to serve process in any manner permitted by law. Nothing contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Nothing contained herein (i) shall be deemed or operate to preclude any Holder from bringing suit or taking other legal action against the
Company in any other jurisdiction to collect on the Company’s obligations to such Holder, to realize on any collateral or any other security for such obligations, or to enforce a
judgment or other court ruling in favor of such Holder or (ii) shall limit, or shall be deemed or construed to limit, any provision of Section 23 above. THE COMPANY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF
ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS CERTIFICATE OF DESIGNATIONS OR ANY TRANSACTION
CONTEMPLATED HEREBY.
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27. Judgment Currency.
(a) If for the purpose of obtaining or enforcing judgment against the Company in any court in any jurisdiction it becomes necessary to convert into any other currency
(such other currency being hereinafter in this Section 27 referred to as the “Judgment Currency”) an amount due in U.S. dollars under this Certificate of Designations, the
conversion shall be made at the Exchange Rate prevailing on the Trading Day immediately preceding:
(i) the date actual payment of the amount due, in the case of any proceeding in the courts of New York or in the courts of any other jurisdiction that will give effect to
such conversion being made on such date: or
(ii) the date on which the foreign court determines, in the case of any proceeding in the courts of any other jurisdiction (the date as of which such conversion is made
pursuant to this Section 27(a)(ii) being hereinafter referred to as the “Judgment Conversion Date”).
(b) If in the case of any proceeding in the court of any jurisdiction referred to in Section 27(a)(ii) above, there is a change in the Exchange Rate prevailing between the
Judgment Conversion Date and the date of actual payment of the amount due, the applicable party shall pay such adjusted amount as may be necessary to ensure that the
amount paid in the Judgment Currency, when converted at the Exchange Rate prevailing on the date of payment, will produce the amount of US dollars which could have been
purchased with the amount of Judgment Currency stipulated in the judgment or judicial order at the Exchange Rate prevailing on the Judgment Conversion Date.
(c) Any amount due from the Company under this provision shall be due as a separate debt and shall not be affected by judgment being obtained for any other amounts
due under or in respect of this Certificate of Designations.
28. Severability. If any provision of this Certificate of Designations is prohibited by law or otherwise determined to be invalid or unenforceable by a court of
competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be
valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Certificate of Designations so long
as this Certificate of Designations as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the
prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties
or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in good faith negotiations to replace the prohibited,
invalid or unenforceable provision(s) with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).
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29. Maximum Payments. Without limiting Section 9(d) of the Securities Purchase Agreement, nothing contained herein shall be deemed to establish or require the
payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges
hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to the applicable
Holder and thus refunded to the Company.
30. Stockholder Matters; Amendment.
(a) Stockholder Matters. Any shareholder action, approval or consent required, desired or otherwise sought by the Company pursuant to the NRS, the Articles of
Incorporation, this Certificate of Designations or otherwise with respect to the issuance of Preferred Shares may be effected by written consent of the Company’s shareholders
or at a duly called meeting of the Company’s shareholders, all in accordance with the applicable rules and regulations of the NRS. This provision is intended to comply with the
applicable sections of the NRS permitting shareholder action, approval and consent affected by written consent in lieu of a meeting.
(b) Amendment. Except for Section 4(d)(i), which may not be amended or waived hereunder, this Certificate of Designations or any provision hereof may be amended
by obtaining the affirmative vote at a meeting duly called for such purpose, or written consent without a meeting in accordance with the NRS, of the Required Holders, voting
separate as a single class, and with such other shareholder approval, if any, as may then be required pursuant to the NRS and the Articles of Incorporation.
31. Certain Defined Terms. For purposes of this Certificate of Designations, the following terms shall have the following meanings:
(a) “1933 Act” means the Securities Act of 1933, as amended, and the rules and regulations thereunder.
(b) “1934 Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
(c) “Additional Amount” means, as of the applicable date of determination, with respect to each Preferred Share, all declared and unpaid Dividends on such Preferred
Share and any other unpaid amounts then due and payable hereunder with respect to such Preferred Share.
(d) “Adjustment Right” means any right granted with respect to any securities issued in connection with, or with respect to, any issuance or sale (or deemed issuance
or sale in accordance with Section 8(a)) of shares of Common Stock (other than rights of the type described in Section 7(a) hereof) that could result in a decrease in the net
consideration received by the Company in connection with, or with respect to, such securities (including, without limitation, any cash settlement rights, cash adjustment or
other similar rights).
(e) “Affiliate” or “Affiliated” means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by, or is under common control
with, such Person, it being understood for purposes of this definition that “control” of a Person means the power directly or indirectly either to vote 10% or more of the stock
having ordinary voting power for the election of directors of such Person or direct or cause the direction of the management and policies of such Person whether by contract or
otherwise.
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(f) “Alternate Conversion Floor Amount” means an amount in cash, to be delivered by wire transfer of immediately available funds pursuant to wire instructions
delivered to the Company by the Holder in writing, equal to the product obtained by multiplying (A) the higher of (I) the highest price that the Common Stock trades at on the
Trading Day immediately preceding the relevant Alternate Conversion Date and (II) the applicable Alternate Conversion Price and (B) the difference obtained by subtracting (I)
the number of shares of Common Stock delivered (or to be delivered) to the Holder on the applicable Share Delivery Deadline with respect to such Alternate Conversion from
(II) the quotient obtain by dividing (x) the applicable Conversion Amount that the Holder has elected to be the subject of the applicable Alternate Conversion, by (y) the
applicable Alternate Conversion Price without giving effect to clause (x) of such definition.
(g) “Alternate Conversion Price” with respect to any Alternate Conversion that price which shall be the lower of (i) the applicable Conversion Price as in effect on
the applicable Conversion Date of the applicable Alternate Conversion and (ii) the greater of (x) the Floor Price and (y) 85% of the price computed as the quotient of (I) the
sum of the VWAP of the Common Stock for each Trading Day in five (5) consecutive Trading Day period ending and including the Trading Day immediately preceding the
delivery or deemed delivery of the applicable Conversion Notice, divided by (II) five (5) (such period, the “Alternate Conversion Measuring Period”). All such
determinations to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction that proportionately decreases or
increases the Common Stock during such Alternate Conversion Measuring Period.
(h) “Approved Stock Plan” means any employee benefit plan which has been approved by the Board prior to or subsequent to the Subscription Date pursuant to
which shares of Common Stock and options to purchase Common Stock may be issued to any employee, officer, consultant or director for services provided to the Company in
their capacity as such.
(i) “Attribution Parties” means, collectively, the following Persons and entities: (i) any investment vehicle, including, any funds, feeder funds or managed accounts,
currently, or from time to time after the Initial Issuance Date, directly or indirectly managed or advised by a Holder’s investment manager or any of its Affiliates or principals,
(ii) any direct or indirect Affiliates of such Holder or any of the foregoing, (iii) any Person acting or who could be deemed to be acting as a Group together with such Holder or
any of the foregoing and (iv) any other Persons whose beneficial ownership of the Company’s Common Stock would or could be aggregated with such Holder’s and the other
Attribution Parties for purposes of Section 13(d) of the 1934 Act. For clarity, the purpose of the foregoing is to subject collectively such Holder and all other Attribution Parties
to the Maximum Percentage.
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(j) “Black Scholes Consideration Value” means the value of the applicable Option, Convertible Security or Adjustment Right (as the case may be) as of the date of
issuance thereof calculated using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to
the Closing Sale Price of the Common Stock on the Trading Day immediately preceding the public announcement of the execution of definitive documents with respect to the
issuance of such Option, Convertible Security or Adjustment Right (as the case may be), (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to
the remaining term of such Option, Convertible Security or Adjustment Right (as the case may be) as of the date of issuance of such Option, Convertible Security or
Adjustment Right (as the case may be), (iii) a zero cost of borrow and (iv) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT
function on Bloomberg (determined utilizing a 365 day annualization factor) as of the Trading Day immediately following the date of issuance of such Option, Convertible
Security or Adjustment Right (as the case may be).
(k) “Bloomberg” means Bloomberg, L.P.
(l) “Book-Entry” means each entry on the Register evidencing one or more Preferred Shares held by a Holder in lieu of a Preferred Share Certificate issuable
hereunder.
(m) “Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law
to remain closed.
(n) “Change of Control” means any Fundamental Transaction other than (i) any merger of the Company or any of its, direct or indirect, wholly-owned Subsidiaries
with or into any of the foregoing Persons, (ii) any reorganization, recapitalization or reclassification of the shares of Common Stock in which holders of the Company’s voting
power immediately prior to such reorganization, recapitalization or reclassification continue after such reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, are, in all material respects, the holders of the voting power of the surviving entity (or entities with the authority or voting power to elect
the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities) after such reorganization, recapitalization or reclassification or
(iii) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company or any of its Subsidiaries.
(o) “Change of Control Redemption Premium” means 125%.
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(p) “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the last closing bid price and last closing trade price, respectively, for such
security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price
or the closing trade price (as the case may be) then the last bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York time, as reported by
Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last
closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or,
if no closing bid price or last trade price, respectively, is reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market
makers for such security as reported in the “pink sheets” by OTC Markets Group Inc. (formerly Pink Sheets LLC). If the Closing Bid Price or the Closing Sale Price cannot be
calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price (as the case may be) of such security on such date
shall be the fair market value as mutually determined by the Company and the Required Holder. If the Company and the Required Holders are unable to agree upon the fair
market value of such security, then such dispute shall be resolved in accordance with the procedures in Section 23. All such determinations shall be appropriately adjusted for
any stock splits, stock dividends, stock combinations, recapitalizations or other similar transactions during such period.
(q) “Closing Date” shall have the meaning set forth in the Securities Purchase Agreement, which date is the date the Company initially issued the Preferred Shares, the
Preferred Warrants and the Common Warrants pursuant to the terms of the Securities Purchase Agreement.
(r) “Common Stock” means (i) the Company’s shares of common stock, $0.001 par value per share, and (ii) any capital stock into which such common stock shall
have been changed or any share capital resulting from a reclassification of such common stock.
(s) “Common Warrants” has the meaning ascribed to such term in the Securities Purchase Agreement, and shall include all warrants issued in exchange therefor or
replacement thereof.
(t) “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any Indebtedness, lease,
dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the
obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.
(u) “Conversion Floor Price Condition” means that the relevant Alternate Conversion Price or other conversion price determined pursuant to Section 11(a) hereof, as
applicable, is being determined based on clause (x) of such definition or section, as applicable.
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(v) “Convertible Securities” means any stock or other security (other than Options) that is at any time and under any circumstances, directly or indirectly, convertible
into, exercisable or exchangeable for, or which otherwise entitles the holder thereof to acquire, any shares of Common Stock.
(w) “Current Subsidiary” means any Person in which the Company on the Subscription Date, directly or indirectly, (i) owns any of the outstanding capital stock or
holds any equity or similar interest of such Person or (ii) controls or operates all or any part of the business, operations or administration of such Person, and all of the
foregoing, collectively, “Current Subsidiaries”.
(x) “Dividend Date” means, with respect to any given calendar month, the first Trading Day of such calendar month, but with the first Dividend Date commencing on
March 1, 2020.
(y) “Dividend Rate” means nine percent (9%) per annum, as may be adjusted from time to time in accordance with Section 3(b).
(z) “Eligible Market” means The New York Stock Exchange, the NYSE American, the Nasdaq Global Select Market, the Nasdaq Global Market or the Principal
Market.
(aa) “Event Market Price” means, with respect to any Stock Combination Event Date, the quotient determined by dividing (x) the sum of the VWAP of the Common
Stock for each of the five (5) Trading Days with the lowest VWAP of the Common Stock during the fifteen (15) consecutive Trading Day period ending and including the
Trading Day immediately preceding the sixteenth (16th) Trading Day after such Stock Combination Event Date, divided by (y) five (5).
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(bb) “Excluded Securities” means (i) shares of Common Stock or options to purchase Common Stock issued to directors, consultants, officers or employees of the
Company for services rendered to the Company in their capacity as such pursuant to an Approved Stock Plan (as defined above), provided that (A) all such issuances (taking
into account the shares of Common Stock issuable upon exercise of such options) after the Subscription Date pursuant to this clause (i) do not, in the aggregate, exceed more
than 15% of the Common Stock issued and outstanding immediately prior to the Subscription Date, in the aggregate and (B) the exercise price of any such options is not
lowered, none of such options are amended to increase the number of shares issuable thereunder and none of the terms or conditions of any such options are otherwise
materially changed in any manner that adversely affects any of the Holders; (ii) shares of Common Stock issued upon the conversion or exercise of Convertible Securities
(other than options to purchase Common Stock issued pursuant to an Approved Stock Plan that are covered by clause (i) above) issued prior to the Subscription Date, provided
that the conversion price of any such Convertible Securities (other than options to purchase Common Stock issued pursuant to an Approved Stock Plan that are covered by
clause (i) above) is not lowered, none of such Convertible Securities (other than options to purchase Common Stock issued pursuant to an Approved Stock Plan that are covered
by clause (i) above) are amended to increase the number of shares issuable thereunder and none of the terms or conditions of any such Convertible Securities (other than
options to purchase Common Stock issued pursuant to an Approved Stock Plan that are covered by clause (i) above) are otherwise materially changed in any manner that
adversely affects any of the Holders; (iii) the shares of Common Stock issuable upon conversion of the Preferred Shares or otherwise pursuant to the terms of this Certificate of
Designations; provided, that the terms of this Certificate of Designations are not amended, modified or changed on or after the Subscription Date (other than antidilution
adjustments pursuant to the terms thereof in effect as of the Subscription Date), (iv) the Warrant Preferred Shares issuable upon exercise of the Preferred Warrants; provided,
that the terms of the Preferred Warrants are not amended, modified or changed on or after the Subscription Date (other than antidilution adjustments pursuant to the terms
thereof in effect as of the Subscription Date), (vi) the shares of Common Stock issuable upon exercise of the Common Warrants; provided, that the terms of the Common
Warrants are not amended, modified or changed on or after the Subscription Date (other than antidilution adjustments pursuant to the terms thereof in effect as of the
Subscription Date) and (vii) shares of Common Stock and Common Stock issued upon the conversion or exercise of Convertible Securities or Options (other than options to
purchase Common Stock issued pursuant to an Approved Stock Plan on or after the date of this Certificate of Designations that are covered by clause (i) above) issued or
issuable pursuant to strategic alliances, strategic mergers and acquisitions, strategic partnerships, strategic license agreements and other similar transactions, provided that (I)
the primary purpose of such issuance is not to raise capital, (II) the purchaser or acquirer of such shares of Common Stock, Options and/or Convertible Securities in such
issuance solely consists of the actual participants in such strategic transaction or the stockholders, partners, members or Affiliates of the such participants, and (III) to the extent
there are multiple participants in such transaction, the number or amount (as the case may be) of such shares of Common Stock, Options and/or Convertible Securities issued to
such Person by the Company in such transaction shall not be disproportionate to such Person’s actual participation in such strategic transaction.
(cc) “Floor Price” means $0.18.
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(dd) “Fundamental Transaction” means (A) that the Company shall, directly or indirectly, including through subsidiaries, Affiliates or otherwise, in one or more
related transactions, (i) consolidate or merge with or into (whether or not the Company is the surviving corporation) another Subject Entity, or (ii) sell, assign, transfer, convey
or otherwise dispose of all or substantially all of the properties or assets of the Company or any of its “significant subsidiaries” (as defined in Rule 1-02 of Regulation S-X) to
one or more Subject Entities, or (iii) make, or allow one or more Subject Entities to make, or allow the Company to be subject to or have its Common Stock be subject to or
party to one or more Subject Entities making, a purchase, tender or exchange offer that is accepted by the holders of at least either (x) 50% of the outstanding shares of
Common Stock, (y) 50% of the outstanding shares of Common Stock calculated as if any shares of Common Stock held by all Subject Entities making or party to, or Affiliated
with any Subject Entities making or party to, such purchase, tender or exchange offer were not outstanding; or (z) such number of shares of Common Stock such that all Subject
Entities making or party to, or Affiliated with any Subject Entity making or party to, such purchase, tender or exchange offer, become collectively the beneficial owners (as
defined in Rule 13d-3 under the 1934 Act) of at least 50% of the outstanding shares of Common Stock, or (iv) consummate a stock or share purchase agreement or other
business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with one or more Subject Entities whereby all such
Subject Entities, individually or in the aggregate, acquire, either (x) at least 50% of the outstanding shares of Common Stock, (y) at least 50% of the outstanding shares of
Common Stock calculated as if any shares of Common Stock held by all the Subject Entities making or party to, or Affiliated with any Subject Entity making or party to, such
stock purchase agreement or other business combination were not outstanding; or (z) such number of shares of Common Stock such that the Subject Entities become
collectively the beneficial owners (as defined in Rule 13d-3 under the 1934 Act) of at least 50% of the outstanding shares of Common Stock, or (v) reorganize, recapitalize or
reclassify its Common Stock, (B) that the Company shall, directly or indirectly, including through subsidiaries, Affiliates or otherwise, in one or more related transactions,
allow any Subject Entity individually or the Subject Entities in the aggregate to be or become the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or
indirectly, whether through acquisition, purchase, assignment, conveyance, tender, tender offer, exchange, reduction in outstanding shares of Common Stock, merger,
consolidation, business combination, reorganization, recapitalization, spin-off, scheme of arrangement, reorganization, recapitalization or reclassification or otherwise in any
manner whatsoever, of either (x) at least 50% of the aggregate ordinary voting power represented by issued and outstanding Common Stock, (y) at least 50% of the aggregate
ordinary voting power represented by issued and outstanding Common Stock not held by all such Subject Entities as of the date of this Certificate of Designations calculated as
if any shares of Common Stock held by all such Subject Entities were not outstanding, or (z) a percentage of the aggregate ordinary voting power represented by issued and
outstanding shares of Common Stock or other equity securities of the Company sufficient to allow such Subject Entities to effect a statutory short form merger or other
transaction requiring other shareholders of the Company to surrender their shares of Common Stock without approval of the shareholders of the Company or (C) directly or
indirectly, including through subsidiaries, Affiliates or otherwise, in one or more related transactions, the issuance of or the entering into any other instrument or transaction
structured in a manner to circumvent, or that circumvents, the intent of this definition in which case this definition shall be construed and implemented in a manner otherwise
than in strict conformity with the terms of this definition to the extent necessary to correct this definition or any portion of this definition which may be defective or inconsistent
with the intended treatment of such instrument or transaction.
(ee) “GAAP” means United States generally accepted accounting principles, consistently applied.
(ff) “Group” means a “group” as that term is used in Section 13(d) of the 1934 Act and as defined in Rule 13d-5 thereunder.
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(gg) “Holder Pro Rata Amount” means, with respect to any Holder, a fraction (i) the numerator of which is the number of Preferred Shares issued to such Holder
pursuant to the Securities Purchase Agreement on the Initial Issuance Date and (ii) the denominator of which is the number of Preferred Shares issued to all Holders pursuant to
the Securities Purchase Agreement on the Initial Issuance Date.
(hh) “Indebtedness” means of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as
the deferred purchase price of property or services, including, without limitation, “capital leases” in accordance with United States generally accepted accounting principles
consistently applied for the periods covered thereby (other than trade payables entered into in the ordinary course of business consistent with past practice), (C) all
reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising
under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all
monetary obligations under any leasing or similar arrangement which, in connection with United States generally accepted accounting principles, consistently applied for the
periods covered thereby, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, deed of trust, lien, pledge, charge, security interest or other encumbrance of any
nature whatsoever in or upon any property or assets (including accounts and contract rights) with respect to any asset or property owned by any Person, even though the Person
which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or
obligations of others of the kinds referred to in clauses (A) through (G) above.
(ii) “Intellectual Property Rights” means, with respect to the Company and its Subsidiaries, all of their rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, original works of authorship, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations,
trade secrets and other intellectual property rights and all applications and registrations therefor.
(jj) “Liquidation Event” means, whether in a single transaction or series of transactions, the voluntary or involuntary liquidation, dissolution or winding up of the
Company or such Subsidiaries the assets of which constitute all or substantially all of the assets of the business of the Company and its Subsidiaries, taken as a whole.
(kk) “Make-Whole Amount” means as of any given date, the amount of any Dividend that, but for any conversion hereunder on such given date, would have accrued
with respect to the Conversion Amount being redeemed hereunder at the Dividend Rate then in effect for the period from such given date through the third (3rd) anniversary of
the Initial Issuance Date.
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(ll) “Material Adverse Effect” means any material adverse effect on the business, properties, assets, liabilities, operations, results of operations, condition (financial
or otherwise) or prospects of the Company and its Subsidiaries, if any, individually or taken as a whole, or on the transactions contemplated hereby or on the other Transaction
Documents (as defined below), or by the agreements and instruments to be entered into in connection therewith or on the authority or ability of the Company to perform its
obligations under the Transaction Documents.
(mm) “New Subsidiary” means, as of any date of determination, any Person in which the Company after the Subscription Date, directly or indirectly, (i) owns or
acquires any of the outstanding capital stock or holds any equity or similar interest of such Person or (ii) controls or operates all or any part of the business, operations or
administration of such Person, and all of the foregoing, collectively, “New Subsidiaries.”
(nn) “Options” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.
(oo) “Parent Entity” of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is
quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of
the date of consummation of the Fundamental Transaction.
(pp) “Permitted Indebtedness” means (i) Indebtedness set forth on Schedule 3(s) to the Securities Purchase Agreement, as in effect as of the Subscription Date, (ii)
Indebtedness secured by Permitted Liens or unsecured but as described in clauses (iv) and (v) of the definition of Permitted Liens and (iii) Permitted Senior Indebtedness .
(qq) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves
have been established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of business by operation of law with respect to a liability that is not yet
due or delinquent, (iii) any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other similar liens, arising in the ordinary course of business
with respect to a liability that is not yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv) Liens (A) upon or in any equipment acquired
or held by the Company or any of its Subsidiaries to secure the purchase price of such equipment or Indebtedness incurred solely for the purpose of financing the acquisition or
lease of such equipment, or (B) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements
thereon, and the proceeds of such equipment, in either case, with respect to Indebtedness in an aggregate amount not to exceed $250,000, (v) Liens incurred in connection with
the extension, renewal or refinancing of the Indebtedness secured by Liens of the type described in clause (iv) above, provided that any extension, renewal or replacement Lien
shall be limited to the property encumbered by the existing Lien and the principal amount of the Indebtedness being extended, renewed or refinanced does not increase, (vi)
Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of custom duties in connection with the importation of goods, (vii) Liens arising
from judgments, decrees or attachments in circumstances not constituting a Triggering Event under Section 5(a)(ix) and (viii) Liens with respect to Permitted Senior
Indebtedness.
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(rr) “Permitted Senior Indebtedness” means the principal of (and premium, if any), interest on, and all fees and other amounts (including, without limitation, any
reasonable out-of-pocket costs, enforcement expenses (including reasonable out-of-pocket legal fees and disbursements), collateral protection expenses and other
reimbursement or indemnity obligations relating thereto) payable by Company and/or its Subsidiaries under or in connection with any credit facility to be entered into by the
Company and/or its Subsidiaries with one or more financial institutions (and on terms and conditions), in form and substance reasonably satisfactory to the Required Holders;
provided, however, that (i) no Permitted Senior Indebtedness is outstanding during the Restricted Period (as defined in the Securities Purchase Agreement (or until such earlier
time as approved by the Required Holders), (ii) the aggregate outstanding amount of such Indebtedness permitted hereunder (taking into account the maximum amounts which
may be advanced under the loan documents evidencing such Permitted Senior Indebtedness) does not at any time exceed $2,000,000, (iii) such Permitted Senior Indebtedness
shall not be convertible or exchangeable, directly or indirectly, into Common Stock of the Company and (iv) no Convertible Securities or Options shall be issued in connection
with such Permitted Senior Indebtedness.
(ss) “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity or
a government or any department or agency thereof.
(tt) “Preferred Warrants” has the meaning ascribed to such term in the Securities Purchase Agreement, and shall include all warrants issued in exchange therefor or
replacement thereof.
(uu) “Principal Market” means the Nasdaq Capital Market.
(vv) “Redemption Conversion Floor Amount” means an amount in cash, to be delivered by wire transfer of immediately available funds pursuant to wire
instructions delivered to the Company by the Holder in writing, equal to the product obtained by multiplying (A) the higher of (I) the highest price that the Common Stock
trades at on the Trading Day immediately preceding the relevant Conversion Date and (II) the applicable conversion price determined in accordance with Section 11(a) above
and (B) the difference obtained by subtracting (I) the number of shares of Common Stock delivered (or to be delivered) to the Holder on the applicable Share Delivery Deadline
with respect to such conversion from (II) the quotient obtain by dividing (x) the applicable Conversion Amount that the Holder has elected to be the subject of the applicable
conversion, by (y) the applicable conversion price determined in accordance with Section 11(a) above without giving effect to clause (x) of such definition.
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(ww) “Redemption Notices” means, collectively, the Triggering Events Redemption Notices, and the Change of Control Redemption Notices, and each of the
foregoing, individually, a “Redemption Notice.”
(xx) “Redemption Premium” means 125%.
(yy) “Redemption Prices” means, collectively, any Triggering Event Redemption Price, Change of Control Redemption Price, and each of the foregoing, individually,
a “Redemption Price.”
(zz) “Registration Rights Agreement” means that certain registration rights agreement, dated as of the Closing Date, by and among the Company and the initial
holders of the Preferred Shares relating to, among other things, the registration of the resale of the Preferred Shares, the Common Stock issuable upon conversion of the
Preferred Shares or otherwise pursuant to the terms of this Certificate of Designations and exercise of the Common Warrants, as may be amended from time to time.
(aaa) “SEC” means the United States Securities and Exchange Commission or the successor thereto.
(bbb) “Securities Purchase Agreement” means that certain securities purchase agreement by and among the Company and the initial holders of Preferred Shares,
dated as of the Subscription Date, as may be amended from time in accordance with the terms thereof.
(ccc) “Series E Preferred Stock” shall mean the Series E Convertible Preferred Stock, par value $0.001, of the Company as in effect as of the Initial Issuance Date.
(ddd) “Stated Value” shall mean, with respect to any given Preferred Share, the sum of (x) $1,000 per Preferred Share, and (y) the aggregate amount of any
Capitalized Dividends per such Preferred Share, in each case, subject to adjustment for stock splits, stock dividends, recapitalizations, reorganizations, reclassifications,
combinations, subdivisions or other similar events occurring after the Initial Issuance Date with respect to the Preferred Shares.
(eee) “Subscription Date” means January 28, 2020.
(fff) “Subject Entity” means any Person, Persons or Group or any Affiliate or associate of any such Person, Persons or Group.
(ggg) “Subsidiaries” means, as of any date of determination, collectively, all Current Subsidiaries and all New Subsidiaries, and each of the foregoing, individually, a
“Subsidiary.”
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(hhh) “Successor Entity” means the Person (or, if so elected by the Required Holders, the Parent Entity) formed by, resulting from or surviving any Fundamental
Transaction or the Person (or, if so elected by the Required Holders, the Parent Entity) with which such Fundamental Transaction shall have been entered into.
(iii) “Trading Day” means, as applicable, (x) with respect to all price or trading volume determinations relating to the Common Stock, any day on which the Common
Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded, provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such
exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such
exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time) unless
such day is otherwise designated as a Trading Day in writing by the applicable Holder or (y) with respect to all determinations other than price determinations relating to the
Common Stock, any day on which The New York Stock Exchange (or any successor thereto) is open for trading of securities.
(jjj) “Transaction Documents” means the Securities Purchase Agreement, this Certificate of Designations, the Preferred Warrants, the Common Warrants and each of
the other agreements and instruments entered into or delivered by the Company or any of the Holders in connection with the transactions contemplated by the Securities
Purchase Agreement, all as may be amended from time to time in accordance with the terms thereof.
(kkk) “VWAP” means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market (or, if the Principal Market
is not the principal trading market for such security, then on the principal securities exchange or securities market on which such security is then traded), during the period
beginning at 9:30 a.m., New York time, and ending at 4:00 p.m., New York time, as reported by Bloomberg through its “VAP” function (set to 09:30 start time and 16:00 end
time) or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such
security during the period beginning at 9:30 a.m., New York time, and ending at 4:00 p.m., New York time, as reported by Bloomberg, or, if no dollar volume-weighted average
price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for
such security as reported in the “pink sheets” by OTC Markets Group Inc. (formerly Pink Sheets LLC). If the VWAP cannot be calculated for such security on such date on any
of the foregoing bases, the VWAP of such security on such date shall be the fair market value as mutually determined by the Company and the Required Holders. If the
Company and the Required Holders are unable to agree upon the fair market value of such security, then such dispute shall be resolved in accordance with the procedures in
Section 23. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination, recapitalization or other similar transaction during
such period.
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(lll) “Warrant Common Shares” means, collectively, the shares of Common Stock issuable upon exercise of the Common Warrants.
(mmm) “Warrant Preferred Shares” means, collectively, the Preferred Shares issuable upon exercise of the Preferred Warrants.
32. Disclosure. Upon receipt or delivery by the Company of any notice in accordance with the terms of this Certificate of Designations, unless the Company has in
good faith determined that the matters relating to such notice do not constitute material, non-public information relating to the Company or any of its Subsidiaries, the Company
shall within one (1) Business Day of such receipt or prior to (or simultaneous with) such delivery, as applicable, publicly disclose such material, non-public information on a
Current Report on Form 8-K or otherwise. In the event that the Company believes that a notice contains material, non-public information relating to the Company or any of its
Subsidiaries, the Company so shall indicate to such Holder explicitly in writing in such notice (or immediately upon receipt of notice from such Holder, as applicable), and in
the absence of any such written indication in such notice (or notification from the Company immediately upon receipt of notice from such Holder), such Holder shall be
allowed to presume that all matters relating to such notice do not constitute material, non-public information relating to the Company or any of its Subsidiaries. If the Company
or any of its Subsidiaries provides material non-public information to a Holder that is not simultaneously filed in a Current Report on Form 8-K and such Holder has not agreed
to receive such material non-public information, the Company hereby covenants and agrees that such Holder shall not have any duty of confidentiality to the Company, any of
its Subsidiaries or any of their respective officers, directors, employees, affiliates or agents with respect to, or a duty to any of the foregoing not to trade on the basis of, such
material non-public information. Nothing contained in this Section 32 shall limit any obligations of the Company, or any rights of any Holder, under Section 4(i) of the
Securities Purchase Agreement.
* * * * *
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IN WITNESS WHEREOF, the Company has caused this Certificate of Designations of Series D Convertible Preferred Stock of Sigma Labs, Inc to be signed by its
Chief Executive Officer on this 27th day of January, 2020.
SIGMA LABS, INC.
By:
Name:
Title:
/s/ John Rice
John Rice
Chief Executive Officer
53
EXHIBIT I
SIGMA LABS, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of the Series D Convertible Preferred Stock of Sigma Labs, Inc (the “Certificate of
Designations”). In accordance with and pursuant to the Certificate of Designations, the undersigned hereby elects to convert the number of shares of Series D Convertible
Preferred Stock, $[ ] par value per share (the “Preferred Shares”), of Sigma Labs, Inc a Nevada corporation (the “Company”), indicated below into shares of common stock,
$0.001 value per share (the “Common Stock”), of the Company, as of the date specified below.
Date of Conversion:
Aggregate number of Preferred Shares to be converted
Aggregate Stated Value of such Preferred Shares to be converted:
Aggregate accrued and unpaid Dividends and accrued and unpaid Late Charges with respect to such Preferred Shares and such Aggregate Dividends to be
converted:
AGGREGATE CONVERSION AMOUNT TO BE CONVERTED:
Please confirm the following information:
Conversion Price:
Number of shares of Common Stock to be issued:
[ ] If this Conversion Notice is being delivered with respect to an Alternate Conversion, check here if Holder is electing to use the following Alternate Conversion
Price:____________
Please issue the Common Stock into which the applicable Preferred Shares are being converted to Holder, or for its benefit, as follows:
[ ] Check here if requesting delivery as a certificate to the following name and to the following address:
Issue to:
[ ] Check here if requesting delivery by Deposit/Withdrawal at Custodian as follows:
DTC Participant:
DTC Number:
Account Number:
Date: _____________ __,
__________________________
Name of Registered Holder
Tax ID:_____________________
Facsimile:___________________
E-mail Address:
By:
Name:
Title:
54
EXHIBIT II
ACKNOWLEDGMENT
The Company hereby (a) acknowledges this Conversion Notice, (b) certifies that the above indicated number of shares of Common Stock [are][are not] eligible to be
resold by the Holder either (i) pursuant to Rule 144 (subject to the Holder’s execution and delivery to the Company of a customary 144 representation letter) or (ii) an effective
and available registration statement and (c) hereby directs _________________ to issue the above indicated number of shares of Common Stock in accordance with the
Transfer Agent Instructions dated _____________, 20__ from the Company and acknowledged and agreed to by ________________________.
SIGMA LABS, INC.
By:
Name:
Title:
55
SIGMA LABS, INC.
FORM OF CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES E CONVERTIBLE PREFERRED STOCK
PURSUANT TO SECTION 78 OF THE NEVADA REVISED STATUTES
The undersigned, John Rice, Chief Executive Officer, does hereby certify that:
1. He is the Chief Executive Officer of Sigma Labs, Inc., a Nevada corporation (the “Corporation”).
2. The Corporation is authorized to issue up to ten million (10,000,000) shares of preferred stock, of which (a) shares of Series A Preferred Stock, Series B Preferred
Stock, and Series C Preferred Stock were authorized, none of which are presently issued and outstanding, nor will be outstanding, and (b) up to 7,796 shares of Series D
Convertible Preferred Stock have been authorized.
3. The following resolutions were duly adopted by the board of directors of the Corporation (the “Board of Directors”):
WHEREAS, the certificate of incorporation of the Corporation provides for a class of its authorized stock known as preferred stock, consisting of 10,000,000 shares,
$0.001 par value per share, issuable from time to time in one or more series;
WHEREAS, the Board of Directors is authorized to fix the dividend rights, dividend rate, voting rights, conversion rights, rights and terms of redemption and
liquidation preferences of any wholly unissued series of preferred stock and the number of shares constituting any series and the designation thereof, of any of them; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to a
series of the preferred stock, which shall consist of, except as otherwise set forth in the Purchase Agreement, up to 500 shares of Series E Preferred Stock (the “Preferred
Stock”) which the Corporation has the authority to issue, as follows:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for the issuance of a series of preferred stock for cash or exchange of other
securities, rights or property and does hereby fix and determine the rights, preferences, restrictions and other matters relating to such series of preferred stock as follows:
TERMS OF PREFERRED STOCK
Section 1. Definitions. For the purposes hereof, the following terms shall have the following meanings:
“Additional Amount” means, as of the applicable date of determination, with respect to each Preferred Share, all declared and unpaid dividends on such Share and any
other unpaid amounts then due and payable hereunder with respect to said Share.
1
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as
such terms are used in and construed under Rule 405 of the Securities Act.
“Alternate Consideration” shall have the meaning set forth in Section 7(e).
“Bankruptcy Event” means any of the following events: (a) the Corporation or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X)
thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction relating to the Corporation or any Significant Subsidiary thereof, (b) there is commenced against the Corporation or any Significant Subsidiary
thereof any such case or proceeding that is not dismissed within 60 days after commencement, (c) the Corporation or any Significant Subsidiary thereof is adjudicated insolvent
or bankrupt or any order of relief or other order approving any such case or proceeding is entered, (d) the Corporation or any Significant Subsidiary thereof suffers any
appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar days after such appointment, (e) the
Corporation or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the Corporation or any Significant Subsidiary thereof calls a
meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts, or (g) the Corporation or any Significant Subsidiary thereof, by any act
or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of
the foregoing.
“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking
institutions in the State of New York are authorized or required by law or other governmental action to close.
“Buy-In” shall have the meaning set forth in Section 6(c)(iv).
“Closing” means the closing of the purchase and sale of the Securities pursuant to Section 2.1 of the Purchase Agreement.
“Closing Date” means the Trading Day on which all of the Transaction Documents have been executed and delivered by the applicable parties thereto and all
conditions precedent to (i) each Holder’s obligations to pay the Subscription Amount and (ii) the Corporation’s obligations to deliver the Securities have been satisfied or
waived.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock” means the Corporation’s common stock, par value $0.001 per share, and stock of any other class of securities into which such securities may
hereafter be reclassified or changed.
“Common Stock Equivalents” means any securities of the Corporation or the Subsidiaries including without limitation the Corporation’s Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Convertible Preferred Stock, and any other class of preferred stock or other equity other than the Preferred Stock
which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other
instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
2
“Conversion Amount” means the sum of the Stated Value at issue.
“Conversion Date” shall have the meaning set forth in Section 6(a).
“Conversion Price” shall have the meaning set forth in Section 6(c).
“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of the shares of Preferred Stock and dividends in accordance with the
terms hereof.
“Disclosure Letter” shall have the meaning set forth in the Purchase Agreement.
“Dividend Date” means the first Trading Day of each calendar month, but with the first Dividend Date commencing on March 1, 2020.
“Dividend Rate” means nine percent per annum.
“Dividend Share Amount” shall have the meaning set forth in Section 3(a).
“Effective Date” means the date that all of the Conversion Shares and Dividend Conversion Shares have been sold pursuant to Rule 144 or may be sold pursuant to
Rule 144 without the requirement for the Company to be in compliance with the current public information requirement under Rule 144 and without volume or manner-of-sale
restrictions and Company counsel has delivered to the Transfer Agent and Holders a standing written unqualified opinion that resales may then be made by Holders of the
Conversion Shares and Dividend Conversion Shares pursuant to such exemption which opinion shall be in form and substance reasonably acceptable to such holders.
“Equity Conditions” means, during the period in question, (a) the Corporation shall have duly honored all conversions scheduled to occur or occurring by virtue of one
or more Notices of Conversion of the applicable Holder on or prior to the dates so requested or required, if any, (b) the Corporation shall have paid all liquidated damages and
other amounts owing to the applicable Holder in respect of the Preferred Stock, (c) all of the Conversion Shares issuable pursuant to the Transaction Documents (and shares
issuable in lieu of cash payments of dividends) may be resold pursuant to Rule 144 without volume or manner-of-sale restrictions or current public information requirements as
determined by the counsel to the Corporation as set forth in a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the affected Holders, (d)
the Common Stock is trading on a Trading Market and all of the shares issuable pursuant to the Transaction Documents are listed or quoted for trading on such Trading Market
(and the Corporation believes, in good faith, that trading of the Common Stock on a Trading Market will continue uninterrupted for the foreseeable future), (e) there is a
sufficient number of authorized, but unissued and otherwise unreserved, shares of Common Stock for the issuance of all of the shares then issuable pursuant to the Transaction
Documents, (f) Shareholder Approval has been obtained, (g) there has been no public announcement of a pending or proposed Fundamental Transaction that has not been
consummated, (h) the applicable Holder is not in possession of any information provided by the Corporation that constitutes, or may constitute, material non-public
information, (i) the Corporation is not in material default of any of its obligations pursuant to the Purchase Agreement, and (j) a Material Adverse Effect (as defined in the
Purchase Agreement) has not occurred
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
3
“Fundamental Transaction” means the occurrence after the date hereof of any of (a) an acquisition after the date hereof by an individual or legal entity or “group” (as
described in Rule 13d 5(b)(1) promulgated under the Exchange Act), other than a legal entity majority owned by, or a group wholly consisting of, officers and directors of the
Corporation and their Affiliates, of effective control (whether through legal or beneficial ownership of capital stock of the Corporation, by contract or otherwise) of in excess of
50% of the voting securities of the Corporation (other than by means of conversion or exercise of Preferred Stock and the Securities issued together with the Preferred Stock),
(b) the Corporation merges into or consolidates with any other Person, or any Person merges into or consolidates with the Corporation and, after giving effect to such
transaction, the stockholders of the Corporation immediately prior to such transaction own less than 50% of the aggregate voting power of the Corporation or the successor
entity of such transaction, (c) the Corporation, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially
all of its assets in one or a series of related transactions, (d) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Corporation or another Person)
is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by
the holders of 50% or more of the outstanding Common Stock, (e) to the extent not covered by clauses (a) – (d) above, the Corporation, directly or indirectly, in one or more
related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common
Stock is effectively converted into or exchanged for other securities, cash or property, or (f) the execution by the Corporation of an agreement to which the Corporation is a
party or by which it is bound, providing for any of the events set forth in clauses (a) through (f) above.
“GAAP” means United States generally accepted accounting principles.
“Holder” shall have the meaning given such term in Section 2.
“Indebtedness” means (a) any liabilities for borrowed money or amounts owed in excess of $300,000 (other than trade accounts payable incurred in the ordinary
course of business), (b) all guaranties, endorsements and other contingent obligations in respect of indebtedness of others, whether or not the same are or should be reflected in
the Corporation’s balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business, but in all cases excluding trade accounts payable incurred by the Corporation and its Subsidiaries in the ordinary course of business.
“Junior Securities” means the Common Stock and all other Common Stock Equivalents of the Corporation, at any time outstanding or issuable, including the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock of the Corporation but not the Company’s Series D Convertible Preferred Stock.
“Liquidation” shall have the meaning set forth in Section 5.
“Liens” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.
“Make-Whole Amount” means as of any given date, the amount of any dividend that, but for any conversion on such date, would have accrued with respect to the
Conversion Amount being redeemed hereunder at the Dividend Rate then in effect for the period from such date through the third anniversary of the Initial Issuance Date.
4
“New York Courts” shall have the meaning set forth in Section 10(d).
“Notice of Conversion” shall have the meaning set forth in Section 6(a).
“Original Issue Date” means the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of
Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock
company, government (or an agency or subdivision thereof) or other entity of any kind.
“Preferred Shares” shall have the meaning set forth in Section 2.
“Preferred Stock” shall have the meaning set forth in Section 2.
“Purchase Agreement” means with respect to the Series E Preferred Stock, the Securities Purchase Agreement entered into by the Corporation and the initial issuees of
Preferred Stock, at or about January 27, 2020, as amended, modified or supplemented from time to time in accordance with its terms.
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
“Securities” means the Preferred Stock, the Warrants, the Warrant Shares and the Underlying Shares.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Senior Securities” means the Series D Preferred Stock and any series of preferred stock which by its terms is expressly senior in rank to the Series E Preferred Stock.
“Series D. Preferred Stock” means the Series D Convertible Preferred Stock, par value $0.001.
“Series E Preferred Stock” means the Series E Preferred Stock, par value $0.001, issued at or about January 28, 2020.
“Share Delivery Date” shall have the meaning set forth in Section 6(c).
“Shareholder Approval” shall have the meaning attributed to such term in the Purchase Agreement.
“Stated Value” shall have the meaning set forth in Section 2.
“Subscription Amount” shall mean, as to each Holder, the aggregate amount to be paid for the Preferred Stock purchased pursuant to the Purchase Agreement as
specified below such Holder’s name on the signature page of the Purchase Agreement and next to the heading “Subscription Amount” and on the Exercise Notice in United
States dollars and in immediately available funds.
5
“Subsidiary” means any subsidiary of the Corporation as set forth on Schedule 3.1(a) of the Disclosure Letter (as defined in the Purchase Agreement) and shall, where
applicable and with regard to future events, also include any direct or indirect subsidiary of the Corporation identified on the SEC Reports and formed or acquired after the date
hereof.
“Successor Entity” shall have the meaning set forth in Section 7(e).
“Trading Day” means a day on which the principal Trading Market is open for business.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE
American, the NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global Select Market, the New York Stock Exchange, the OTC Bulletin Board, the
OTCQB or the OTCQX (or any successors to any of the foregoing). As of the date of the Purchase Agreement and the Initial Closing Date, the NASDAQ Capital Market is and
will be the Trading Market.
“Transaction Documents” means this Certificate of Designations, the Purchase Agreement, the Disclosure Letter, the Warrants, the Lockup Agreement, all exhibits and
schedules thereto and hereto and any other documents or agreements executed in connection with the transactions contemplated pursuant to the Purchase Agreement.
“Transfer Agent” means Issuer Direct Corporation, 1981 Murray Holladay Road, Suite 100, Salt Lake City, Utah 84117, and any successor transfer agent of the
Company.
“Underlying Shares” means the shares of Common Stock issued and issuable upon conversion or redemption of the Preferred Stock, the Warrant Shares and shares of
Common Stock issued and issuable in lieu of the cash payment of dividends on the Preferred Stock in accordance with the terms of this Certificate of Designation.
“Variable Rate Transaction” shall have the meaning ascribed to such term in Section 4.13(b) of the Purchase Agreement.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading
Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then
listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if the OTC Bulletin
Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board, (c) if the
Common Stock is not then listed or quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported on the OTCQX, OTCQB or OTC Pink
Marketplace maintained by the OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the volume weighted average
price of the Common Stock on the first such facility (or a similar organization or agency succeeding to its functions of reporting prices), or (d) in all other cases, the fair market
value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers of a majority in interest of the Securities then
outstanding and reasonably acceptable to the Corporation, the fees and expenses of which shall be paid by the Corporation.
“Warrants” means, collectively, the Common Stock purchase warrants delivered to the Holder at the Closing in accordance with the Purchase Agreement.
6
“Warrant Shares” means the shares of Common Stock issuable upon exercise of the Warrants.
Section 2. Designation, Amount and Par Value; Ranking The series of preferred stock shall be designated as its Series E Convertible Preferred Stock (the “Preferred
Stock”) and the number of shares (the “Preferred Shares”) so designated shall be 500 (which shall not be subject to increase without the written consent of the holders of a
majority of the then outstanding shares of Preferred Stock (each, a “Holder” and collectively, the “Holders”)). Each share of Preferred Stock shall have a par value of $0.001
per share and a stated value equal to $1,500 (the “Stated Value”). The Preferred Stock shall be junior in rank to the Series D Preferred Stock in respect of the preferences as to
dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company.
Section 3. Dividends.
a) From and after January 28, 2020 (the “Initial Issuance Date”), each holder of a Preferred Share (each, a “Holder” and collectively, the “Holders”) shall be entitled to
receive dividends (“Dividends”), which Dividends shall be computed on the basis of a 360-day year and twelve 30-day months and shall increase the Stated Value of the
Preferred Shares on each Dividend Date (each, a “Capitalized Dividend”).
b) Prior to the capitalization of Dividends on a Dividend Date, Dividends on the Preferred Shares shall accrue at the Dividend Rate and be payable by way of inclusion
of the Dividends in the Conversion Amount on each Conversion Date in accordance with Section 6.
c) Other Securities. So long as any of the Preferred Stock issued pursuant to the Purchase Agreement or Dividends shall remain outstanding, neither the Corporation
nor any Subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities. So long as any of the Preferred Stock issued pursuant to the
Purchase Agreement or Dividends shall remain outstanding, neither the Corporation nor any Subsidiary thereof shall directly or indirectly pay or declare any dividend or make
any distribution upon, nor shall any distribution be made in respect of, any Junior Securities, nor shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities or shares pari passu with the Preferred Stock. So long as any of the Preferred Stock issued pursuant to the
Purchase Agreement or Dividends shall remain outstanding, neither the Corporation nor any Subsidiary thereof shall issue any security or Common Stock Equivalent which
shall be pari passu or senior to the Preferred Stock in terms of rights upon Liquidation, Dividends or redemption except for the Series D Convertible Preferred Stock.
Section 4. Voting Rights. Except as otherwise provided herein or as otherwise required by law, the Preferred Stock shall have no voting rights. In any event, and
notwithstanding the foregoing limitation, as long as any shares of Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a
majority of the then outstanding shares of the Preferred Stock, (a) alter or amend this Certificate of Designation, or (b) increase the number of authorized shares of Preferred
Stock, or (c) enter into any agreement with respect to any of the foregoing.
Section 5. Liquidation. Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a “Liquidation”), the Holders shall be
entitled to receive out of the assets, whether capital or surplus, of the Corporation an amount equal to the Stated Value, plus any accrued and unpaid dividends thereon and any
other fees or liquidated damages then due and owing thereon under this Certificate of Designation, for each share of Preferred Stock before any distribution or payment shall be
made to the holders of any Junior Securities, but after distribution or payment to holders of the Series D Preferred Stock and any other Senior Securities, and if the assets of the
Corporation shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the Holders shall be ratably distributed among the Holders in accordance
with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. Upon occurrence of a Liquidation which is also a
Fundamental Transaction, the Holder may elect to receive the rights and benefits of this section 5 and/or the rights and benefits set forth in Section 7(e) or any other rights set
forth in the Transaction Documents. The Corporation shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each
Holder.
7
Section 6. Conversion. At any time after the Initial Issuance Date, each Preferred Share shall be convertible into validly issued, fully paid and non-assessable shares of
Common Stock (as defined below), on the terms and conditions set forth in this Section 6.
a) Holder’s Conversion Right. At any time or times on or after date of Shareholder Approval, each Holder shall be entitled to convert any portion of the outstanding
Preferred Shares held by such Holder into validly issued, fully paid and non-assessable shares of Common Stock in accordance with Section 6(c) at the Conversion Rate(as
defined below). The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share
of Common Stock, the Company shall round such fraction of a share of Common Stock up to the nearest whole share. The Company shall pay any and all transfer, stamp,
issuance and similar taxes, costs and expenses (including, without limitation, fees and expenses of the Transfer Agent (as defined below)) that may be payable with respect to
the issuance and delivery of Common Stock upon conversion of any Preferred Shares.
b) Conversion Rate. The number of shares of Common Stock issuable upon conversion of any Preferred Share pursuant to section 6(a) shall be determined by dividing
(x) the Conversion Amount of such Preferred Share by (y) the Conversion Price (the “Conversion Rate”):
i.
ii.
“Conversion Amount” means, with respect to each Preferred Share, as of the applicable date of determination, the sum of (A) the Stated
Value thereof plus (B) the Additional Amount thereon, plus (C) the Make-Whole amount.
“Conversion Price” means, with respect to each Preferred Share, as of any Conversion Date or other date of determination, $0.13 above
the consolidated closing bid price of the Common Stock for the Trading Day immediately preceding the date of the Purchase Agreement, subject to
adjustment as provided herein.
c) Mechanics of Conversion
i. Delivery of Certificate Upon Conversion. To convert a Preferred Share into shares of Common Stock on any date (a “Conversion Date”), a Holder shall deliver a
copy of an executed notice of conversion to the Company with the form of said notice attached hereto as Annex A (a “Notice of Conversion”). Not later than two (2) Trading
Days after each Conversion Date (the “Share Delivery Date”), the Corporation shall deliver, or cause to be delivered, to the converting Holder (A) a certificate or certificates
representing the Conversion Shares, which, on or after the Effective Date, shall be free of restrictive legends and trading restrictions (other than those which may then be
required by the Purchase Agreement), provided that the Conversion Shares meet the requirements of the Securities Act for removing such restrictive legends, representing the
number of Conversion Shares being acquired upon the conversion of the Preferred Stock (including, if the Corporation has given notice pursuant to Section 3(c) for payment of
dividends in shares of Common Stock at least 20 Trading Days prior to the date on which the Notice of Conversion is delivered to the Corporation, shares of Common Stock
representing the payment of accrued dividends otherwise determined pursuant to Section 3(a) but assuming that the Dividend Notice Period is the 20 Trading Days period
immediately prior to the date on which the Notice of Conversion is delivered to the Corporation and excluding for such issuance the condition that the Corporation deliver the
Dividend Share Amount as to such dividend payment prior to the commencement of the Dividend Notice Period), and (B) a bank check in the amount of accrued and unpaid
dividends (if the Corporation has elected or is required to pay accrued dividends in cash). On or after the Effective Date, the Corporation shall deliver any certificate or
certificates required to be delivered by the Corporation under this Section 6 electronically through the Depository Trust Company or another established clearing corporation
performing similar functions.
8
ii. Failure to Deliver Certificates. If, in the case of any Notice of Conversion, such certificate or certificates are not delivered to or as directed by the applicable Holder
by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the Corporation at any time on or before its receipt of such certificate or certificates, to
rescind such Conversion, in which event the Corporation shall promptly return to the Holder any original Preferred Stock certificate delivered to the Corporation and the Holder
shall promptly return to the Corporation the Common Stock certificates issued to such Holder pursuant to the rescinded Conversion Notice.
iii. Obligation Absolute; Partial Liquidated Damages. The Corporation’s obligation to issue and deliver the Conversion Shares upon conversion of Preferred Stock in
accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by a Holder to enforce the same, any waiver or consent with respect to
any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or
any breach or alleged breach by such Holder or any other Person of any obligation to the Corporation or any violation or alleged violation of law by such Holder or any other
person, and irrespective of any other circumstance which might otherwise limit such obligation of the Corporation to such Holder in connection with the issuance of such
Conversion Shares; provided, however, that such delivery shall not operate as a waiver by the Corporation of any such action that the Corporation may have against such
Holder. In the event a Holder shall elect to convert any or all of the Stated Value of its Preferred Stock, the Corporation may not refuse conversion based on any claim that such
Holder or anyone associated or affiliated with such Holder has been engaged in any violation of law, agreement or for any other reason, unless an injunction from a court, on
notice to Holder, restraining and/or enjoining conversion of all or part of the Preferred Stock of such Holder shall have been sought and obtained, and the Corporation posts a
surety bond for the benefit of such Holder in the amount of 150% of the Stated Value of Preferred Stock and Dividends which are subject to the injunction, which bond shall
remain in effect until the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to such Holder to the extent it obtains
judgment. In the absence of such injunction, the Corporation shall issue Conversion Shares and, if applicable, cash, upon a properly noticed conversion. If the Corporation fails
to deliver to a Holder such certificate or certificates pursuant to Section 6(c)(i) on the second Trading Day after the Share Delivery Date applicable to such conversion, the
Corporation shall pay to such Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Stated Value of Preferred Stock being converted, $10 per Trading
Day (increasing to $20 per Trading Day on the fifth Trading Day after such damages begin to accrue) for each Trading Day after such second Trading Day after the Share
Delivery Date until such certificates are delivered or Holder rescinds such conversion. Nothing herein shall limit a Holder’s right to pursue actual damages for the Corporation’s
failure to deliver Conversion Shares within the period specified herein and such Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit a Holder from seeking to enforce
damages pursuant to any other Section hereof or under applicable law.
9
iv. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. In addition to any other rights available to the Holder, if the Corporation fails
for any reason to deliver to a Holder the applicable certificate or certificates by the Share Delivery Date pursuant to Section 6(c)(i), and if after such Share Delivery Date such
Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common Stock
to deliver in satisfaction of a sale by such Holder of the Conversion Shares which such Holder was entitled to receive upon the conversion relating to such Share Delivery Date
(a “Buy-In”), then as such Holder’s sole remedy against the Corporation and the Corporation’s sole liability in respect of such Buy-In the Corporation shall (A) pay in cash to
such Holder (in addition to any other remedies available to or elected by such Holder) the amount, if any, by which (x) such Holder’s total purchase price (including any
brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder was entitled to
receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage
commissions) and (B) at the option of such Holder, either reissue (if surrendered) the shares of Preferred Stock equal to the number of shares of Preferred Stock submitted for
conversion (in which case, such conversion shall be deemed rescinded) or deliver to such Holder the number of shares of Common Stock that would have been issued if the
Corporation had timely complied with its delivery requirements under Section 6(c)(i). For example, if a Holder purchases shares of Common Stock having a total purchase
price of $11,000 to cover a Buy-In with respect to an attempted conversion of shares of Preferred Stock with respect to which the actual sale price of the Conversion Shares
(including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Corporation
shall be required to pay such Holder $1,000. The Holder shall provide the Corporation written notice indicating the amounts payable to such Holder in respect of the Buy-In
and, upon request of the Corporation, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at
law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Corporation’s failure to timely deliver certificates
representing shares of Common Stock upon conversion of the shares of Preferred Stock as required pursuant to the terms hereof.
v. Reservation of Shares Issuable Upon Conversion. The Corporation covenants that it will at all times reserve and keep available out of its authorized and unissued
shares of Common Stock for the sole purpose of issuance upon conversion of the Preferred Stock and payment of dividends on the Preferred Stock, each as herein provided,
free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Preferred Stock), not less than such
aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 7) upon the conversion of the then outstanding shares of Preferred Stock and payment of dividends hereunder. The Corporation
covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable.
vi. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of the Preferred Stock. As to any fraction of a
share which the Holder would otherwise be entitled to purchase upon such conversion, the Corporation shall at its election, either pay a cash adjustment in respect of such final
fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.
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vii. Transfer Taxes and Expenses. The issuance of certificates for shares of the Common Stock on conversion of this Preferred Stock shall be made without charge to
any Holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that the Corporation shall not be
required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of
the Holders of such shares of Preferred Stock and the Corporation shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the
issuance thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. The
Corporation shall pay all Transfer Agent fees required for same-day processing of any Notice of Conversion.
Section 7. Certain Adjustments.
a) Stock Dividends and Stock Splits. If the Corporation, at any time while this Preferred Stock is outstanding: (i) pays a stock dividend or otherwise makes a
distribution or distributions payable in shares of Common Stock on shares of Common Stock or any other Common Stock Equivalents (which, for avoidance of doubt, shall not
include Securities upon the exercise or exchange of or conversion of any Securities issued or issuable pursuant to the Transaction Documents), (ii) subdivides outstanding
shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number
of shares, or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Corporation, then the Conversion Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Corporation) outstanding immediately
before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to
this Section 7(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
b) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 7(a) above, if at any time the Corporation grants, issues or sells any Common Stock
Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”),
then the Holder of will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the
Holder had held the number of shares of Common Stock acquirable upon complete conversion of such Holder’s Preferred Stock immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be
determined for the grant, issue or sale of such Purchase Rights.
c) Pro Rata Distributions. The Corporation, at any time while this Preferred Stock is outstanding, shall include Holders, on an as-if-converted-to-Common-Stock basis,
in all distributions of any kind (including cash and cash dividends) issued to all holders of Common Stock.
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d) Fundamental Transaction. If, at any time while this Preferred Stock is outstanding, a Fundamental Transaction occurs, then, upon any subsequent conversion of this
Preferred Stock, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence
of such Fundamental Transaction, the number of shares of Common Stock of the successor or acquiring corporation or of the Corporation, if it is the surviving corporation, and
any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for
which this Preferred Stock is convertible immediately prior to such Fundamental Transaction. For purposes of any such conversion, the determination of the Conversion Price
shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in
such Fundamental Transaction, and the Corporation shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value
of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Preferred Stock following
such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Corporation or surviving entity in such Fundamental
Transaction shall file a new Certificate of Designation with the same terms and conditions and issue to the Holders new preferred stock consistent with the foregoing provisions
and evidencing the Holders’ right to convert such preferred stock into Alternate Consideration. The Corporation shall cause any successor entity in a Fundamental Transaction
in which the Corporation is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Corporation under this Certificate of Designation and the
other Transaction Documents (as defined in the Purchase Agreement) in accordance with the provisions of this Section 7(d) pursuant to written agreements in form and
substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the
holder of this Preferred Stock, deliver to the Holder in exchange for this Preferred Stock a security of the Successor Entity evidenced by a written instrument substantially
similar in form and substance to this Preferred Stock which is convertible for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity)
equivalent to the shares of Common Stock acquirable and receivable upon conversion of this Preferred Stock (without regard to any limitations on the conversion of this
Preferred Stock) prior to such Fundamental Transaction, and with a conversion price which applies the conversion price hereunder to such shares of capital stock (but taking
into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of
capital stock and such conversion price being for the purpose of protecting the economic value of this Preferred Stock immediately prior to the consummation of such
Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor
Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Certificate of Designation and the other
Transaction Documents referring to the “Corporation” shall refer instead to the Successor Entity), and may exercise every right and power of the Corporation and shall assume
all of the obligations of the Corporation under this Certificate of Designation and the other Transaction Documents with the same effect as if such Successor Entity had been
named as the Corporation herein. Notwithstanding the foregoing or anything contained herein to the contrary, in the event of a Fundamental Transaction in which the
Corporation’s stockholders receive consideration consisting primarily of cash and in which the Corporation ceases to be listed or quoted on a Trading Market, the Holder shall
only have the right to receive the Alternate Consideration upon consummation of such Fundamental Transaction.
e) Calculations. All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this
Section 7, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock
(excluding any treasury shares of the Corporation) issued and outstanding.
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f) Notice to the Holders.
i. Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of this Section 7, the Corporation shall promptly deliver to
each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Conversion by Holder. If (A) the Corporation shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the
Corporation shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Corporation shall authorize the granting to all holders of the
Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the
Corporation shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Corporation is a party, any sale or transfer
of all or substantially all of the assets of the Corporation, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or
(E) the Corporation shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, then, in each case, the Corporation shall
cause to be filed at each office or agency maintained for the purpose of conversion of this Preferred Stock, and shall cause to be delivered to each Holder at its last address as it
shall appear upon the stock books of the Corporation, at least twenty (20) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the
holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity
of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information
regarding the Corporation or any of the Subsidiaries, the Corporation shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The
Holder shall remain entitled to convert the Conversion Amount of this Preferred Stock (or any part hereof) during the 20-day period commencing on the date of such notice
through the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
Section 8. Redemption. The Corporation shall have no right to require Holders to surrender Preferred Stock for redemption.
Section 9. Intentionally Omitted.
Section 10. Miscellaneous.
a) Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Conversion,
shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service, addressed to the Corporation, at: 3900 Paseo del Sol,
Santa Fe, New Mexico 87507, Attn: John Rice, President and CEO, e-mail: rice@sigmalabsinc.com, or such other facsimile number or address as the Corporation may specify
for such purposes by notice to the Holders delivered in accordance with this Section 11. Any and all notices or other communications or deliveries to be provided by the
Corporation hereunder shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service addressed to each Holder at the
facsimile number or address of such Holder appearing on the books of the Corporation, or if no such facsimile number or address appears on the books of the Corporation, at
the principal place of business of such Holder, as set forth in the Purchase Agreement. Any notice or other communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth in this Section prior to 5:30
p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile
number set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the
date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.
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b) Absolute Obligation. Except as expressly provided herein, no provision of this Certificate of Designation shall alter or impair the obligation of the Corporation,
which is absolute and unconditional, to pay liquidated damages, accrued dividends and accrued interest, as applicable, on the shares of Preferred Stock at the time, place, and
rate, and in the coin or currency, herein prescribed.
c) Lost or Mutilated Preferred Stock Certificate. If a Holder’s Preferred Stock certificate shall be mutilated, lost, stolen or destroyed, the Corporation shall execute and
deliver, in exchange and substitution for and upon cancellation of a mutilated certificate, or in lieu of or in substitution for a lost, stolen or destroyed certificate, a new
certificate for the shares of Preferred Stock so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such certificate, and of
the ownership hereof reasonably satisfactory to the Corporation.
d) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Certificate of Designation shall be governed by and
construed and enforced in accordance with the internal laws of the State of Nevada, without regard to the principles of conflict of laws thereof. Each party agrees that all legal
proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party
hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York,
Borough of Manhattan (the “New York Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction
of such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process
and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this Certificate of Designation and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this
Certificate of Designation or the transactions contemplated hereby. If any party shall commence an action or proceeding to enforce any provisions of this Certificate of
Designation, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses incurred in the
investigation, preparation and prosecution of such action or proceeding.
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e) Waiver. Any waiver by the Corporation or a Holder of a breach of any provision of this Certificate of Designation shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of this Certificate of Designation or a waiver by any other Holders. The failure of the Corporation
or a Holder to insist upon strict adherence to any term of this Certificate of Designation on one or more occasions shall not be considered a waiver or deprive that party (or any
other Holder) of the right thereafter to insist upon strict adherence to that term or any other term of this Certificate of Designation on any other occasion. Any waiver by the
Corporation or a Holder must be in writing.
f) Severability. If any provision of this Certificate of Designation is invalid, illegal or unenforceable, the balance of this Certificate of Designation shall remain in
effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that
any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum rate of interest permitted under applicable law.
g) Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.
h) Headings. The headings contained herein are for convenience only, do not constitute a part of this Certificate of Designation and shall not be deemed to limit or
affect any of the provisions hereof.
i) Status of Converted or Redeemed Preferred Stock. Shares of Preferred Stock may only be issued pursuant to the Purchase Agreement. If any shares of Preferred
Stock shall be converted, redeemed or reacquired by the Corporation, such shares shall resume the status of authorized but unissued shares of preferred stock and shall no
longer be designated as Series E Convertible Preferred Stock.
j) No Cash Payments. Notwithstanding any provision of this Certificate of Designations to the contrary, during the period that any shares of Series D Preferred Stock
are outstanding, the Company shall not make any cash payments otherwise required to be paid hereunder but in lieu thereof shall increase the Stated Value by the amount of
such payment.
*********************
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RESOLVED, FURTHER, that the Chairman, the president or any vice-president, and the secretary or any assistant secretary, of the Corporation be and they hereby are
authorized and directed to prepare and file this Certificate of Designation of Preferences, Rights and Limitations in accordance with the foregoing resolution and the provisions
of Nevada law.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this 27th day of January, 2020.
/s/ John Rice
John Rice
President and Chief Executive Officer
Name:
Title:
16
ANNEX A
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT
SHARES OF PREFERRED STOCK)
The undersigned hereby elects to convert the number of shares of Series E Convertible Preferred Stock indicated below into shares of common stock, par value $0.001
per share (the “Common Stock”), of Sigma Labs, Inc., a Nevada corporation (the “Corporation”), according to the conditions hereof, as of the date written below. If shares of
Common Stock are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as may be required by the Corporation in accordance with the Purchase Agreement. No fee will be charged to the Holders for any
conversion, except for any such transfer taxes.
Conversion calculations:
Date to Effect Conversion: _____________________________________________
Number of shares of Preferred Stock owned prior to Conversion: _______________
Number of shares of Preferred Stock to be Converted: ________________________
Accrued Dividends Being Converted: _________________________________
Conversion Price: $____________________
Aggregate Conversion Amount to be Converted:____________________________
Number of shares of Common Stock to be Issued: ________________
Address for Delivery: ______________________
or
DWAC Instructions:
Broker no: _________
Account no: ___________
[HOLDER]
By:
Name:
Title:
17
AMENDED AND RESTATED
BY-LAWS
OF
SIGMA LABS, INC.
ARTICLE I
OFFICES
Exhibit 3.12
Section 1. The Corporation may have offices at such places both within and without the State of Nevada as the Board of Directors may from time to time determine or
the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders shall be held at any place within or outside the State of Nevada as shall be designated from time to time by the Board of
Directors. In the absence of any such designation, stockholders’ meetings shall be held at the principal executive office of the Corporation.
Section 2. The annual meeting of stockholders shall be held on such date and at such time and place as may be fixed by the Board of Directors and stated in the notice
of the meeting, for the purpose of electing directors and for the transaction of such other business as is properly brought before the meeting in accordance with these By-Laws.
To be properly brought before the annual meeting, business must be either (i) specified in the notice of annual meeting (or any supplement or amendment thereto)
signed by the President or Vice President, or the Secretary, or an Assistant Secretary, or by such other person or persons as the Board of Directors shall designate, (ii) otherwise
brought before the annual meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the annual meeting by a stockholder. Except as
provided in Article III, Section 1 of these By-Laws with respect to stockholder nominations of director candidates, any stockholder entitled to vote in the election of directors
may propose any action or actions for consideration by the stockholders at any meeting of stockholders only if notice is timely given in writing to the Secretary of the
Corporation. To be timely, written notice of such stockholder’s intent to propose such action or actions for consideration by the stockholders must be given, either by personal
delivery or by registered or certified mail, to the Secretary of the Corporation, by the date specified under Rule 14a-8(e) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) (or any amendment or successor to such rule) as the deadline for submitting stockholder proposals.
A stockholder’s notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the
business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the
Corporation’s books, of the stockholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder, (iv)
any material interest of the stockholder in such business, and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the
Exchange Act, in his capacity as a proponent to a stockholder proposal. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this Section 2. The chairman of the annual meeting shall, if the facts warrant, determine and declare at the
meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 2, and, if he should so determine, he shall so declare at
the meeting that any such business not properly brought before the meeting shall not be transacted.
Section 3. The holders of a majority of the voting power of the Corporation’s stock at any meeting of stockholders, which are present in person or represented by
proxy, shall constitute a quorum for the transaction of business except as otherwise provided by law, by the Articles of Incorporation, or by these By-Laws. A quorum, once
established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. If,
however, such quorum shall not be present or represented at any meeting of the stockholders, a majority of the voting stock represented in person or by proxy may adjourn the
meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote thereat.
Section 4. When a quorum is present at any meeting, action by the stockholders on a matter other than the election of directors is approved if the number of votes cast
in favor of the action exceeds the number of votes cast in opposition to the action, unless the matter is one upon which, by express provisions of the statutes of Nevada or the
Articles of Incorporation, a different vote is required, in which case such express provision shall govern and control.
Section 5. At each meeting of the stockholders, each stockholder having the right to vote may vote in person or may authorize another person or persons to act for him
by proxy appointed in a reasonable manner as may be permitted by law, including, without limitation, a signed writing, telegram, facsimile, and electronic communication. All
proxies must be filed with the Secretary of the Corporation at the beginning of each meeting in order to be counted in any vote at the meeting. Each stockholder shall have one
vote for each share of stock having voting power, registered in his name on the books of the Corporation on the record date set by the Board of Directors.
Section 6. No stockholder shall be permitted to cumulate his votes in the election of directors or for any other matter voted upon by stockholders.
Section 7. Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Articles of Incorporation, may be called
only by the Chairman of the Board, the Chief Executive Officer, the President or the Board of Directors. Such request shall state the purpose or purposes of the proposed
meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.
Section 8. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which notice shall state the
place, date and hour of the meeting and the purpose or purposes for which the meeting is called. The written notice of any meeting shall be given to each stockholder entitled to
vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation.
Section 9. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the
name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of
at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 10. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in writing by such stockholders.
ARTICLE III
DIRECTORS
Section 1. Subject to any limitations in the laws of the State of Nevada, the Articles of Incorporation or these By-Laws, the authorized number of directors of the
Corporation shall be not less than one (1) nor more than seven (7) as fixed from time to time by resolution of the Board of Directors; provided that no decrease in the number of
directors shall shorten the term of any incumbent directors. A director need not be a stockholder of the Corporation. Nominations of persons for election to the Board of
Directors of the Corporation at the annual meeting may be made at such meeting by or at the direction of the Board of Directors, by any committee or persons appointed by the
Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this
Article III, Section 1. A nomination may be made by a stockholder only if written notice of the nomination has been given to the Secretary of the corporation, either by personal
delivery or registered or certified mail, not less than the date specified under Rule 14a-8 of the Securities Exchange Act of 1934 (or any amendment or successor to such rule)
as the deadline for submitting stockholder proposals for any meeting of stockholders called for purposes of electing directors. Such stockholder’s notice to the Secretary shall
set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (a) the name, age, business address and residence address of
the person, (b) the principal occupation or employment of the person, (c) the class and number of shares of capital stock of the Corporation which are beneficially owned by the
person, and (d) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to the Rules and
Regulations of the Securities and Exchange Commission under Section 14 of the Securities Exchange Act of 1934; and (ii) as to the stockholder giving the notice (a) the name
and record address of the stockholder and (b) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder. The
Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such
proposed nominee to serve as a director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the
procedures set forth herein. The officer of the Corporation presiding at an annual meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. The
directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article III, and each director elected shall hold office until his
successor is elected and qualified; provided, however, that unless otherwise restricted by the Articles of Incorporation or law, any director or the entire Board of Directors may
be removed, either with or without cause, from the Board of Directors at any meeting of stockholders by the holders of two-thirds of the voting power of the Corporation’s
stock.
Section 2. Commencing with the election of directors at the 2017 annual meeting of stockholders, the directors shall be divided into three classes designated as Class I,
Class II and Class III. Each class shall consist, as nearly as is possible, of one-third of the number of directors constituting the entire Board of Directors. Initial class
assignments shall be determined by the Board of Directors. At each annual meeting of stockholders, successors to the directors whose terms expired at that annual meeting shall
be elected for a three-year term, except that, the director or directors elected to Class I will be subject to election for a three-year term at the annual meeting of stockholders in
2018 and the director or directors elected to Class II will be subject to election for a three-year term at the annual meeting of stockholders in 2019. If the number of directors
changes, any increase or decrease shall be apportioned among the classes such that the number of directors in each class shall remain as nearly equal as possible, but in no case
will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires
and until his successor shall be elected and qualified, subject, however, to such director’s prior death, resignation, retirement, disqualification or removal from office. Subject to
the rights of the holders of any one or more series of preferred stock then outstanding, newly created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office, or other cause shall, unless otherwise
provided by law, be filled solely by the affirmative vote of a majority of the remaining directors then in office, although less than a quorum, or by a sole remaining director. Any
director so chosen shall hold office until the next annual election of the class for which such director shall have been chosen and until his successor shall be elected and
qualified. No decrease in the authorized number of directors shall shorten the term of any incumbent director. In the event of a vacancy on the Board of Directors, the remaining
directors, except as otherwise provided by law, may exercise the powers of the full Board of Directors until the vacancy is filled.
Section 3. The property and business of the Corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities
by these By-Laws expressly conferred upon them, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by
the Articles of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders.
ARTICLE IV
MEETINGS OF THE BOARD OF DIRECTORS
Section 1. The directors may hold their meetings and have one or more offices, and keep the books of the Corporation outside of the State of Nevada.
Section 2. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board.
Section 3. Special meetings of the Board of Directors may be called by the Chairman of the Board or President on twenty-four hours’ notice to each director, either
personally, by telephone, by facsimile, by e-mail, by mail or by telegram; special meetings shall be called by the President or the Secretary in like manner and on like notice on
the written request of two directors unless the Board consists of only one director; in which case special meetings shall be called by the President or Secretary in like manner or
on like notice on the written request of the sole director.
Section 4. At all meetings of the Board of Directors a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be
otherwise specifically provided by statute, by the Articles of Incorporation or by these By-Laws. If a quorum shall not be present at any meeting of the Board of Directors the
directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
Section 5. Unless otherwise restricted by the Articles of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board or committee.
Section 6. Unless otherwise restricted by the Articles of Incorporation or these By-Laws, members of the Board of Directors, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting.
ARTICLE V
COMMITTEES OF DIRECTORS
Section 1. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each such committee to consist of
one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the
powers of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers
which may require it; but no such committee shall have the power in reference to amending the Articles of Incorporation (except that a committee may, to the extent authorized
in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other
class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation’s property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the
By-Laws of the Corporation; and, unless the resolution, By-Laws, or the Articles of Incorporation expressly so provide, no such committee shall have the power or authority to
declare a dividend to authorize the issuance of stock, or to adopt Articles of Merger.
Section 2. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.
ARTICLE VI
COMPENSATION OF DIRECTORS
Section 1. Unless otherwise restricted by the Articles of Incorporation or these By-Laws, the Board of Directors shall have the authority to fix the compensation of
directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting
of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.
ARTICLE VII
INDEMNIFICATION
Section 1. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the Corporation, by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another Corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and
in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
Section 2. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit
by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer, employee or agent of another Corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation. Indemnification shall not be made for any claim,
issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the Corporation or for
amounts paid in settlement to the Corporation unless and only to the extent that the court in which such action or suit was brought or other court of competent jurisdiction
determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
Section 3. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 1 and 2, or in defense of any claim, issue or matter therein, he must be indemnified by the Corporation against expenses, including attorneys’
fees, actually and reasonably incurred by him in connection with the defense.
Section 4. Any indemnification under Sections 1 and 2, unless ordered by a court or advanced pursuant to Section 5, shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination shall be
made (1) by the holders of a majority of the voting power of the corporation’s stock, (2) by the Board of Directors by majority vote of a quorum consisting of directors who
were not parties to the action, suit or proceeding, (3) if a majority vote of a quorum consisting of directors who are not parties to the action, suit or proceeding so order, by
independent legal counsel in a written opinion, or (4) if a quorum consisting of directors who were not parties to the action, suit or proceeding cannot be obtained, by
independent legal counsel in a written opinion.
Section 5. Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation as they are incurred
and in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the Corporation. Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
Section 6. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to the other paragraphs of this Article VII, (i) does not
exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office except that indemnification, unless
ordered by a court pursuant to Section 78.7502 of the Nevada Revised Statutes or for the advancement of expenses made pursuant to Section 5, may not be made to or on behalf
of any director or officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material
to the cause of action; and (ii) continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and
administrators of such a person. If a claim for indemnification or payment of expenses under this Section 1 is not paid in full within ninety (90) days after a written claim
therefor has been received by the Corporation, the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be
paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the claimant was not entitled to the requested
indemnification or payment of expenses under applicable law.
Section 7. The Board of Directors may authorize, by a vote of a majority of a quorum of the Board of Directors, the Corporation to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another Corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article
VII.
Section 8. The Board of Directors may authorize the Corporation to enter into a contract with any person who is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another partnership, joint venture, trust or other enterprise
providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than those provided for in this Article VII.
Section 9. For the purposes of this Article VII, references to “the Corporation” shall include, in addition to the resulting Corporation, any constituent Corporation
(including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent Corporation, or is or was
serving at the request of such constituent Corporation as a director, officer, employee or agent of another Corporation, partnership, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of this Section with respect to the resulting or surviving Corporation as he would have with respect to such constituent
Corporation if its separate existence had continued.
Section 10. For purposes of this section, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the Corporation” shall include service as a director, officer, employee
or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants
or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit
plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this section.
ARTICLE VIII
OFFICERS
Section 1. The officers of this Corporation shall be chosen by the Board of Directors and shall include a President, a Secretary and a Treasurer. The Corporation may
also have at the discretion of the Board of Directors such other officers as are desired, including a Chief Executive Officer, Chairman of the Board, one or more Vice Presidents,
one or more Assistant Secretaries and Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 hereof. In the event there
are two or more Vice Presidents, then one or more may be designated as Executive Vice President, Senior Vice President, or other similar or dissimilar title. At the time of the
election of officers, the directors may by resolution determine the order of their rank. Any number of offices may be held by the same person, unless the Articles of
Incorporation or these By-Laws otherwise provide.
Section 2. The Board of Directors, at its first meeting after each annual meeting of stockholders, shall choose the officers of the Corporation.
Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise
such powers and perform such duties as shall be determined from time to time by the Board.
Section 4. The salaries of all officers and agents of the Corporation may be fixed by the Board of Directors.
Section 5. The officers of the Corporation shall hold office until their successors are chosen and qualify in their stead. Any officer elected or appointed by the Board of
Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. If the office of any officer or officers becomes vacant for any reason, the
vacancy shall be filled by the Board of Directors.
Section 6. The Chairman of the Board, if such an officer be elected, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such
other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these By-Laws.
Section 7. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President
shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the Corporation. He shall preside at all
meetings of the stockholders, and in the absence of the Chairman of the Board, at all meetings of the Board of Directors. He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or by the By-
Laws.
Section 8. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President
designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other duties as from time to time may be prescribed for them, respectively, by the Board of Directors.
Section 9. The Secretary shall attend all sessions of the Board of Directors and all meetings of the stockholders and record all votes and the minutes of all proceedings
in a book to be kept for that purpose; and shall perform like duties for the standing committees when required by the Board of Directors. Except as otherwise provided herein,
the Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed
by the Board of Directors or these By-Laws. The Secretary shall keep in safe custody the seal of the Corporation, and affix the same to any instrument requiring it, and when so
affixed it shall be attested by his signature or by the signature of an Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal
of the Corporation and to attest the affixing by his signature.
Section 10. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, or if there be no such
determination, the Assistant Secretary designated by the Board of Directors, shall, in the absence or disability of the Secretary perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.
Section 11. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys, and other valuable effects in the name and to the credit of the Corporation, in such depositories as may be designated
by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition
of the Corporation. If required by the Board of Directors, he shall give the Corporation a bond, in such sum and with such surety or sureties as shall be satisfactory to the Board
of Directors, for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation.
Section 12. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors, or if there be no
such determination, the Assistant Treasurer designated by the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers
of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.
ARTICLE IX
CERTIFICATES OF STOCK
Section 1. Shares of the capital stock of the Corporation may be certificated or uncertificated, as provided under the General Corporation Law of the State of Nevada.
Each stockholder, upon written request to the transfer agent or registrar of the Corporation, shall be entitled to a certificate of the capital stock of the Corporation in such form
as may from time to time be prescribed by the Board of Directors. Such certificate shall be signed by the Chairman of the Board, the President or a Vice President and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. The Corporation seal, if applied, and the signatures by corporation officers may be facsimiles if
the certificate is manually countersigned by an authorized person on behalf of a transfer agent or registrar other than the Corporation or its employee. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were such officer, transfer agent or registrar at the
time of its issue. Every certificate for shares of stock which are subject to any restriction on transfer and every certificate issued when the Corporation is authorized to issue
more than one class or series of stock shall contain such legend with respect thereto as is required by law. The Corporation shall be permitted to issue fractional shares.
Section 2. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the voting powers, designations,
preferences, limitations, restrictions and relative rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as
otherwise provided in section 78.195 of the Revised Nevada Statutes, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which
the Corporation shall issue a statement setting forth the office or agency of the Corporation from which the stockholders may obtain a copy of a statement setting forth in full or
summarizing the voting powers, designations, preferences, limitations, restrictions and relative rights of each class of stock or series thereof that the Corporation will furnish
without charge to each stockholder who so requests.
Section 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation
alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of
such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond
in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 4. Subject to any restrictions on transfer and unless otherwise provided by the Board of Directors, shares of stock may be transferred only on the books of the
Corporation, if such shares are certificated, by the surrender to the Corporation or its transfer agent of the certificate therefore properly endorsed or accompanied by a written
assignment or power of attorney properly executed, or upon proper instructions from the holder of uncertificated shares, in each case with such proof of the authenticity of
signature as the Corporation or its transfer agent may reasonably require.
Section 5. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound
to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly
provided by the laws of the State of Nevada.
Section 1. Distributions.
ARTICLE X
GENERAL PROVISIONS
Board of Directors at any regular or special meeting, pursuant to law.
(a) Distributions upon the capital stock of the Corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the
(b) Before payment of any distribution there may be set aside out of any funds of the Corporation available for distributions such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing distributions, or for repairing or maintaining any
property of the Corporation, or for such other purpose as the directors shall think conducive to the interests of the Corporation, and the directors may abolish any such reserve.
Section 2. Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers, or such other persons, as the Board of
Directors may from time to time designate.
Section 3. Seal. The corporate seal shall have inscribed thereon the name of the Corporation and the words “Corporate Seal, Nevada”. Said seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 4. Notices. Whenever, under the provisions of the statutes or of the Articles of Incorporation or of these By-Laws, notice is required to be given to any director
or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, addressed to such director or stockholder, at the stockholder’s address
as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to any director may be by any reasonable means, including, without limitation, mail, personal delivery, facsimile, or electronic communication. All
notices shall be deemed given when sent.
Section 5. Waiver. Whenever any notice is required to be given under the provisions of the statutes or of the Articles of Incorporation or of these By-Laws, a waiver
thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.
Section 1. Except as otherwise restricted in the Articles of Incorporation or these By-Laws:
ARTICLE XI
AMENDMENTS
(a) Any provision of these By-Laws may be altered, amended or repealed at the annual or any regular meeting of the Board of Directors without
prior notice, or at any special meeting of the Board of Directors if notice of such alteration or repeal be contained in the notice of such special meeting. Any such alteration,
amendment or repeal shall not require stockholder approval.
stockholders by the affirmative vote of the holders of at least two-thirds of the voting power of the Corporation’s stock.
(b) The stockholders may not adopt, amend, alter or repeal these By-Laws unless such action is approved at a duly convened meeting of the
I, Amanda Cola, hereby certify that the forgoing Amended and Restated By-Laws of Sigma Labs, Inc. were duly adopted by written consent of the Board of Directors
of Sigma Labs, Inc., effective as of February 15, 2017.
/s/ Amanda Cola
Name: Amanda Cola,
Secretary
Amendment Number One to Amended and Restated Bylaws of Sigma Labs, Inc.
(A Nevada Corporation)
The Amended and Restated Bylaws (the “Bylaws”) of Sigma Labs, Inc. are hereby amended as follows:
1. The first sentence of the second paragraph of Article II, Section 2 of the Bylaws is hereby amended and restated to read in its entirety as follows:
“To be properly brought before the annual meeting, business must be either (i) specified in the notice of annual meeting (or any supplement or amendment thereto)
signed by the Chief Executive Officer or by such other person or persons as the Board of Directors shall designate, (ii) otherwise brought before the annual meeting by or at the
direction of the Board of Directors, or (iii) otherwise properly brought before the annual meeting by a stockholder.”
2. The first sentence of Article II, Section 7 of the Bylaws is hereby amended and restated to read in its entirety as follows:
“Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Articles of Incorporation, may be called only by
the Chairman of the Board, the Chief Executive Officer, the Board of Directors or, in the absence of a Chief Executive Officer, the President.”
3. Article IV, Section 3 of the Bylaws is hereby amended and restated to read in its entirety as follows:
“Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer or, in the absence of a Chief Executive Officer,
the President, on twenty-four hours’ notice to each director, either personally, by telephone, by facsimile, by e-mail, by mail or by telegram; special meetings shall be called by
the Chief Executive Officer, in the absence of a Chief Executive Officer, the President, or the Secretary in like manner and on like notice on the written request of two directors
unless the Board consists of only one director, in which case special meetings shall be called by the Chief Executive Officer, in the absence of a Chief Executive Officer, the
President, or the Secretary in like manner or on like notice on the written request of the sole director.”
4. Article VIII, Section 1 of the Bylaws is hereby amended and restated to read in its entirety as follows:
“The officers of this Corporation shall be chosen by the Board of Directors and shall include a Chief Executive Officer, a President, a Secretary and a Treasurer. The
Corporation may also have at the discretion of the Board of Directors such other officers as are desired, including a Chairman of the Board, one or more Vice Presidents, one or
more Assistant Secretaries and Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 hereof. In the event there are
two or more Vice Presidents, then one or more may be designated as Executive Vice President, Senior Vice President, or other similar or dissimilar title. At the time of the
election of officers, the directors may by resolution determine the order of their rank. Any number of offices may be held by the same person, unless the Articles of
Incorporation or these By-Laws otherwise provide.”
5. Article VIII, Section 7 of the Bylaws is hereby amended and restated to read in its entirety as follows:
“Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the Chief Executive
Officer shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the Corporation. He shall preside at
all meetings of the stockholders, and in the absence of the Chairman of the Board, at all meetings of the Board of Directors. He shall have the general powers and duties of
management usually vested in the office of chief executive officer of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors
or by the By-Laws.”
6. Article VIII, Section 8 of the Bylaws is hereby amended and restated to read in its entirety as follows:
“In the absence or disability of the Chief Executive Officer, the President shall perform all the duties of the Chief Executive Officer, and when so acting shall have all
the powers of and be subject to all the restrictions upon the Chief Executive Officer. The President shall have such other duties as from time to time may be prescribed for him
or her by the Board of Directors.”
7. A new Section 13 is added to the end of Article VIII of the Bylaws to read in its entirety as follows: “Section 13.
“The President shall perform all duties and have all powers which are delegated to him or her by the Board of Directors.”
8. The third sentence of Article IX, Section 1 of the Bylaws is hereby amended and restated to read in its entirety as follows:
“Such certificate shall be signed by the Chairman of the Board or the Chief Executive Officer or, in the absence of a Chief Executive Officer, the President, or a Vice
President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary.”
Except as amended hereby, the Amended and Restated Bylaws of Sigma Labs, Inc. shall remain in full force and effect.
I, Amanda Cola, hereby certify that the forgoing Amendment Number One to Amended and Restated Bylaws of Sigma Labs, Inc. was duly adopted by written consent
of the Board of Directors of Sigma Labs, Inc., effective as of July 24, 2017.
/s/ Amanda Cola
Name: Amanda Cola,
Secretary
Amendment Number Two to Amended and Restated Bylaws of Sigma Labs, Inc.
(A Nevada Corporation)
The Amended and Restated Bylaws (the “Bylaws”) of Sigma Labs, Inc. are hereby amended as follows:
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Article II, Section 1 of the Bylaws is hereby amended and restated to read in its entirety as follows:
“All meetings of the stockholders shall be held at any place within or outside the State of Nevada as shall be designated from time to time by the Board of Directors.
Notwithstanding anything to the contrary in the Bylaws, in the absence of any such designation, stockholders’ meetings shall be held at the principal executive office of the
Corporation; provided, however, that in lieu of holding an annual or special meeting of stockholders at a designated place, the Board of Directors, may, in its sole discretion,
determine that any meeting of stockholders may be held solely by means of remote communication. For the purpose of this Section 1, “remote communication” shall mean
electronic communications, videoconferencing, teleconferencing or other available technology where this Corporation has implemented reasonable measures to: (a) verify the
identity of each person participating through such means as a stockholder; and (b) provide the stockholders a reasonable opportunity to participate in the meeting and to vote on
matters submitted to the stockholders, including an opportunity to communicate, and to read or hear the proceedings of the meetings in a substantially concurrent manner with
such proceedings.”
Except as amended hereby, the Amended and Restated Bylaws of Sigma Labs, Inc. shall remain in full force and effect.
I, Frank Orzechowski, hereby certify that the forgoing Amendment Number Two to Amended and Restated Bylaws of Sigma Labs, Inc. was duly adopted by written
consent of the Board of Directors of Sigma Labs, Inc., effective as of March 24, 2020.
/s/ Frank Orzechowski
Name: Frank Orzechowski,
Secretary
DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED PURSUANT
TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.13
Sigma Labs, Inc. (“Sigma,” “we,” “our,” and “us”) has two classes of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended: (1)
our common stock, par value $0.001 per share (the “common stock”), and (2) warrants to purchase common stock at an exercise price of $40.00 per share (the “Public
Warrants”).
The following description of our common stock, and preferred stock is a summary and does not purport to be complete. It is subject to and qualified in its entirety by
reference to (1) our Amended and Restated Articles of Incorporation filed as an Exhibit to our Form 10-K, (2) our Certificate of Correction to Amended and Restated Articles
of Incorporation filed as an Exhibit to our Current Report on Form 8-K on June 1, 2011, (3) our Amended and Restated Bylaws filed as an Exhibit to our Form 10-K, (4)
Certificate of Designations of Rights Preferences and Privileges of our Series D Convertible Preferred Stock filed as an Exhibit to our Current Report on Form 8-K filed
January 30, 2020, and (5) Certificate of Designations of Rights Preferences and Privileges of our Series E Convertible Preferred Stock filed as an Exhibit to our Current Report
on Form 8-K on January 30, 2020, each of which is filed as an exhibit to our Annual Report on Form 10-K of which this Exhibit 4.13 is a part. We encourage you to read the
Articles of Incorporation, the Bylaws, and the Certificates of Designations, as well as the applicable provisions of the Nevada Revised Statutes (the “NRS”), for additional
information.
Authorized Capital Stock
We are presently authorized to issue 12,000,000 shares of common stock, $0.001 par value per share, of which ,970,303 shares were outstanding as of March 24, 2021.
We are presently authorized to issue 10,000,000 shares of $0.001 par value preferred stock, of which 1,610,000 shares have been designated “Series A Preferred Stock,” 1,000
shares have been designated “Series B Convertible Preferred Stock,” 1,500 shares have been designated “Series C Convertible Preferred Stock,” 7,796 shares have been
designated as “Series D Convertible Stock” and 500 shares have been designated as “Series E Convertible Stock.” As of the date of this Form 10-K, we had no shares of Series
A Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Stock issued and outstanding, 132 shares of Series D Convertible Preferred Stock issued and
outstanding and 333 shares of Series E Convertible Preferred Stock issued and outstanding.
Common Stock
We have one class of common stock. Holders of our common stock are entitled to one vote per share on all matters to be voted upon by stockholders and do not have
cumulative voting rights in the election of directors. Holders of shares of common stock are entitled to receive on a pro rata basis such dividends, if any, as may be declared
from time to time by our board of directors in its discretion from funds legally available for that use, subject to any preferential dividend rights of outstanding preferred stock.
They are also entitled to share on a pro rata basis in any distribution to our common stockholders upon our liquidation, dissolution or winding up, subject to the prior rights of
any outstanding preferred stock. Common stockholders do not have preemptive rights to subscribe to any additional stock issuances by us, and they do not have the right to
require the redemption of their shares or the conversion of their shares into any other class of our stock. The rights, preferences and privileges of holders of common stock are
subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock that we may designate and issue in the future.
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Public Warrants
The Public Warrants are exercisable at an exercise price of $40.00 per share, subject to certain adjustments. The Public Warrants expire on February 21, 2022. Each
Public Warrant will have a cashless exercise right in the event that shares of common stock underlying such Warrants are not covered by an effective registration statement. As
of December 31, 2020, we had 162,150 Public Warrants outstanding.
Preferred Stock
Under our articles of incorporation, our board of directors has the authority, without further action by stockholders, to designate one or more series of preferred stock
and to fix the voting powers, designations, preferences, limitations, restrictions and relative rights granted to or imposed upon the preferred stock, including dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation preference and sinking fund terms, any or all of which may be preferential to or greater than the
rights of the common stock.
Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the
holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among
other things, have the effect of delaying, deferring or preventing a change in our control and may adversely affect the market price of the common stock and the voting and
other rights of the holders of common stock.
In connection with our underwritten public offering of equity securities on February 21, 2017, we created a series of Preferred Stock called “Series A Preferred Stock.”
None of such shares were issued in such offering. In our April 6, 2018 private placement, we issued 1,000 shares of Series B Preferred Stock (“Series B Preferred”), which
were convertible into 100,000 shares of common stock. All shares of our Series B Preferred have been converted and 50,000 shares of common stock issued upon conversion of
such shares are currently beneficially owned by an affiliate of a selling stockholder. In our June 26, 2018 public offering of equity securities, we issued 350 shares of Series C
Preferred Stock which were initially convertible into 35,000 shares of common stock. Accordingly, as of the date of this Form 10-K, all shares of such preferred stock have
been fully converted. In connection with the private placements occurring on January 27, 2020, we created two new series of Preferred Stock: Series D Preferred Stock and
Series E Preferred Stock. As of the date of this Form 10-K, 132 shares of Series D Preferred Stock and 333.33 shares of Series E Preferred Stock are issued and outstanding.
Under the Certificate of Designations for the Series D Preferred Stock, the Series D Preferred Stock has an initial stated value of $1,000 per share (the “Stated Value”).
Dividends accrue at a dividend rate of 9% per annum (subject to increase upon the occurrence (and during the continuance) of certain triggering events described therein) will
accrue and, on a monthly basis, shall be payable in kind by the increase of the Stated Value of the Series D Preferred Shares by said amount. The holders of the Series D
Preferred Shares have the right at any time to convert all or a portion of the Series D Preferred Shares (including, without limitation, accrued and unpaid dividends and make-
whole dividends through the third anniversary of the closing date) into shares of the Company’s Common Stock at the conversion price then in effect, which is $2.50 (subject to
adjustment for stock splits, dividends, recapitalizations and similar events and full ratchet price protection). In addition, a holder may at any time, alternatively, convert all, or
any part, of its Series D Preferred Shares at an alternative conversion price, which equals the lower of the applicable conversion price then in effect, and the greater of (x) $1.80
and (y) 85% of the average volume weighted average price (“VWAP”) of the Common Stock for a five (5) trading day period prior to such conversion. Upon the occurrence of
certain triggering events, described in the Certificate of Designations, including, but not limited to payment defaults, breaches of transaction documents, failure to maintain
listing on the Nasdaq Capital Market, and other defaults set forth therein, the Series D Preferred Shares would become subject to redemption, at the option of a holder, at a
125% premium to the underlying value of the Series D Preferred Shares being redeemed.
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Under the Certificate of Designations for the Series E Preferred Stock, the Series E Preferred Shares have an initial stated value of $1,500 per share (the “Stated
Value”). Dividends at the initial rate of 9% per annum will accrue and, on a monthly basis, shall be payable in kind by the increase of the Stated Value of the Series E Preferred
Stock by said amount. The holders of the Series E Preferred Shares have the right at any time to convert all or a portion of the Preferred Shares (including, without limitation,
accrued and unpaid dividends and make-whole dividends through the third anniversary of the closing date) into shares of the Company’s Common Stock at an initial conversion
rate determined by dividing the Conversion Amount by the Conversion Price ($0.13 above the consolidated closing bid price for the trading day prior to the execution of the
Securities Purchase Agreement, dated January 27, 2020, between and the purchasers referenced therein). The Conversion Amount is the sum of the Stated Value of the Series E
Preferred Shares then being converted plus any other unpaid amounts payable with respect to the Series E Preferred Shares being converted plus the “Make Whole Amount”
(the amount of any dividends that, but for the conversion, would have accrued at the dividend rate for the period through the third anniversary of the initial issuance date). The
Conversion Rate is also subject to adjustment for stock splits, dividends recapitalizations and similar events.
Transfer Agent
The transfer agent and registrar of our common stock is Issuer Direct Corporation. The address of our transfer agent and registrar is 1981 Murray Holladay Road, Suite
100 Salt Lake City, Utah 84117, and its telephone number is (801) 272-9294.
Anti-Takeover Effects of Certain Provisions of Our Charter Documents
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;
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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.
NASDAQ Capital Market
Our Common Stock and Public Warrants are currently traded on the NASDAQ Capital Market under the symbols “SGLB” and “SGLBW” respectively.
Nevada Anti-Takeover Law and Charter and Bylaws Provisions
NRS sections 78.378 to 78.3793 provide state regulation over the acquisition of controlling interest in certain Nevada corporations unless the articles of incorporation
or bylaws of the corporation provide that the provisions of these sections do not apply. This statute currently does not apply to our company because in order to be applicable,
we would need to have a specified number of Nevada residents as shareholders, and we would have to do business in Nevada directly or through an affiliate.
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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, 333-228628, 333-233348 and 333-250181 on
forms S-8, Registration Statement Nos. 333-225377, 333-232037, 333-236231 and 333-239774 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 March 24, 2021, relating to our audits of the financial statements which appear in this Annual Report on Form
10-K of Sigma Labs, Inc. for the years ended December 31, 2020 and 2019.
Exhibit 23.1
/s/ Haynie & Company
Haynie & Company
Salt Lake City, Utah
March 24, 2021
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Mark K. Ruport, 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: March 24, 2021
/s/ Mark K. Ruport
By:
Name: Mark K. Ruport
Title:
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, Frank Orzechowski, 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: March 24, 2021
/s/ Frank Orzechowski
By:
Name: Frank Orzechowski
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, 2020 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: March 24, 2021
Date: March 24, 2021
/s/ Mark K. Ruport
By:
Name: Mark K. Ruport
Title:
President and Chief Executive Officer (Principal Executive Officer)
/s/ Frank Orzechowski
By:
Name: Frank Orzechowski
Title:
Chief Financial Officer (Principal Financial and Accounting Officer)