PART
I
ITEM
1. BUSINESS.
Summary
Sigma
is a software company that has developed In-Process-Quality-Assurance (“IPQA”) software known as PrintRite3D®.
This technology is also sometimes referred to as Real-Time-Computer-Aided Inspection (“CAI”). Sigma believes that
its PrintRite3D® solves the major problem that has prevented large-scale metal part production using 3D printers for cost
efficient production runs.
3D
metal manufacturing, also known as Additive Manufacturing, is a technology that uses lasers to sculpt parts by welding powdered
metals into 3-dimensional (3D) objects and, to date,
the quality of these parts can vary from part to part in a single production
run, as well as from machine to machine in a production line
. Traditional quality assurance methods relying on statistically
based post-process inspection methods so well proven by “Subtractive Manufacturing” cannot be used effectively to
improve and assure quality of parts manufactured using 3D metal printers. The aforementioned traditional quality assurance methods
are based on a manufacturing process that is the opposite of 3D Additive Manufacturing; Subtractive Manufacturing begins with
quality-assured already formed pieces of metal as a raw material (not powdered metal as is used as raw material in 3D) and machines
it with equipment such as lathes, milling machines, and CNC machines to subtract metal and thus form finished metal parts, or
by casting molten metal into molded parts usually to then be further machined. Since the metal used in Subtractive Manufacturing
is already of proven quality, the quality of the metal for all parts in a production run is known to be the uniform, subject to
post process inspection of a statistically significant sample.
The
lynchpin reality of 3D Additive Manufacturing quality assurance is illustrated by the fact that if a 3D metal manufacturing machine
fabricates 10 parts, and quality inspectors then rigorously inspect three of them, the inspectors will have learned about the
quality of only the three parts they destroyed or CT scanned and nothing that is sufficient to confirm or reject the quality of
the remaining seven. Quality assurance of 3D Additive metal parts requires manufacturers to institute procedures to inspect 100%
of the parts being made. Sigma believes that the best, indeed, the only known way to attain high yields for both manufacturing
quality and cost efficiency is an In-Process-Quality-Assurance (IPQA®) approach that examines each part in real time as it
is being manufactured, determines in real time whether it meets quality specifications and permits machine operators to act on
the information if a part is beginning to deviate from its design specifications.
GE
Aviation stated in 2016 that it planned to commit $3.5 billion by 2020 to, among other things, build a metal 3D production facility
to produce 3D printed metal parts for its Leap engine and other engines. Starting in September 2016 and continuing into 2017 GE
has spent over $1 billion buying controlling interests in AM equipment manufacturers, Concept Laser and Arcam AB, has announced
that it invested over $300 million creating AM manufacturing capability in both the United States and India, and was an investor
in a $115 million series D investment round of Desktop Metal, a metal 3D printing company. Sigma Labs has learned from its interactions
in the marketplace that the pent-up demand apparent from GE and others, such as Airbus, to press forward into advanced 3D manufacturing
production are taking place with the assumption that in-process quality assurance capacity will likely emerge either from their
own internal efforts or be attained through licensing, or possibly acquisition. In the meantime, CT scans and other costly post-process
inspection appear to be an accepted cost as initially sustainable in
the s
tartup
phase of production.
However, until companies that utilize 3D production facilities like
GE Aviation are able to effectively verify that each part conforms to design specifications of attributes of shape, density, strength
and consistency in real-time during the manufacturing process, we believe that such companies will be at risk of letting some
substandard parts through and, also, be unable to improve the workflow to high quality cost-optimum yields of 3D printed metal
parts. We believe that our principal product, PrintRite3D®, which can be positioned “inside” a 3D metal printer,
solves these problems by determining if each part is being made to the quality specifications of the Design/Specification file
as each part is being made. Our software enables 3D prototyping to evolve forward into 3D manufacturing by providing a software
with an algorithms-based tool that addresses and overcomes the quality issues that are specific to 3D Metal Additive Manufacturing
and that are not solved using the quality methods derived for Subtractive manufacturing. No matter how much acuity and at what
cost of a suite of post process inspection tools might provide 3D manufactured metal parts, it currently can only assure quality
by rejecting fully formed parts. PrintRite3D® is able to replace these ‘interim’ post process solutions such as
CT scanning with a tool that has substantially lower operating costs and can attain higher yields by inspecting parts as they
are being made and providing machines and their operators actionable information that includes the option of stopping manufacture
of given part(s) while operations continue to complete parts that are in specification, thus saving time and money while raising
yields. PrintRite3D® also gives operators information from run to run that enables them to ‘learn up’ quality
for a given machine by using PrintRite3D® data about machine behaviors that can then be offset by making adjustments to power
settings directed at a given sector.
We
have filed 18 patent applications on our In-Process Quality Assurance™ (“IPQA®”) process and procedure for
advanced manufacturing. In addition, we anticipate that our core PrintRite3D® software will enable our customers to combine
their digital manufacturing technologies with our 3D manufacturing QA to achieve both cost savings and more reliable parts. We
believe that certain vertical markets would benefit from our technology and software, including aerospace, defense, bio-medical,
power generation, and oil & gas industries because: (1) they each stand to benefit by taking advantage of the weight/strength/performance
ratios that can often be optimized by taking advantage of 3D design; (2) they each stand to benefit
by
taking maximum
advantage of
3D manufacturing’s
material cost savings
resulting
from
designing
parts
to needed tolerances while requiring less metal; and (3)
there are severe consequences for quality failures in some of their products. We provide our software products to customers in
the form of Software as a Service (“SaaS”).
About
3D Printing
3D
printing (“3DP”) or additive manufacturing (“AM”) is changing the world by producing real metal parts
from a computerized input. 3D printing has been applied to the manufacture of plastic parts for decades. 3D manufacturing of metal
parts involves directing a laser or other energy source at a layer of powdered metal and melting it. These layers become melted
together from the bottom up. Worldwide revenues attributable to 3D manufacturing for metal products were $88.1 million in 2015
(Wohlers Report 2016, 3D Printing and Additive Manufacturing State of the Industry – Annual Worldwide Progress Report).
By 2016, annual sales of the powdered metals used for raw material in metal Additive Manufacturing had grown to $126 million.
Large powdered metal suppliers surveyed by Wohlers about their growth forecasts for 2017 averaged expectations of a 59% increase
for 2017. . According to Sigma’s experience in costing and pricing the manufacturing of AM metal parts, as confirmed by
consultation with other service providers, the total powdered metal sales forecast for 2017 is enough raw material to produce
a “retail value” of the metal parts of ~$800 million.
The
application of 3D printing to high-tolerance, precision manufactured metal parts has only recently emerged. 3D printing of metal
parts today represents only a minor percentage of all 3D manufacturing. However, we believe the greatest future growth for 3D
printing appears to be in metal parts, given the interest and investment being made by Fortune 100 companies, Federal government
laboratories and agencies as well as university-based institutions. These high-end manufacturers and technology leaders are strongly
focused on helping transform analog manufacturing of precision, high-tolerance parts in the U.S. to a digital manufacturing encompassing
automation, robotics and closed-loop process control. We believe that the on-going success of 3D printing for metal parts will
be highly dependent upon the evolution of digital quality assurance procedures used, such as our PrintRite3D® process control.
About
Quality Assurance in 3D Printing
Current
methods for providing quality in 3DP are generally either (i) inaccurate due to use of procedures that do not recognize and measure
the primary quality issues of 3D metal manufacturing or due to the misuse of statistically based assessments, or (ii) are cost
prohibitive due to the expense of equipment required to examine the interior of complex dense parts that 3D manufacturing can
create. After 3D-manufacture, costs are normally incurred by using non-destructive technologies such as ultrasound and non-traditional
CT technology on these parts, and old-fashioned visual inspection. Destructive testing of 3D parts is a mis-applied carryover
from current Subtractive Manufacturing quality assurance practice, in which the great part to part consistency of traditional
metal machining equipment permits quality inspectors to infer the quality of a production run by cutting up and analyzing a statistically
relevant number of parts. The test result of the parts that are destroyed and analyzed have been, at great time and expense, statistically
demonstrated to be representative of the rest of the parts in the production lot. The underlying premise of quality assurance
for Subtractive Manufactured parts is that if a machine is set up properly, then all parts it produces will be the same. This
simple, effective and accurate quality system does not apply to Additive Manufacturing, in which each part is built in an average
production lot of 5-20, and in which quality variance may occur from part to part and within any part notwithstanding that the
AM machine settings are the same. Therefore, unable to rely on a traditional statistically based quality system, 3D Manufacturing’s
optimum quality assurance system would evaluate the quality of each individual part. PrintRite3D®’s in-process quality
inspection approach of each part individually allows a manufacturer to use AM to form a single part, such as a hip replacement
or one spare aircraft part needed on an aircraft carrier, or several lots of the same part, in large quality – each approved
or rejected in real time and based upon complete inspection during fabrication. We offer our customers the ability to use real-time
sensors to track individual scans of each layer, and our software continuously analyzes the part health so that when it is finished
we can determine if it meets the production quality standard set by the customer. We believe our PrintRite3D® software could
reduce inspection costs by a factor of 10 and development time for new parts by 50% or more because IPQA permits factories to
make the part manufactured the constant and the machines manufacturing them the variable. Consequently, the lower cost statistical
based post-process inspection methods that work well with Subtractive Manufacturing could be successfully and economically applied
to parts made with 3D Metal machines, and because utilizing PrintRite3D® for design reduces the number and iterations of development
parts required to lead to a final design. Most importantly is the ability of our software to reduce risk associated with the qualification
and certification of printed parts.
By
using PrintRite3D® software, a high-precision manufacturer would have the ability to offer its customers product warranties
and assurances that its printed parts were produced in compliance with stringent quality requirements. Orders for our software
have been received from Honeywell Aerospace, Aerojet Rocketdyne, Woodward, Siemens Turbomachinery, Pratt and Whitney, and Solar
Turbines.
We
believe there is potential for our PrintRite3D® software to be incorporated into a majority of 3D metal printing devices made
by companies like Electro-Optical Systems (“EOS”), Additive Industries, Concept Lasers, Trumpf Lasers, Renishaw, Sentrol,
Farsoon, Desktop Metal and others.
Sigma’s Cloud-Based
IIoT Solutions
The
process of making a 3D printed part could start with our customers loading a computer aided design (“CAD”) model of
the part into the Cloud as shown in “A” in Figure 1. Next, computer aided engineering (“CAE”) and/or computer
aided manufacturing (“CAM”) instructions are sent to the 3D printer (see “B”, as shown in Figure 1). Metal
powder in the machine is then deposited onto the build platform where a laser beam, or other energy source, focused onto the build
platform melts each successive layer of powder in 20-60 micron increments. Our PrintRite3D SENSORPAK® (see “C”
in Figure 1) detects, records, analyzes and compares the part as it is being made layer-by-layer against the CAD/CAM specifications
and physical reference points for quality assurance during manufacturing. Our PrintRite3D INSPECT®, Version 3.02 software
utilizes our patent applied for TED tool to determine compliance of each part for its metallurgical quality. Our alpha version
of PrintRite3D CONTOUR® software determines the shape and conformity of a part in real-time manufacture with its geometric
design specification.
Our
PrintRite3D® CAI web-based software suite (see “D” in Figure 1) resides in situ and/or in the Cloud (see “A”
in Figure 1) of the Industrial Internet of Things (“IIoT”). We enable manufacturing engineers to confirm the part
quality layer-by-layer, provide for manufacturing statistical process control and harvest, aggregate, and analyze big data from
the real-time manufacturing data collected from our PrintRite3D SENSORPAK® (see “C” in Figure 1), as well as post-process
manufacturing data collected by our customers (see “E” in Figure 1).
Our
specialized sensor suite (see “C” in Figure 1), known as PrintRite3D SENSORPAK®, is an edge computing device,
which means that it can be operated outside of a customer’s primary computer hardware and software systems while delivering
actionable information to these systems. Thus, PrintRite3D SENSORPAK® contains the modular hardware and software necessary
to connect to “cyber-physical” objects (see “B” in Figure 1) living on the manufacturing floor. It allows
for bi-directional information flow between the manufacturing floor and the Cloud (see “A” in Figure 1). It starts
with a million-fold data reduction required to manage and analyze the very large quantities of data garnered that layer by layer
monitoring +/- 30 Micron thicknesses create. It finishes with our PrintRite3D® Digital Quality Record (“DQR”)
and report, which provides customers with product guarantees and assurances that parts were produced in compliance with stringent
quality standards. It can collect, analyze, aggregate, filter, and then further communicate data from the manufacturing floor
to the Cloud (see “A” in Figure 1) and enable links to other areas (see “F” in Figure 1) of the IIoT.
Figure
1. Sigma’s Industrial IoT
/
PrintRite 3D® Cloud Architecture
Business Activities and Industry Applications
Our
business is currently focused on the continued development and commercialization of our PrintRite3D® suite of software applications.
We are specifically focusing on the 3DP and AM industries and further developing our contract additive manufacturing business
for metal 3DP to be a customer prototype center available for cutting edge 3D challenges and a concurrent means of demonstrating
and proving the merit of PrintRite3D® for customers’ parts or application. Our strategy is to continue to leverage our
advanced manufacturing knowledge, experience and capabilities through the following means:
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Identify,
develop and commercialize our quality assurance software applications for advanced manufacturing technologies. The applications
are designed to assure part quality in real time, and improve process control practices for a variety of industries;
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Provide
materials and process engineering consulting services with our PrintRite3D® CAI quality assurance software applications
for advanced manufacturing to customers that need:
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to
learn and characterize the individual performance parameters of each machine intended to produce 3CD metal parts;
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to
determine and characterize the traits, signatures, and in-process behaviors of the materials designated for a given part’s
production,
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to
improve manufacturing quality yields by utilizing IPQA;
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to
improve, perhaps for the first time, documentable third party part-by-part quality certification.
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Build
and run a prototype and small lot contract manufacturing and demonstration division for metal 3DP beginning with our EOSM290
state-of-the-art metal printer.
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We
are presently engaged with and focused primarily on the following industry sectors:
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Aerospace
and defense manufacturing;
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Energy
and power generation;
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Bio-medical
manufacturing
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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. By running a small-scale contract AM
services operation, we are able to understand the current needs of our customers and where they are going with their next-generation
product development efforts. Contract AM further allows us a means for material on-going partial self-funding of our IPQA®-enabled
R&D and product development activities for CAI software. We provide our AM contract manufacturing services to customers in
the form of Quality as a Service (“QaaS”). Starting with our PrintRite3D® cloud-based SaaS model, customers will
contract with us for CAE, CAM and CAI services to generate and establish a Digital Quality Record (DQR) for AM built parts. Each
DQR is cloud-based and allows for archiving and storage of quality data, access to our big data ANALYTICS™ software App
for continuous quality monitoring and improvement, and automatic industry benchmarking while maintaining firewalls between company-specific
data.
In
late 2015, we launched two programs − an Early Adopter Program (“EAP”) and an Original Equipment Manufacturer
(“OEM”) Partner Program − designed to broaden our market presence and speed adoption of our PrintRite3D®
technology. The EAP was designed to attract end user customers who have an existing, installed base of 3D metal printers and to
offer them incentivized pricing in return for feedback on engineering and beta releases of our PrintRite3D® software Apps.
Our OEM Partner Program was specifically designed for AM machine manufacturers seeking to embed our PrintRite3D® quality assurance
software Apps directly into their machines for customers purchasing a turnkey solution for their new AM machine purchases.
We
possess the resident expertise to provide manufacturing materials and process (“M&P”) engineering services and
support to companies using our PrintRite3D® software Apps for metal AM. Accordingly, in addition to our primary business focus,
we intend to generate revenues by providing such engineering services and support to businesses that license our PrintRite3D®
software Apps.
Our
President and Chief Technology Officer has worked at or with the Edison Welding Institute and United States Department of Energy
(“DOE”) national laboratories (including the Knolls Atomic Power Laboratory, Bettis Atomic Power Laboratory, Los Alamos
National Laboratory and Sandia National Laboratory) over the past 34 years. Due to his work with the DOE, our President and Chief
Technology Officer has developed extensive relationships with the DOE and its network of national laboratories. Accordingly, we
expect to leverage these relationships in connection with licensing and developing technologies created at such national laboratories
for commercialization in the private sector.
Early-Stage
Technology Commercialization and Market Positioning
Since
our inception in 2010, we have made progress in bringing early-stage disruptive technology from scientific concept and curiosity
to practical reality, as described below.
PrintRite3D®
Quality Assurance Software for Computer-Aided Inspection of Metal Additive Manufacturing
We
believe that AM will significantly impact the manufacturing landscape. AM results in very efficient metal utilization for parts
made on-demand, and utilizes a wide variety of rapid prototyping methods. As a result of AM, parts can go straight from computer-aided
designs (CAD) and 3D computer models to actual, physical parts through the use of computer-aided engineering (CAE) and computer-aided
manufacturing (CAM) steps. However, there are severe challenges in connection with 3D printing of metal parts. Current manufacturing
processes are not capable of making every part right the first time. Also, process consistency and repeatability require further
development for metal parts and this is a typical case for emerging technologies. Although many industry experts have lamented
that 3D Printing for metal parts is limited in current applications, we are developing our IPQA®-enabled technology into a
hardware and software suite of products for CAI of AM known as PrintRite3D®, which we expect will address some these shortcomings
and enable mass production for metals AM technology to be realized sooner than would otherwise be possible given its current state
of maturity. PrintRite3D® comprises a suite of CAI software apps that address the three fundamental problems facing metal
AM today, namely: assuring the metal integrity or quality of the product; assuring the as-built geometry of the product; and,
increasing the productivity or speed of the AM process.
Contract
Manufacturing for Metal Additive Manufacturing
According
to the Wohlers 2017 Annual Report, industry growth in the independent service provider segment including the secondary market
of dies and molds produced for and by AM machines for AM manufacturing in 2016 was an estimated $4.2 billion, up from $3.6 billion
in 2015. End users are still in the early stages of adding metal AM systems to supply production parts to aerospace and defense
OEMs, such as GE Aviation (“GEA”), Honeywell Aerospace, Pratt & Whitney, and Siemens Turbomachinery. We believe
that most AM machines produced through October 2017 are still not well suited for production applications. They have limited feedback
measurement and control sensors to guarantee part quality real time. Some of the latest machines available, such as EOS’s
M290 machine, are beginning to be sold with limited advanced measurement system capability.
We
believe that this service provider market segment represents an opportunity for us to capture significant future portions of the
demand for metal production parts by enhancing service bureaus quality through the licensing of PrintRite3D®. Accordingly,
we acquired our first EOS M290 metal printing machine in 2014. Using the M280 as its base, the M290 adds improved energy efficiencies,
faster build times, and slightly larger build platform capabilities. Through our EOS M290 machine, our customers gain the benefits
of many years of M280-proven applications while accessing the latest in DMLS® technology, as well as receiving parts certifiably
produced using our state-of-the-art PrintRite3D® quality assurance software Apps. We provide our AM contract manufacturing
services to customers in the form of Quality as a Service.
A
detailed description of our technologies and business follows.
PrintRite3D®
Quality Assurance Software for Additive Manufacturing
The
Market
An
area of increasing interest in the manufacturing world is AM or 3DP. AM is a method of producing functional parts directly from
computer design or CAD files without any tooling or other processing.
The
sale of AM products and services in 2016 composed of all AM products and services,
but not including the aerospace and medical
industries which are deemed by Wohlers as currently too difficult to document
, grew 17.8% to $6.1 billion according to Wohler’s
Annual 2017 report. The AM industry is expected to grow to about $15.8 billion in 2019. In 2021, the AM industry is forecasted
to grow to about $26.5 billion, all according to the Wohlers 2016 Annual Report.
Metal
parts are a small and rapidly growing segment of this overall market space as AM or 3D printing moves from just making models
to making actual, fully functional parts. Large end users such as Honeywell Aerospace, GEA and Boeing Defense view AM as an enabling
process for many components. A report in a series by Deloitte University Press on additive manufacturing published in Fall 2015
titled, “3D Opportunity For Quality Assurance and Parts Qualification,” states that, “[o]ne of the most important
barriers is the qualification of AM-produced parts. So crucial is this issue, in fact, that many characterize quality assurance
(QA) as the single biggest hurdle to widespread adoption of AM technology, particularly for metal.” We believe that OEM
end user companies as well as first-tier suppliers cannot achieve their long-term AM production goals without advanced quality
assurance and control technologies for metal AM parts because current quality control methods are not sufficient to reliably allow
cost-effective manufacturing of safety- and performance-critical metal parts. We believe that our PrintRite3D® CAI technology
would directly address this “important barrier” for metal parts and allow such AM applications to move forward. In
response to this need, we have experienced an increase in our installed base of PrintRite3D® systems and we are beginning
to provide material & process engineering services and support for our PrintRite3D® software licenses for our installed
base at GEA, Honeywell Aerospace, Spartacus3D, Additive Industries, Aerojet Rocketdyne, 3D Material Technologies, LLC, Woodward,
Siemens, Pratt & Whitney, and the Edison Welding Institute (“EWI”).
We
have ongoing contracts that include a Phase 3 project with Honeywell Aerospace funded by the Defense Advanced Projects Agency
(“DARPA”) on the application of our PrintRite3D® technology to performance-critical AM metal parts for aerospace.
This project is vitally important because it provided an early opportunity to demonstrate how our IPQA®-enabled PrintRite3D®
software Apps will reduce our customers’ reliance on unnecessary post process inspection, ultimately reducing costs and
improving quality for AM of highly critical aerospace metal components. Also, we were a participant on a GEA led team of companies
and universities, which was awarded a research contract by the National Additive Manufacturing Innovation Institute (“NAMII”
or America Makes) titled, “In-Process Quality Assurance™ for Laser Powder Bed Production of Aerospace Components”.
The contract has the stated objective of maturing our In-Process-Quality-Assurance™ (IPQA®) technology for aerospace
applications by leveraging a development approach incorporating multiple AM OEM machines, multiple superalloys, and multiple product
intent aerospace components. In support of this effort, we were awarded related contracts from the subcontractor Aerojet Rocketdyne
to install one of our PrintRite3D® systems and software Apps on a Concept Laser M2 metal AM machine at Aerojet Rocketdyne’s
Canoga Park, California facility, as well as a contract from Honeywell Aerospace to make initial test specimens for reliability
and repeatability testing using our EOS M290 printer. We were also part of a large research team, led by the Edison Welding Institute
that was awarded a grant funded by the National Institute of Standards (“NIST”) to ensure that quality parts are produced
and certified for use in products made by a variety of industries and their supply chains. The emphasis was on providing tools
needed for additive manufacturing applications to progress from prototype to serial production. This program was successfully
completed in Fall 2015. We are currently a subcontractor to Honeywell Aerospace who was awarded a program in 2015 by America Makes
which is designed to address Design for Additive Manufacturing (“DFAM”) issues. In support of this program, we will
use our EOS M290 printer to build canonical shapes and mechanical test specimens for evaluation by Honeywell Aerospace.
Technology
and Competitive Advantage
The
evolution of AM from prototyping to volume manufacturing in production runs is occurring in, and led by, aerospace while also
appearing in niche products such as medical appliances and replacement parts of diverse applications, including unavailable parts
required by still deployed but aging technologies. A major problem for 3D metal products production-run manufacturing today is
that traditional quality systems that rely heavily on other industries’ experiences with high precision CNC machines in
Subtractive Manufacturing that lathe, mill, or drill with high precision consistency and can successfully rely on after-manufacture
statistically based part sample destruction and inspection procedures simply do not export and apply to Additive manufacturing
machines. Further, post-production non-destructive test instruments from ultrasound to CT Scans are either not effective or not
cost efficient on many complex part configurations that take advantage of 3D capability, and in the case of CT scans, are prohibitively
expensive for production cost efficiency. The most important feature of our PrintRite3D® is that it develops actionable quality
and process control data of manufacturing information in real-time and, when no flaws are detected, can provide manufacturers
and their end-users with a part-by-part quality certification backed up by a file of supporting data.
Our
PrintRite3D® suite, as described below, is composed of hardware, software, data analytics, and proprietary algorithms. The
hardware is an array of photodiodes, non-contact pyrometer, and a data processing unit that can be either sold with an AM manufacturing
machine unit by an OEM manufacturer or retrofitted on customers’ sites.
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PrintRite3D®
SENSORPAK™ – the auxiliary sensor and hardware kit that sits on every AM machine to collect the data to drive
the software.
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PrintRite3D®
INSPECT™ – software which verifies quality layer by layer.
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The
following software modules are currently in development:
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PrintRite3D®
CONTOUR™ – software which assures the as-built geometry.
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PrintRite3D®
ANALYTICS™ – software that harvests, aggregates, and analyzes big data from in-process manufacturing data and
post-process manufacturing data.
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PrintRite3D®
THERMAL™ – software which predicts the residual stress and distortion in the part.
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PrintRite3D®
CLOSED LOOP CONTROL- software that signals for laser adjustments required to correct a developing deviance from design specification
detected by other PrintRite3D® modules.
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The
proprietary software and its embedded algorithms process the substantial amount of layer by layer data gathered and then informs
operators of the Quality Compliance status of each part in a build. We have been active in patent protecting our in-depth data
analysis and quality algorithms to link our analysis to root cause metallurgy for determining the granular quantification of the
part conformance to metallurgical requirements such as tensile strength. Concurrent with assessing the internal quality features
of all parts in a build, PrintRite3D® deploys its CONTOUR™ module that measures each part’s adherence to the configuration
specification of both internal channels and external form. OEM machine manufacturers as well as control system manufacturers may
use the Sigma data stream to direct machine performance adjustments.
We
have developed a tool that enables companies using Additive Manufacturing equipment for metal parts to move from prototyping on
into production runs by assuring quality in a uniquely reliable and cost-effective fashion. Not only does PrintRite3D® enable
a single AM machine to operate at high quality yields, by measuring the product of the manufacturing equipment rather than just
the equipment settings, it also is a reliable method to assure and document uniform quality assurance of a single part’s
specification being manufactured by factories utilizing a number of different AM machines.
We
believe that the broad domain coverage of our PrintRite3D® patents and metallurgical know-how make the licensing of our product
suite to be the best means by which Additive Manufacturing OEM equipment manufacturers can offer in-process-quality-monitoring
that certifies and documents the quality of all parts that pass continuous inspection. PrintRite3D® provides 3D metal manufacturing
equipment makers with a patent protected data configuration of information that the manufacturers may use to adjust controls of
their equipment in response to real-time quality information by, for example, precisely adjusting laser power to sustain manufacturing
to design and specification.
Our
IPQA®-enabled PrintRite3D® software Apps appear well suited to meet the needs of metal AM at this critical juncture in
its development. Our technology will allow metal AM to be used during manufacturing of safety-critical or performance-critical
metal parts, such as used in aerospace, defense and biomedical. Currently, these applications are difficult because the part quality
cannot be completely guaranteed using today’s conventional nondestructive inspection technologies, because using inspection
after manufacturing is difficult, costly and does not find all defects of concern. Therefore, we believe that PrintRite3D®
could be an enabler for metal AM to realize its full potential. We have unique and patent protected offerings in this field. Furthermore,
as a greater number of these AM applications could be cloud-based, the PrintRite3D® technology is fully compatible with highly
networked, cloud- or web-based implementation – subject to the data and intellectual property restrictions which may be
imposed by some companies for competitive reasons.
Our
proprietary PrintRite3D® software Apps have been demonstrated and tested at many manufacturing sites around the world. We
believe these demonstrations have served to validate the underlying technology of PrintRite3D® INSPECT™ and SENSORPAK™
software and hardware modules, respectively. In addition, we have developed relationships with experienced aerospace companies
in North America that have assisted in the validation of the underlying technology for our PrintRite3D® software App known
as CONTOUR™.
We
are continuing to work with Honeywell Aerospace on the separate development of our PrintRite3D® CONTOUR™ software App
for metal-based AM under our Trial Evaluation Agreement with Honeywell Aerospace, which sets forth the parties’ intent to
use Honeywell’s Advanced Manufacturing Engineering Center as a beta test site for our PrintRite3D® CONTOUR™ software
module. In further support of this effort, in 2015 Honeywell Aerospace installed its second PrintRite3D® system on one of
its Concept Laser M2 machines at their Advanced Manufacturing Engineering Center in Phoenix, Arizona.
We
have expanded our market presence and associated installed base of PrintRite3D® systems through our Early Adopter Program
(“EAP”) and our Original Equipment Manufacturer (“OEM”) Partner Program to include European companies
in France, Germany and The Netherlands. These European partners’ installations are key to our long-term strategy to broaden
its installed base through our EAP as well as gain market presence though embedded OEM offerings of our PrintRite3D® technology.
Our PrintRite3D® product commercialization efforts reflect the strategic nature of our selective alliance partnerships.
We
believe PrintRite3D® is uniquely positioned to grow into this market as its technology is platform independent and deployable
with all currently known metal AM manufacturing units.
Business
Model
Our
commercialization strategy for PrintRite3D® products is:
|
●
|
Enter
into early adopter license agreements with high potential future AM equipment manufacturers and complex part AM manufacturing
service bureaus;
|
|
|
|
|
●
|
Enter
into OEM license agreements for PrintRite3D® to be integrated directly into the printers of major AM equipment manufacturers;
|
|
|
|
|
●
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Effective
September 1, 2017, target and install units only at companies that are already manufacturing 3D metal parts and need to solve
a quality yield problem; and
|
|
|
|
|
●
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Provide
manufacturing engineering consulting services to third parties that have needs in developing quality assurance tactical methods
for manufacturing.
|
PrintRite3D®
is designed to run on different machine platforms which allow us to maximize our product offering to the entire AM metal market.
The target markets include OEMs both on the AM software side as well as OEM machine producers and end users.
We
believe another much-needed area for AM metal parts manufacturing is in software Apps for reducing design and development cycle
times, saving the end customer time and money. In support of that, in 2016, we entered into a Technology Development Agreement
with 3DSIM, LLC of Park City, Utah, to pursue commercial metal AM software opportunities for rapid qualification and part certification.
These software Apps could form the underpinnings and backbone of a conceptual software App known as THERMAL™. We expect
in the future to attempt to develop and offer a PrintRite3D® suite of Apps which would be specifically developed to improve
part designs and reduce traditional trial and error design approaches for features such as distortion control.
To
summarize, we have formed an operating division focused on real-time, advanced quality assurance solutions for additive manufacturing
thereby increasing the value of the AM part. Although in the past our revenues have been generated mainly through engineering
consulting services we provided to third parties, we have generated revenues from December 2013 through January 2018 through sales
and licensing of our PrintRite3D® systems and software.
Technology
and Competitive Advantage Demonstrated On-site
We
currently have an AM 3D metal printing facility that employs state-of-the-art technology from the leading provider of metal AM
systems, Electro-Optical Systems. While our current printing capacity is limited, we believe that a unique selling point or competitive
advantage both for system sales of PrintRite3D® as well as local service bureau part sales is our demonstrable on-site PrintRite3D®
technology. Our EOS M290 printer is outfitted with our latest PrintRite3D®-enabled technology allowing us to provide customers
with the necessary documented objective evidence that a part is being built (and has been completed) in precise accord with the
design specification, or Quality-as-a- Service (QaaS) data package, to ensure they can meet compliance with their design intent
and ultimately end-user performance requirements for their highly-critical and demanding components. Our QaaS starts with our
PrintRite3D® cloud-based SaaS model. Customers will contract with us to generate and establish a digital quality record for
AM built parts based on Design for Additive Manufacturing (“DFAM”) principles. Each DQR is cloud-based and allows
for archiving and storage of quality data. The Reports both provide data to and have retrieval access from our big data ANALYTICS™
software App. The cloud based system provides capability and resources for continuous quality monitoring and improvement. Concurrently,
it will automatically compare build-data to industry benchmarking. Sigma has built in firewalls to shield company-specific data.
Our QaaS service benefits our customers by providing independent quality assurance and increased process intelligence and access
to our latest proprietary big data ANALYTICS™ software Apps for trending and additional manufacturing intelligence.
Business
Purpose
Our
AM 3D metal printing facility serves three business purposes. First, it is a demonstration facility that allows us a means of
demonstrating our IPQA products for a prospective customer without them having to first install it on their equipment. Second,
the printing facility allows us to stay current with the market’s needs by manufacturing high technology prototypes and
then evaluating the challenges that each new configuration poses. Third, the in-house printing facility enables us to conduct
research that deepens our own IPQA products.
Recent
Developments (in reverse chronological order)
On
April 6, 2018, the Company closed a private placement of equity securities resulting in net proceeds of approximately $840,000
,
after deducting commissions and other offering expenses payable by the Company.
On
March 28, 2018, Morf3D repaid Sigma in full for the $500,000 loan with interest that Sigma had extended to Morf3D on March 27,
2017.
On
March 26, 2018, we announced that we entered into a Cooperative Research and Development Agreement (CRADA) with the National Institute
of Standards and Technology (NIST). NIST and Sigma will study the effects of recycled powder and part placement on process variability
and part quality using Sigma’s PrintRite3D® technology. The study will be the first of its kind to characterize the
use of recycled powder in the Laser Powder Bed Fusion (LPBF) process using both in-situ monitoring technology and post process
mechanical property characterization, and is vitally important to the global Additive Manufacturing (AM) community because today
it is known that changes in powder characteristics and chemistry may impact the build process and resulting part quality. This
collaboration represents an important step forward in providing a much-awaited technical solution and understanding of powder
reuse and its implicit cost savings. The results from this study will be disseminated to the AM community through journal articles
while the in-situ and ex-situ data will be made available via the NIST AM Material Database. During this study, Sigma’s
In-Process Quality Assurance™ PrintRite3D INSPECT® software will play a key role in quantifying process variability
and part quality using its proprietary Thermal Energy Density™ (TED™) In Process Quality Metric™, an industry
first for quantitatively measuring melt pool variation and part quality.
On
March 1, 2018, we announced we were releasing Version 3.0.2 of our PrintRite3D INSPECT® In-Process Quality Assurance™
(IPQA®) software. This evolutionary version of PrintRite3D® is now available for new installations and upgrades to existing
customers. This latest release features Sigma Labs’ new and proprietary Thermal Energy Density™ (TED™) In Process
Quality Metric™ (IPQM®), setting what the Company views as a new industry standard for quantitatively measuring melt
pool and part quality. Armed with Sigma Labs’ new PrintRite3D INSPECT® Version 3.0.2 software, process engineers will
now be able to produce an alloy-specific process map generated using Sigma Labs’ in-process TED™ metric, an industry
first. This industry first approach to in-process monitoring is designed to enable rapid process qualification, which Sigma Labs
believes will result in increased production yields and faster product to market times.
On
December 22, 2017, we announced that we had received a contract from Laser Zentrum Nord (LZN) GmbH, a leading Additive Manufacturing
(AM) technology and research innovator located in Hamburg, Germany for PrintRite 3D INSPECT
®
. Terms of the contract
have not been disclosed. The two companies have also agreed to actively collaborate to certify Sigma’s IPQA
®
methodology and solutions for serial production 3D printing in the aerospace industry. The PrintRite3D
®
system
will be installed onto a SLM Solutions selective laser melting machine located at Laser Zentrum Nord GmbH in Hamburg, Germany.
On
October 16, 2017, we announced that we would unveil our PrintRite3D® INSPECT™ V3.0 quality assurance software at the
international Formnext 2017 (
www.formnext.com
), that showcased current and future cutting-edge applications of additive
technologies. Sigma Labs’ PrintRite3D® INSPECT™ V3.0 software is a web-based, distributed application featuring
3D Thermal Mapping of the melt pool using Sigma Labs’ proprietary TED™ (Thermal Emission Density™) metrics.
These metrics are an industry first and powered by an advanced analytics engine, designed to meet the needs of users focused on
research, development and qualification-level activities as well as day-to-day production activities. The researcher tools utilize
in-process sensor data without the need for baseline comparisons providing users the data and framework for focused characterization
and analysis leading to rapid process qualification and part certification. Quantitative, in-situ thermal history maps can also
be used to validate modeling and simulation (M&S) results prior to process characterization studies, process qualification
& validation phases, as well as in conjunction with design optimization evaluations.
On
August 22, 2017, we announced that we had entered into an agreement with Digital-CAN Tech Co., LTD to serve as the Company’s
non-exclusive sales agent in Taiwan. Digital-CAN is at Taiwan’s forefront in the additive manufacturing (“AM”)
industry with over a decade of experience in industrial 3D printing and rapid prototyping. Digital-CAN is AS9100 and ISO13485
certificated (Quality Systems Standards for Aircraft, Space, Defense and Medical Devices industry suppliers), and is one of Taiwan’s
largest additive manufacturing centers. Digital-CAN has experience in a variety of industries such as aerospace, medical, tooling,
industrial manufacturing 4.0 applications, architecture, product design, automotive design, & lifestyle applications. The
Company has agreed to pay Digital-CAN a commission tied to revenue generated by the Company as a result of customers identified
by Digital-CAN.
On
July 27, 2017, we announced changes in our senior management. Co-founder Mark Cola, who serves as President, was appointed as
Sigma Labs’ Chief Technology Officer, responsible for building and implementing the Sigma Labs technological strategy and
guiding key technical advancements towards digitalization in the context of the Industrial Internet of Things (IIoT). Together
with the other executive team members, Mr. Cola will seek to expand and grow the Company through next-generation products and
key customer development in a broad range of industries. John Rice, Chairman of the Board since his appointment in April 2017,
serves as Interim CEO, replacing Mr. Cola. As Chairman and Interim CEO, Mr. Rice oversees Sigma Labs’ implementation of
internal and external growth. He brings substantial operating and investment experience to the tasks.
On
June 28, 2017, we announced that our PrintRite3D® INSPECT® software Version 2.0 had recently been installed at Honeywell
Aerospace in Honeywell’s Advanced Manufacturing Engineering Center in Phoenix, AZ, in connection with Sigma Labs’
ongoing participation in the Honeywell lead, DARPA-sponsored Period III Open Manufacturing Program.Sigma Labs’ PrintRite3D®
INSPECT® software Version 2.0 is now available as a cloud-based data API platform and allows for web-based access to metal
additive manufacturing (“AM”) machines, providing users the ability to monitor AM machines, and capture and record
the entire build sequence.
On
June 6, 2017, we announced that we had entered into agreements with two additional, non-exclusive sales agents in the Asia Pacific
region, driven by strong customer interest in the region for PrintRite3D®. One such agent, Enervision Inc., will target the
high growth expectations in the South Korean AM market, driven by the Korean government’s announcement in April 2017 of
a $37 million investment to accelerate the development of 3D printing across the country. The nation’s Ministry of Science,
ICT and Future Planning will spend much of the budget on various 3D printing businesses to strengthen South Korea’s competitiveness
and ability to meet demand. Sigma Labs’ other new sales agent, Beijing Yida Sifang Technology Co., Ltd, a leading metal
AM reseller with multiple offices in China, will assist Sigma Labs with its expansion into the China AM market. The Company will
pay the sales agents a commission tied to revenue generated by the Company through customers identified by the sales agents. The
addition of two new agents in the Asia-Pacific region follows Sigma Labs’ April 2016 announcement of an agreement with Creatz3D
Pte Ltd to be the non-exclusive sales and service agent for Sigma Labs in Singapore, Indonesia and Vietnam. Sigma Labs is exploring
additional opportunities to engage agents throughout Asia-Pacific region.
On
May 9, 2017, we announced that we would unveil our PrintRite3D® INSPECT™ V.2.0 quality assurance software at RAPID +
TCT 2017 (
www.rapid3devent.com
), North America’s preeminent event for discovery, innovation, and networking in 3D
manufacturing. Sigma Lab’s PrintRite3D® INSPECT™ V.2.0 innovates on the Company’s integrated, interactive
system that combines inspection, feedback, data collection and critical analysis. The system pairs SENSORPAK™ multi-sensors
and hardware with INSPECT™, CONTOUR™ and ANALYTICS™ software modules for comprehensive management of Additive
Manufacturing (“AM”) processes. The V.2.0 release is now both web and IoT-enabled and features statistical process
control and visualization, providing a real-time snapshot of the entire process, part-by-part multivariate analysis; and allows
for machine floor to cloud data communication with multiple machine system integration.
On
April 18, 2017, we announced that we had received a contract from Solar Turbines Incorporated, a subsidiary of Caterpillar Inc.
(NYSE:CAT) located in San Diego, California. Solar Turbines will implement Sigma Labs’ In-Process Quality Assurance™
(IPQA®) technology for the production of gas turbine components using metal additive manufacturing (“AM”). The
division makes mid-size industrial turbines for use in electric power generation, gas compression, and pumping systems. Sigma
Las installed its PrintRite3D® software on a 3D Systems’ ProX300 machine, with the potential for multiple system orders
as the company ramps up to full serial production.
On
April 5, 2017, we announced the release of our OEM Developer’s Kit for PrintRite3D® INSPECT™ quality assurance
software version 2.0. The Company has placed its alpha version of the OEM Developer’s Kit with a European OEM partner for
immediate evaluation and incorporation into its 3D printers. The Developer’s Kit allows an OEM to seamlessly and quickly
embed PrintRite3D® technology directly into their products, speeding their product launch, rapidly reaching customers and
achieving a competitive advantage.
On
March 29, 2017, we announced that we had entered into a long term non-exclusive commercial agreement with Additive Industries
B.V. of The Netherlands. In the course of 2017, Additive Industries advised Sigma that it rolled out its new equipment and was
forced to delay initial steps with respect to this agreement, and informed Sigma that it now intends to commence work with Sigma
in 2018.
Also
on March 29, 2017, and in an effort to bring enhanced solutions for additive manufacturing (“AM”) to the aerospace
and defense (“A&D”) sector and capitalize on growth in demand for 3D printed metal components within the A&D
industry, we entered into a strategic alliance with Morf3D, a California-based company that specializes in additive engineering
and manufacturing with metals and that provides advisory services in additive manufacturing strategy and technology adoption road-mapping.
By leveraging our PrintRite3D® quality assurance software, we believe that Morf3D will be able to provide a means for its
customers to increase AM production rates while ensuring consistent part quality, thereby better meeting the high-quality demands
of its aerospace customers. We also plan to work together with Morf3D to manufacture certain 3D printed parts.
On
March 27, 2017, we completed funding of a loan in the principal amount of $500,000 to Morf3D pursuant to a Secured Convertible
Promissory Note dated March 27, 2017 delivered by Morf3D to us. The loan bears interest at the rate of 7% per annum, is due and
payable in full on March 27, 2018, is secured by certain assets of Morf3D, and is convertible at our option into 10% of the outstanding
shares of the common stock of Morf3D unless Morf3D exercises its right under specified circumstances to repay all principal and
accrued interest on the loan. The purpose of the loan is to provide working capital to Morf3D to, among other things, lease an
EOS M 400 system for Morf3D to expand production for contracts related to AM of high-precision aerospace & defense components,
in furtherance of our strategic alliance. Morf3D repaid the loan on March 28, 2018.
On
February 21, 2017, we closed an underwritten public offering of 1,410,000 units, with each unit consisting of one share of our
common stock and one warrant to purchase one share of common stock.
The
underwriter exercised the over-allotment option covering additional warrants to purchase up to 211,500 additional shares of common
stock. Gross proceeds to us from the offering, including the exercise of the over-allotment option, were approximately $5.8 million,
before deducting underwriting discounts and commissions and other offering expenses payable by us.
Competition
We
believe our technologies will be beneficial to several industries, including aerospace, defense, oil and gas, bio-medical, and
power generation. However, developments by others may render our current and proposed technologies noncompetitive or obsolete,
or we may be unable to keep pace with technological developments or other market factors. Additionally, our competitive position
may be materially affected by our ability to develop or successfully commercialize certain technologies that we have identified
for commercialization. Other general external factors may also impact the ability of our products to meet expectations or effectively
compete, including pricing pressures.
We
anticipate some of our principal competitors in the United States will include AM End Users, such as GE Aviation, Honeywell Aerospace,
Rolls-Royce PLC, Pratt & Whitney; AM OEM equipment manufacturers, such as EOS, Concept Lasers, 3D Systems, Renishaw, Arcam
and SLM; third party solution providers like Stratonics Inc., and Vibrant Corporation that specialize in designing and manufacturing
quality control monitoring devices used in industrial applications. Most of these competitors have significantly greater research
and development capabilities than we do, as well as substantially more sales, marketing and financial and managerial resources.
These entities represent significant competition for us. In addition, acquisitions of, or investments in, competing companies
by large corporations could increase such competitors’ research, financial, manufacturing and other resources.
Research
and Development
Research
and development costs are expensed as incurred. Our research and development expenses relate to our engineering activities, which
consist of the development of our PrintRite3D® quality assurance technologies for specific customers and for the industry
in general. During the years ended December 31, 2017 and 2016, we recognized $261,310 and $87,971, of research and development
costs, respectively.
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 eighteen
foreign and U.S. patent applications related to our IPQA® technology and rapid qualification of additive manufacturing for
metal parts. Twelve of these eighteen patent applications published between November 2015 and December 2017. 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.
Title
|
|
Type
|
|
Patent
No.
|
|
Controlled
Weld Pool Volume Control of Welding Processes
|
|
US
Utility
|
|
|
8,354,608
|
|
Structurally
Sound Reactive Materials
|
|
US
Utility
|
|
|
8,372,224
|
|
Composite
Projectile
|
|
US
Utility
|
|
|
8,359,979
|
|
Government Regulation
Any
contracts that we enter into with governmental agencies will be subject to a variety of federal, state and local laws and regulations.
These regulations are aimed at preventing the inadvertent disclosure of munitions related data or the export of technical knowledge
to foreign countries. The work we do with governmental units may also be subject to laws respecting the confidentiality of any
classified or national security information we receive during the course of our activities under any government contract.
Additionally,
with respect to our work with government agencies, our sales are driven by pricing based on costs incurred to produce products
or perform services under contracts with the U.S. government. U.S. government contracts generally are subject to Federal Acquisition
Regulations (“FAR”), agency-specific regulations that implement or supplement FAR, such as the DoD’s Defense
Federal Acquisition Regulations and other applicable laws and regulations. These regulations impose a broad range of requirements,
many of which are unique to government contracting, including various procurement, import and export, security, contract pricing
and cost, contract termination and adjustment, and audit requirements. A contractor’s failure to comply with these regulations
and requirements could result in reductions of the value of contracts, contract modifications or termination, and the assessment
of penalties and fines and could lead to suspension or debarment from government contracting or subcontracting for a period of
time. In addition, government contractors are also subject to routine audits and investigations by U.S. government agencies such
as the Defense Contract Audit Agency (“DCAA”). These agencies review a contractor’s performance, cost structure,
and compliance with applicable laws, regulations, and standards. The DCAA also reviews the adequacy of, and a contractor’s
compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating,
compensation, and information systems.
Employees
As
of December 31, 2017, we had 12 full-time employees. We are actively searching for additional, qualified sales support and engineering
staff, to support our expanding operations in the area of IPQA® for AM.
Properties
We
lease at 3900 Paseo del Sol, Santa Fe, New Mexico 87507, approximately (1) 1,306 square feet of office space at units C-15, C-16,
C-17, C-20 and C-23 for a total monthly rent expense of approximately $2,575 under the lease, which expires on July 31, 2018,
(2) 172 square feet of office space at unit C-14 for a total monthly rent expense of approximately $400 under the lease, which
expires on September 30, 2018, (3) 202 square feet of office space at unit C-13 for a total monthly rent expense of approximately
$450 under the lease, which expires on October 31, 2018, (4) 708 square feet of production space at unit E-42, for a total monthly
rent expense of approximately $775 under the lease, which expires on September 30, 2018, (5) 708 square feet of production space
at unit E-38, for a total monthly rent expense of approximately $800 under the lease, which expires on July 31, 2018, and (6)
512 square feet of warehouse / production space at unit E-40, for a total monthly rent expense of approximately $650 under the
lease, which expires on September 30, 2018.
We
believe that our facilities are suitable for our current needs.
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.
We
incorporated as Messidor Limited in Nevada on December 23, 1985 and changed our name to Framewaves Inc. in 2001. On September
27, 2010, we changed our name from Framewaves Inc. to Sigma Labs, Inc.
ITEM
1A. RISK FACTORS.
Investing
in our securities involves a high degree of risk. Our business is subject to numerous risks. We caution you that the following
important factors, among others, could cause our actual results to differ materially from those expressed in statements made by
us or on our behalf in filings with the SEC, press releases or communications with investors and others. Any or all of our statements
in this annual report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate
assumptions or by known or unknown risks and uncertainties. The factors mentioned in the discussion below will be important in
determining future results. Consequently, actual future results may vary materially from those anticipated in this annual report
or our other public statements. You should carefully consider the risks described below, as well as the other information in this
annual report, including our financial statements and the related notes and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” before deciding whether to invest in our securities. The occurrence of
any of the events or developments described below could harm our financial condition, results of operations, business and prospects.
In such an event, the market price of our securities could decline, and you could lose all or part of your investment. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial also may have similar adverse effects on
us.
Risks
Related to Our Business
We
have a limited operating history, are not currently profitable and may never become profitable.
We
have incurred losses in every reporting period since we commenced business operations in 2010 and expect to continue to incur
significant losses for the foreseeable future. Our net loss for the years ended December 31, 2017 and 2016 were $4,577,516, and
$2,196,834, respectively. As of December 31, 2017, our accumulated deficit was $14,411,470. 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, 2017 and December 31, 2016 were $641,049 and $966,422, respectively, and our operating expenses for those periods were $4,420,667
and $3,211,258, respectively. Our current revenues are not sufficient to fund our operations. We cannot predict when, if ever,
we might achieve profitability and we are not certain that we will be able to sustain profitability, if achieved. If we fail to
achieve or maintain profitability, the market price of our securities is likely to be adversely affected.
We
may require additional financing to continue our operations, and there is no assurance that we will be able to obtain such financing
on acceptable terms, or at all.
As
of December 31, 2017, we had cash in the amount of $1,515,674. We believe that the approximately $840,000 of net proceeds from
our April 6, 2018 sale of securities and receipt of $535,000 on a note receivable, together with our existing cash and anticipated
revenues, will be sufficient to fund our operations until at least the end of fiscal 2018. There is no assurance that any future
financing that we require to fund our operations will be available on acceptable terms, or at all. Such financing, if in the form
of equity, may be highly dilutive to our existing stockholders and may otherwise include onerous terms. Such financing, if in
the form of debt, may include debt covenants and repayment obligations that are onerous and that adversely affect our business
operations. If adequate funds are not available to us, we may be required to delay, limit or terminate our business operations.
Our
limited operating history makes evaluation of our business difficult.
We
commenced business operations in 2010 and are continuing to develop our technologies and to implement our business plan. Our ability
to implement a successful business plan remains unproven, and there is no assurance that we will ever generate sufficient revenues
to sustain our business. Our relatively short operating history, together with the other risks discussed in this “Risk Factors”
section, may make it difficult for you to evaluate our business in connection with making a decision about whether to invest in
our securities.
We
face the risks normally associated with a new business.
We
face all of the risks inherent in a new business, including the expenses, difficulties, complications and delays frequently encountered
in connection with conducting new operations and efforts to develop and commercialize technologies. These uncertainties include
developing our technologies and our brand name, raising capital to meet our working capital requirements and developing a customer
base, among others. If we are not effective in addressing these risks, we will not be able to operate profitably in the future,
and we may not have adequate working capital to meet our obligations as they become due.
Our
business may be adversely affected by a global economic downturn.
Any
economic downturn generally could cause a drop in government spending and business investment, which could have a material adverse
effect on our business. Further, as a result of the current global economic situation, there may be a disruption or delay in performance
by our third-party contractors and suppliers. If such third parties are unable to adequately satisfy their contractual commitments
to us in a timely manner, our business could be adversely affected.
We
could incur significant damages if we are unable to adequately discharge our contractual obligations.
Our
failure to comply with contract requirements or to meet our clients’ performance expectations on a contract could materially
and adversely affect our financial performance and our reputation. This, in turn, would impact our ability to compete for new
clients and contracts. Our failure to meet contractual obligations could also result in substantial actual and consequential damages
under the terms of such contracts. In addition, some of our contracts require us to indemnify clients for our failure to meet
performance standards and/or contain liquidated damages provisions and financial penalties related to performance failures. Although
we do have liability insurance, the policy limits may not be adequate to provide protection against all such potential liabilities.
Some
of our clients may terminate our contracts prior to completion, which could result in revenue shortfalls and reduce profitability
or cause losses on contracts.
Our
small number of our contracts with clients contain initial or base periods of one or more years, as well as option periods typically
covering more than one-half of the contract’s initial duration. However, such clients are under no obligation to exercise
the option to extend the contract term. The profitability of some of our contracts could be adversely impacted if such options
are not exercised and the contract term is not extended accordingly. Additionally, our contracts contain provisions permitting
a client to terminate the contract on short notice, with or without cause. The unexpected termination of significant contracts
could result in significant revenue shortfalls. If revenue shortfalls occur and are not offset by corresponding reductions in
expenses, our business could be adversely affected. We cannot anticipate if, when or to what extent a client might terminate its
contracts with us.
We
are subject to government audits, and our failure to comply with applicable laws, regulations and standards could subject us to
civil and criminal penalties and administrative sanctions.
The
government agencies we contract with have the authority to audit and investigate our contracts with them. As part of that process,
a government agency may review our performance on a contract, our pricing practices, our cost structure and our compliance with
applicable laws, regulations and standards. If the agency determines that we have improperly allocated costs to a specific contract,
we will not be reimbursed for those costs and we will be required to refund the amount of any such costs that have been previously
reimbursed. If a government audit identifies improper activities by us or we otherwise determine that these activities have occurred,
we could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures
of profits, suspension of payments, fines and suspension or disqualification from doing business with the government. Any adverse
determination could adversely impact our ability to bid for Request for Proposals (“RFPs”) in one or more jurisdictions.
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 seven years, and we expect to grow in the near future as our business
develops and becomes established. If our business grows as we anticipate, it will be necessary for us to manage our expansion
in an orderly fashion. Any significant growth in our activities or in the market for our services will require extension of our
managerial, operational, marketing and other resources. Future growth will also impose significant additional responsibilities
upon the members of management to identify, recruit, maintain, integrate, and motivate new employees. Our failure to manage growth
effectively may lead to operational inefficiencies that will have a negative effect on our profitability. Additionally, if our
growth comes at the expense of providing quality service and generating reasonable profits, our ability to successfully bid for
contracts and our profitability will be adversely affected. We cannot assure investors that we will be able to effectively manage
any future growth we may experience.
Failure
to obtain adequate insurance coverage could put us at risk for uninsured losses.
Some
or all of our customers may require insurance as a requirement to conduct business with us.
A
lthough
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 Interim Chief Executive Officer and other key personnel, and the loss of any of these individuals could harm
our business.
We
depend on John Rice, our interim Chief Executive Officer, as well as key scientific and other personnel. The loss of any of these
individuals could harm our business and significantly delay or prevent the achievement of our business objectives. In addition,
our delivery of services will be labor-intensive: when we are awarded a contract, we may need to quickly hire project leaders
and project management personnel. The additional staff may also create a concurrent demand for increased administrative personnel.
The success of our business will require that we attract, develop, motivate and retain:
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experienced
and innovative executive officers;
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senior
managers who have successfully managed or designed programs in the public sector; and
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information
technology professionals who have designed or implemented complex information technology projects.
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Innovative,
experienced and technically proficient individuals are in great demand and are likely to remain a limited resource. We may be
unable to continue to attract and retain desirable executive officers, senior managers, and technology professionals. Our inability
to hire sufficient personnel on a timely basis or the loss of significant numbers of executive officers and senior managers could
adversely affect our business.
We
may be dependent on cash flow and payments from customers in order to meet our expense obligations.
A
number of factors may cause our revenues, cash flow and operating results to vary from quarter to quarter, including the following:
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the
progression of contracts;
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the
levels of revenues earned on fixed-price and performance-based contracts (including any adjustments in expectations for revenue
recognition on fixed-price contracts);
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the
commencement, completion or termination of contracts during any particular quarter;
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the
schedules of government agencies and large multinational corporations for awarding contracts;
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the
failure of our customers to fulfill their obligations under contracts with us; and
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the
term of awarded contracts and potential acquisitions.
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Changes
in the volume of activity and the number of contracts commenced, completed or terminated during any quarter may cause significant
variations in our cash flow from operations because a significant portion of our expenses are fixed. Fixed expenses include, rent,
payroll, insurance, employee benefits, taxes and other administrative costs and overhead. Moreover, we expect to incur significant
operating expenses during the start-up and early stages of large contracts and typically do not receive corresponding payments
in that same quarter.
We
may make acquisitions in the future that we are unable to effectively manage given our limited resources.
We
may choose to grow our business by acquiring other entities. We may be unable to manage businesses that we have acquired or to
integrate them successfully without incurring substantial expenses, delays or other problems that could negatively impact our
results of operations. Moreover, business combinations involve additional risks, including:
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diversion
of management’s attention;
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loss
of key personnel;
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our
becoming significantly leveraged as a result of the incurrence of debt to finance an acquisition;
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assumption
of unanticipated legal or financial liabilities;
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unanticipated
operating, accounting or management difficulties in connection with the acquired entities;
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amortization
of acquired intangible assets, including goodwill; and
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dilution
to existing stockholders and our earnings per share.
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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.
We
may be unable to protect our intellectual property rights.
Our
success in part depends on the ability to protect our intellectual property and proprietary technology. To do so, we will be required
to prosecute patent applications and maintain patents, obtain new patents and pursue trade secret and other intellectual property
protection. We were awarded two U.S. patents with respect to our munitions technology. We were also awarded a U.S. patent with
respect to our IPQA® technology. In addition, we filed eighteen foreign and U.S. patent applications pertaining to our IPQA®
technology and rapid qualification of additive manufacturing for metal parts. Also, we filed a PCT patent application pertaining
to the advanced dental implant technology. However, the efforts we have taken to protect our proprietary rights may not be sufficient
or effective.
There can be no assurance that our program for protection of
intellectual
property and proprietary technology
will be sufficient to protect our
intellectual
property
and
proprietary technology
from competitors.
Our business is also subject to the risk that our issued patents will not provide us with significant competitive advantages
if, for example, a competitor were to independently develop or obtain similar or superior technologies. In addition, our issued
patents may be challenged or infringed upon by third parties. The enforcement of intellectual property rights is subject to considerable
uncertainty, and can be expensive and time-consuming. Patent reform laws and court decisions interpreting such laws, may create
additional uncertainty around our ability to obtain and enforce patent protection. Any significant impairment of our intellectual
property rights could harm our business and our ability to compete. The unauthorized use of our intellectual property could make
it more expensive to do business and harm our operating results. Proprietary trade secrets and unpatented know-how are also very
important to our business, however, trade secrets are difficult to protect. Our employees, consultants, contractors, outside scientific
collaborators and other advisors may unintentionally or willfully disclose our confidential information to competitors, and confidentiality
agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential or proprietary information.
We
may be sued by third parties who claim that we have infringed their intellectual property rights.
We
may be exposed to future litigation by third parties based on claims that our research, development and commercialization activities
infringe the intellectual property rights of third parties to which we do not hold licenses or other rights, or that we have misappropriated
the trade secrets of others. Any litigation or claims against us, whether or not valid, could result in substantial costs, and
could place a significant strain on our financial and human resources. In addition, if successful, such claims could cause us
to pay substantial damages. Furthermore, because of the substantial amount of discovery required in connection with intellectual
property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this
type of litigation.
Our
services are subject to government regulation, changes in which may have an adverse effect on us.
Our
business activities subject us to a variety of federal, state and local laws and regulations. For example, we will required to
comply with applicable provisions of the International Traffic in Arms Regulations (“ITAR”), as well as other export
controls and laws governing the manufacture and distribution of munitions technology. Despite the fact that we have applied for
and received ITAR compliance, changes in the laws and regulations applicable to our business activities may have an adverse effect
on our operations and profitability by making it more expensive and less profitable for us to do business. Additionally, the market
for our services depends largely on federal and state legislative programs. These programs can be modified or amended at any time
by acts of federal and state governments. Further, if additional programs are not proposed or enacted, or if previously enacted
programs are challenged, repealed or invalidated, our growth strategy could be adversely impacted.
Our
bylaws contain provisions indemnifying our officers and directors against all costs, charges, and expenses incurred by them.
Our
Bylaws contain provisions with respect to the indemnification of our officers and directors against all costs, charges and expenses
actually and reasonably incurred by an officer or director paid to settle an action or satisfy a judgment in a civil, criminal
or administrative action or proceeding to which he is made a party by reason of being or having been one of our directors or officers.
To the extent that our directors’ and officers’ insurance policy does not provide reimbursement for such costs, charges,
expenses and other amounts, we may incur substantial expenses in satisfying our indemnification obligations.
Our
operating costs could be significantly higher than we expect, and this could reduce our future profitability.
In
addition to general economic conditions, market fluctuations and international risks, significant increases in operating, development
and implementation costs could adversely affect us due to numerous factors, many of which are beyond our control.
A
cyber incident could result in information theft, data corruption, operational disruption and/or financial loss.
Businesses
have become increasingly dependent on digital technologies to conduct day-to-day operations. At the same time, cyber incidents,
including deliberate attacks or unintentional events, have increased. A cyber-attack could include gaining unauthorized access
to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption
or result in denial of service on websites. We depend on digital technology, including information systems and related infrastructure,
to process and record financial and operating data, and communicate with our employees and business partners. Our technologies,
systems, networks, and those of our business partners may become the target of cyber-attacks or information security breaches
that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information,
or other disruption of our business operations. Although to date we have not experienced any losses relating to cyber-attacks,
there is no assurance that we will not suffer such losses in the future. As cyber threats continue to evolve, we may be required
to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate
any information security vulnerabilities.
Risks
Related to Our Securities
The
price of our securities could be subject to volatility related or unrelated to our operations, which could result in substantial
losses for our stockholders.
Between
January 1, 2016 and December 31, 2017, the trading price of our common stock has ranged from a low of $1.33 to a high of $12.00,
and could be subject to wide fluctuations in the future in response to various factors, some of which are beyond our control.
The trading price of the warrants that we issued in our recent public offering could be subject to similar fluctuations as a result
of such factors. These factors include those discussed previously in this “Risk Factors” section and others, such
as:
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delays
or failures in the commercialization of our current or future products and services;
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quarterly
variations in our results of operations or those of our competitors;
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changes
in our earnings estimates or recommendations by securities analysts or adverse publicity about us or our products or services;
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announcements
by us or our competitors of new products and services, significant contracts, commercial relationships, acquisitions or capital
commitments;
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adverse
developments with respect to our intellectual property rights;
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commencement
of litigation involving us or our competitors;
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any
major changes in our board of directors or management;
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market
conditions in our industry; and
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general
economic conditions in the United States and abroad.
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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.
An
active trading market in our securities may not develop, and you may therefore have difficulty selling your securities at a price
that you determine is satisfactory.
Although
our common stock and the 2017 warrants are listed on The NASDAQ Capital Market, our common stock and warrants trade infrequently
and in low volumes. There is no assurance that such securities will trade in the public market at or above a price that you consider
acceptable. Furthermore, there is no assurance that an active trading market for any of our securities will develop or be sustained.
If an active market for our securities does not develop or is not maintained, it may be difficult for you to sell your securities
when you wish to sell them or at a price that you consider satisfactory. An inactive trading market may also impair our ability
to raise capital to continue to fund operations by selling securities and may impair our ability to acquire other companies or
technologies by using our securities as consideration.
There
is no assurance that we will satisfy the continued listing requirements of The NASDAQ Capital Market.
Even
though our common stock and 2017 warrants are listed on The NASDAQ Capital Market, we cannot assure you that we will be able to
satisfy the continued listing requirements of The NASDAQ Capital Market. For example, there is no assurance that our common stock
will continue to have a bid price of at least $1.00 per share, which is the minimum bid price under such continued listing requirements,
or that we will be able to satisfy other quantitative continued listing requirements such as the requirement for us to have stockholders’
equity of at least $2.5 million. If our securities are de-listed from The NASDAQ Capital Market, our stockholders could incur
material adverse consequences such as reduced liquidity for their securities and reduced market prices for their securities. Following
such de-listing, we could encounter increased difficulty in issuing additional securities at an attractive price, or at all, in
order to fund our operations.
You
may experience additional dilution as a result of future equity offerings.
In
order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible
into or exchangeable for our common stock. The price per share at which we sell additional shares of our common stock, or securities
convertible or exchangeable into common stock, in future transactions may be lower than the price per share that you paid for
our common stock.
We
have broad discretion in the use of the net proceeds of our recent public and private offerings and may not use them effectively.
We
intend to use our cash for the development of our products and service and to repay our outstanding promissory note (if and to
the extent the holder thereof demands repayment). We may also use a portion of the net proceeds from our February 2017 and April
2018 offerings to acquire other products or businesses, although we are not currently a party to an agreement regarding any such
acquisition. However, our management has broad discretion in the use of cash and will have the right to use our cash in ways that
differ substantially from our current plans. Management may spend our cash in ways that do not improve our results of operations
or enhance the value of our securities. The failure by management to apply funds effectively could result in financial losses
that could have a material and adverse effect on our business and cause the market price of our securities to decline.
We
do not intend to pay dividends on our common stock, and your ability to achieve a return on your investment will depend on appreciation
in the market price of our securities.
We
currently intend to invest our future earnings, if any, to fund our growth and not to pay any cash dividends on our common stock.
Since we do not intend to pay dividends, your ability to receive a return on your investment will depend on any future appreciation
in the market price of our securities. There is no assurance that our securities will appreciate in price.
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.
Our
principal stockholders and management own a significant percentage of our common stock and may be able to significantly affect
matters subject to stockholder approval.
Based
on shares outstanding as of December 31, 2017, our executive officers, directors, holders of 5% or more of our common stock and
their respective affiliates will beneficially own in the aggregate approximately 13.62% of our outstanding shares of common stock.
As a result of their stock ownership, these stockholders will have the ability to influence our management and policies, and are
able to materially affect the outcome of matters requiring stockholder approval such as elections of directors, amendments of
our organizational documents or approvals of any merger, sale of assets or other major corporate transaction. This may prevent
or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as
one of our stockholders.
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, 2017, we have 4,978,929 outstanding shares of common stock. Sales of a large number of the shares described
in the preceding sentence, 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
will 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. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs
and to make some activities more time consuming and costly. We also expect that these applicable rules and regulations may 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 more 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.
Provisions
in our articles of incorporation and bylaws could discourage a takeover that stockholders may consider favorable and may lead
to entrenchment of management.
Our
articles of incorporation and bylaws contain provisions that could delay or prevent changes in control or changes in our management
without the consent of our board of directors. These provisions include the following:
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a
classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership
of a majority of our board of directors;
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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;
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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;
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the
ability of our board of directors to alter our bylaws without obtaining stockholder approval;
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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;
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a
prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special
meeting of our stockholders;
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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
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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.
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These
provisions could inhibit or prevent possible transactions that some stockholders may consider attractive.
Our
board has recently issued a Series B Preferred Stock and could issue one or more additional series of preferred stock with the
effect of diluting existing stockholders and impairing their voting and other rights.
Our
articles of incorporation authorizes the issuance of up to 10,000,000 shares of “blank check” preferred stock with
designations, rights and preferences as may be determined from time to time by our board of directors. In our April 6, 2018 private
placement of equity securities, we issued 1,000 shares of Series B Preferred Stock, which are initially convertible into 1,000,000
shares of common stock. Our board is empowered, without stockholder approval, to issue one or more additional series of preferred
stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting
power of, our common stockholders. The issuance of such additional series of preferred stock could be used as a method of discouraging,
delaying or preventing a change in control. For example, it would be possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any attempt to effect a change in control of our Company.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
Not
applicable.
ITEM
2. PROPERTIES.
We
lease at 3900 Paseo del Sol, Santa Fe, New Mexico 87507, approximately (1) 1,306 square feet of office space at units C-15, C-16,
C-17, C-20 and C-23 for a total monthly rent expense of approximately $2,575 under the lease, which expires on July 31, 2018,
(2) 172 square feet of office space at unit C-14 for a total monthly rent expense of approximately $400 under the lease, which
expires on September 30, 2018, (3) 202 square feet of office space at unit C-13 for a total monthly rent expense of approximately
$450 under the lease, which expires on October 31, 2018, (4) 708 square feet of production space at unit E-42, for a total monthly
rent expense of approximately $775 under the lease, which expires on September 30, 2018, (5) 708 square feet of production space
at unit E-38, for a total monthly rent expense of approximately $800 under the lease, which expires on July 31, 2018, and (6)
512 square feet of warehouse / production space at unit E-40, for a total monthly rent expense of approximately $650 under the
lease, which expires on September 30, 2018.
We
believe that our facilities are suitable for our current needs.
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
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
MANAGEMENT
Executive
Officers
The
following table sets forth the name, age and position of each of our executive officers as of March 31, 2018:
Name
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Age
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Position
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John
Rice
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71
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Chairman
of the Board and Interim Chief Executive Officer
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Mark
J. Cola
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58
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Chief
Technology Officer and President
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Nannette
Toups
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61
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Chief
Financial Officer, Treasurer and Corporate Secretary
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Ronald
Fisher
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48
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Vice
President of Business Development
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John
Rice
was appointed as a director on February 15, 2017, as Chairman of our Board on April 19, 2017, and as our interim Chief
Executive Officer on July 24, 2017. Additional information regarding Mr. Rice is set forth below under “Board of Directors
and Corporate Governance.”
Mark
J. Cola
has served as our Chief Technology Officer since July 24, 2017, and as our President since September 2010. He served
as our Chief Executive Officer from September 2012 until July 24, 2017, and served as our Chief Operating Officer and as a director
from September 2010 until July 24, 2017. From June 2006 through April 2010, Mr. Cola served as Director of Operations for the
Beyond6 Sigma Division of TMC Corporation. In addition, Mr. Cola has over 34 years of experience in the aerospace and nuclear
industries, including with Rockwell International, SPECO Division of Kelsey-Hayes Co., Westinghouse in the Naval Nuclear Reactors
Program, Houston Lighting & Power, and within the NNSA Weapons Complex at Los Alamos National Laboratory at which he held
various technical and managerial positions including team leader and group leader of the welding and joining section as well as
an advanced manufacturing technology group, respectively. He has also worked as a Research Engineer at Edison Welding Institute
and for Thermadyne’s Stoody Division, a leading manufacturer of wear-resistant materials.
At
Beyond6 Sigma, Mr. Cola worked with a wide range of clients ranging from aerospace to defense systems. His expertise is in manufacturing
process development, friction welding, light alloys such as titanium and aluminum, mechanical, physical and welding metallurgy,
and nickel-based super alloys for harsh environments. Mr. Cola served as the Technical Co-Chairman for the inaugural National
Nuclear Security Administration Future Technologies Conference held in May 2004, and he is a principal reviewer for the American
Welding Society’s Welding Journal. Mr. Cola earned a B.S. in Metallurgical Engineering and an M.S. in Welding Engineering
from The Ohio State University.
Nannette
Toups
has served as our Chief Financial Officer, Treasurer, principal accounting officer, principal financial officer and
Corporate Secretary since September 14, 2017. Since December 2013, Ms. Toups has served as a contract CFO and provided accounting
services to a variety of clients in different industries ranging from non-profits to medical device development. From May 2008
to October 2013, Ms. Toups served in various positions at Qforma, Inc., a privately-held custom software development company,
including as Controller and most recently as Senior Vice-President of Finance and Administration. Prior to joining Qforma, she
served as an independent consultant from October 2005 to May 2008, providing a variety of financial, accounting and management
services to individuals, entrepreneurs and a non-profit organization. From May 2004 to September 2005, Ms. Toups served as the
Controller of KSL Joint Venture, where she was responsible for all accounting and financial reporting activities for the Site
Support Services Group at Los Alamos National Laboratory. From January 2002 to April 2003, she served as the Controller and Treasurer
of BiosGroup, Inc., a closely-held complexity science consulting company. Prior thereto, Ms. Toups served in various positions
at Louisiana Intrastate Gas Company, LLC, including Controller and Transition Projects Manager. Ms. Toups received her CPA certification
in 1984 and holds a bachelor’s degree in business administration and accounting from Louisiana State University, and a master’s
of liberal arts degree from St. John’s College.
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.
BOARD
OF DIRECTORS AND CORPORATE GOVERNANCE
The
following table sets forth the names, ages as of March 31, 2018, and certain other information regarding our directors:
Directors
|
|
Class
|
|
Age
|
|
Position
|
|
Director
Since
|
|
Current
Term Expires
|
John
Rice
|
|
I
|
|
71
|
|
Interim
Chief Executive Officer, Director and Chairman of the Board
|
|
2017
|
|
2018
|
Salvatore
Battinelli(1)(2)(3)
|
|
II
|
|
76
|
|
Director
|
|
2017
|
|
2019
|
Frank
J. Garofalo
|
|
II
|
|
67
|
|
Director
|
|
2017
|
|
2019
|
Dennis
Duitch(1)(2)(3)
|
|
III
|
|
73
|
|
Director
|
|
2017
|
|
2020
|
Kent
Summers(1)(2)(3)
|
|
III
|
|
59
|
|
Director
|
|
2018
|
|
2020
|
(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,
and was appointed as our interim Chief Executive Officer on July 24, 2017. 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.
Our
Board of Directors believes that Mr. Rice is qualified to serve as a member of the board because of his broad and deep experience
in improving business operations, engineering financial structures that support ongoing needs of operating companies, and building
investor and shareholder values.
Salvatore
Battinelli
was appointed to our Board of Directors on August 16, 2017. Mr. Battinelli is currently the President and Chief
Executive Officer of Bello e Preciso Co., a manufacturer and wholesaler of Italian-made fashion watches, and has served in those
roles since early 2017. Prior to joining Bello e Preciso Co., from 2011 to 2013, Mr. Battinelli served as Vice-President of Development
and Long Term Strategy of North American Management Corporation, a wealth management firm based in Boston, Massachusetts with
over $2 billion in assets under management. From 1987 to 2011, Mr. Battinelli served as Executive Vice-President and acting Chief
Executive Officer and Chief Operating Officer of Faneuil Hall Associates, Inc., a concierge boutique family office devoted to
five interrelated ultra-high net-worth families. Mr. Battinelli’s primary responsibilities while at Faneuil Hall Associates
included providing planning and investment advice, the management of approximately 30 asset portfolios and more than 65 individual
business entities; and assisting the families in their various business ventures worldwide while working closely with law, accounting
and banking functions. During his tenure at Faneuil Hall Associates, Mr. Battinelli served as an executive officer or director
for certain of the family owned entities and successfully managed several portfolio company IPOs, as well as serving as CEO and
COO for Designhouse International, a Scandinavian furniture company operating out of Atlanta, Georgia, which was previously listed
on NASDAQ in 1983.
From
1970 to 1974, Mr. Battinelli served as Audit Manager for Deloitte & Touche (formally Touche Ross), where he specialized in
management information systems. From 2002 to 2011, Mr. Battinelli also served as the Chairman of the Board of Directors of HealthLink
Europe, BV, a logistics and services company that serves the healthcare industry. Mr. Battinelli is a Certified Public Accountant
and received a BS in accounting and an MBA with an emphasis in international economics and accounting, both from Babson College.
Our
board of directors believes that Mr. Battinelli is qualified to serve as a member of the board on the basis of his deep understanding
of business acquisitions and sales, as well as his background and extensive company management and integration experience.
Frank
J. Garofalo
was appointed to our Board of Directors on January 10, 2017. For more than three decades, Mr. Garofalo has been
a management consultant and corporate finance advisor working on “special assignments” for chief executive officers
and boards of directors, primarily in technology driven markets, assisting companies ranging from $10 million to over $10 billion
in size. His career in professional services includes his serving as Vice President in the Investment Banking division of PaineWebber
(now UBS) and as Director and Senior Consultant in Arthur D. Little’s Technology consulting practice.
While
at Arthur D. Little, Mr. Garofalo was the lead manager on a number of major studies for Fortune 500 client organizations in product/market
forecasting, technology trends assessments, market research, strategic business planning, evaluations of diversification and acquisition
opportunities. He also assisted in the launch of CAD/CAM, CAE and Advance Manufacturing practice within the Technology group at
Arthur D. Little. While at PaineWebber Corporate Finance Group, his assignments included dozens of business development, corporate
development and corporate finance projects including private placements of equity financing, mergers, acquisition, divestitures
and establishing joint ventures / strategic alliances.
Mr.
Garofalo is an expert in strategic, competitive, and market analysis with an emphasis on business and corporate development and
the maximization of shareholder value. He has served on a number boards. He was a Director of J.M. Lafferty Associates, Inc. in
Chicago, a financial analytics and portfolio research firm, when he acted as advisor in the sale of the business to Corporate
Development Board. From 2000 until 2011, he was a Director of Dynagraf, Inc., one of the top Marketing Communications companies
in New England, where he acted as advisor in the sale of the business to Universal Millennium.
Mr.
Garofalo earned a Bachelor of Science degree in Electrical Engineering from the Massachusetts Institute of Technology, a Master
of Science degree in Computer Systems Engineering from the University of Michigan, and a Master of Business Administration from
Harvard University.
Our
Board of Directors believes that Mr. Garofalo is qualified to serve as a member of the board because of his extensive experience
in rendering a wide variety of management and financial advisory services.
Dennis
Duitch
was appointed to our Board of Directors on August 8, 2017. Mr. Duitch has served as Managing Director of Duitch Consulting
Group, a private consulting company, since 2003. Prior to that time, he practiced public accounting, business management, mediation
and consultancy nationally, with expertise in strategic and operations management, finance, accounting, strategic planning and
business operations for a wide spectrum of companies, including technology, manufacturing and distribution, marketing, real estate,
entertainment, and professional practices. He has served in executive officer roles and as a director of public and private companies,
not-for-profit organizations, including as Vice-Chairman for Accountants Global Network, and as a top-level advisor for public
companies, closely-held businesses, families and high-wealth individuals for over thirty years.
Mr.
Duitch began his career with the international CPA firm Grant Thornton in its Chicago, San Francisco and Beverly Hills offices
before founding Duitch & Franklin LLP, which evolved to become one of Southern California’s largest independent CPA/Business
Management/Consultancy practices, and which was acquired by a public company in 1998. He subsequently served as President for
a consumer products company with direct response marketing, retail, and fulfillment operations, until forming Duitch Consulting
Group in 2003 to serve clients in advisory, C-level, and board of director roles.
Mr.
Duitch is a Certified Family Business and Estate Advisor, and mediator for matters including partner/shareholder agreements and
disputes, business and marital property dissolution, and dysfunctional executive teams and boards of directors. He has lectured
extensively in management, financial and accounting areas for the California CPA Foundation, business and professional groups,
has instructed at several colleges and universities, and has authored technical articles in management and taxation for regional
and national publications.
Mr.
Duitch earned a B.B.A degree in Accounting from the University of Iowa and a Master of Business Administration in Finance from
Northwestern University.
Our
Board of Directors believes that Mr. Duitch is qualified to serve as a member of the board because of his extensive public accounting
experience, which will assist the Board and the Audit Committee in addressing the numerous accounting-related issues, regulations
and SEC reporting requirements to which we are subject, as well as his expertise in business management, finance and strategic
planning.
Kent
Summers
was appointed to our Board of Directors on January 18, 2018. Mr. Summers was also appointed to serve as a member of
the Company’s Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee.
Mr.
Summers currently divides his time among a number of independent activities which focus on early-stage technology company formation
and development strategies, and sales planning and execution needs for emerging- and mid-market technology companies located primarily
in the Boston metropolitan area, including: management consultant to private and family-owned businesses; volunteer Mentor and
Instructor with the Massachusetts Institute of Technology Venture Mentoring Services program; regular lectures on enterprise,
business-to-business sales to company founders and students enrolled at the Massachusetts Institute of Technology Sloan School
of Management, the Harvard MBA Program, the Wharton School at the University of Pennsylvania, and a number of domestic and international
entrepreneurship support organizations; and consultant to Fellows enrolled in the Harvard Advanced Leadership Initiative. Mr.
Summers has served in those roles at various times from 2003 to the present. From 2009 to the present, Mr. Summers has served
as the non-executive Chairman of CADNexus, Inc., and from 2017 to the present, director and Chairman of the Compensation Committee
with iQ3 Connect, Inc.
From
2005 to 2017, Mr. Summers served as Managing Partner at Practical Computer Applications, Inc., a Boston-based database consulting
and engineering services firm, where he was responsible for sales planning and execution activities. Prior to Practical Computer
Applications, from 2001 to 2005, Mr. Summers provided independent merger & acquisition advisory services to support the sale
of privately-owned companies. Over a prior 14-year period, Mr. Summers served in leadership roles at several software and internet
start-ups, including: Chairman and CEO of Collego Corporation (acquired by MRO Software), founder and CEO of MyHelpDesk, Inc.
(acquired by Support.com), founder of PCMovingVan.com (acquired by a PE firm), and Vice President of Marketing at Electronic Book
Technologies, Inc. (acquired by INSO Corporation, formerly listed on Nasdaq).
Prior
to the software industry, Mr. Summers served as Technology Analyst at Electronic Joint Venture Partners LLC and Associate Program
Trader on the Options Trading Desk at Bear Stearns & Co. In 1986, Mr. Summers received a BA in English from the University
of Houston.
Our
Board of Directors believes that Mr. Summers is qualified to serve as a member of our Board on the basis of his deep understanding
of early-stage business growth strategies, enterprise sales, business acquisitions, as well as his background and extensive company
management and leadership experience.
Director
Independence
Our
Board of Directors currently consists of five members. As a result of his appointment as interim Chief Executive Officer, Mr.
Rice is no longer considered an independent director, and Mr. Garofalo is no longer considered an independent director because
on August 8, 2017 we engaged Garofalo & Associates, LLC, a limited liability company owned and controlled by Mr. Garofalo,
to provide services to the Company as corporate development consultant and financial advisor. Our Board of Directors has determined
that our other directors, Salvatore Battinelli, Dennis Duitch and Kent Summers, constituting a majority of our directors, are
“independent” as that term is defined under Rule 5605(a)(2) of the NASDAQ marketplace rules. Pursuant to NASDAQ rules,
our board must consist of a majority of independent directors.
The
NASDAQ independence definition includes a series of objective tests, including that the director is not, and has not been for
at least three years, one of our employees and that neither the director nor any of his family members has engaged in various
types of business dealings with us. In addition, as required by NASDAQ rules, our Board of Directors has made a subjective determination
as to Messrs. Battinelli, Duitch and Summers, our independent directors, that no relationships exists, which, in the opinion of
our Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
In making these determinations, our Board of Directors reviewed and discussed information provided by the directors and us with
regard to each director’s business and personal activities and relationships as they may relate to us and our management. There
are no family relationships among any of our directors or executive officers.
Classified
Board of Directors
In
accordance with our amended and restated bylaws, our Board of Directors is divided into three classes with staggered, three-year
terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from
the time of election and qualification until the third annual meeting following election. Our directors are classified as follows:
|
●
|
the
Class I director is John Rice, with a term expiring at our 2018 annual meeting of stockholders;
|
|
|
|
|
●
|
the
Class II directors are Frank J. Garofalo and Salvatore Battinelli, with terms expiring at our 2019 annual meeting of stockholders;
and
|
|
|
|
|
●
|
the
Class III directors are Dennis Duitch and Kent Summers, with terms expiring at our 2020 annual meeting of stockholders.
|
Our
Board of Directors appointed John Rice as Chairman of the Board on April 19, 2017. Our amended and restated bylaws provide that
the authorized number of directors may be changed by resolution of the Board of Directors. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. The division of our Board of Directors into three classes with staggered three-year
terms may delay or prevent a change of our management or a change in control of our company.
Leadership
Structure of the Board
Our
directors may be removed with or without cause at any meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of our outstanding voting stock entitled to vote in the election of directors. Our amended and restated bylaws provide
our Board of Directors with flexibility in its discretion to combine or separate the positions of Chairman of the Board and Chief
Executive Officer, if we elect to appoint a Chairman of the Board.
On
April 19, 2017, our Board of Directors appointed Mr. Rice as Chairman of the Board. The Chairman of the Board presides at all
meetings of our Board of Directors (but not at its executive sessions) and exercises and performs such other powers and duties
as may be assigned to him from time to time by the Board or prescribed by our amended and restated bylaws. The Chairman of the
Board is appointed by our Board of Directors on an annual basis.
Our
Board of Directors has no established policy on whether it should be led by a Chairman who is also the Chief Executive Officer,
but periodically considers whether combining, or separating, the role of Chairman and Chief Executive Officer is appropriate.
At this time, our Board is committed to the combined role given the circumstances of our company, including Mr. Rice’s knowledge
of our company’s strategy. Our Board believes that having a Chairman who also serves as the Chief Executive Officer allows timely
communication with our board on company strategy and critical business issues, facilitates bringing key strategic and business
issues and risks to the Board’s attention, avoids ambiguity in leadership within the Company, provides a unified leadership voice
externally and clarifies accountability for Company business decisions and initiatives. However, our Board of Directors continually
evaluates our leadership structure and could, in the future, decide to 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, 2017, the Board of Directors held six meetings, and each director attended at least 75% of
the aggregate of (i) the total number of meetings of our Board of Directors held during the period for which he has been a director
and (ii) the total number of meetings held by all committees of our Board of Directors on which he served during the periods that
he served.
Although
we do not have a formal policy regarding attendance by members of our Board of Directors at annual meetings of stockholders, we
encourage, but do not require, our directors to attend. Each of our then current directors attended our 2017 Annual Meeting of
Stockholders, except for one director who was unable to attend.
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;
|
|
|
|
|
●
|
establishing
procedures for the receipt, retention and treatment of accounting related complaints and concerns;
|
|
|
|
|
●
|
meeting
independently with our registered public accounting firm and management;
|
|
|
|
|
●
|
reviewing
and approving or ratifying any related person transactions; and
|
|
|
|
|
●
|
preparing
the Audit Committee report required by SEC rules.
|
The
members of our Audit Committee are Messrs. Duitch, Battinelli and Summers, and Mr. Duitch serves as the chairperson of the committee.
Our Board of Directors has determined that each of Messrs. Duitch, Battinelli and Summers is an independent director under NASDAQ
rules and under SEC Rule 10A-3. All members of our Audit Committee meet the requirements for financial literacy under the applicable
rules and regulations of the SEC and NASDAQ. Our Board of Directors has determined that each member of our Audit Committee is
an “audit committee financial expert” as defined by applicable SEC rules and has the requisite financial sophistication
as defined under the applicable NASDAQ rules and regulations. The Audit Committee met four times during 2017.
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).
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.
Role
of Board in Risk Oversight Process
Risk
assessment and oversight are an integral part of our governance and management processes. Our Board of Directors encourages management
to promote a culture that incorporates risk management into our corporate strategy and day-to-day business operations. Management
discusses strategic and operational risks at regular management meetings and conducts specific strategic planning and review sessions
during the year that include a focused discussion and analysis of the risks we face. Throughout the year, senior management reviews
these risks with the Board of Directors at regular board meetings as part of management presentations that focus on particular
business functions, operations or strategies, and presents the steps taken by management to mitigate or eliminate such risks.
Our Board of Directors does not have a standing risk management committee, but rather administers this oversight function directly
through the Board of Directors as a whole, as well as through standing committees of the Board of Directors that will address
risks inherent in their respective areas of oversight. In particular, our Audit Committee is responsible for overseeing our major
financial risk exposures and the steps our management has taken to monitor and control these exposures. The Audit Committee also
monitors compliance with legal and regulatory requirements and considers and approves or disapproves any related-person transactions.
Our Nominating and Governance Committee monitors the effectiveness of our corporate governance guidelines that we may adopt or
amend from time to time. Our Compensation Committee assesses and monitors whether any of our compensation policies and programs
has the potential to encourage excessive risk-taking by our management.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers and directors, and persons who own
more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission (“SEC”). Executive officers, directors and greater than 10% stockholders
are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
The
Company believes that during its most recent fiscal year ended December 31, 2017, its executive officers, directors and greater
than 10% stockholders complied with the filing requirements under Section 16(a), except that (i) each of Mark Cola, Ronald Fisher
and Frank Garofalo filed a Form 3 in connection with his appointment as an officer and director, an officer, and as a director,
respectively, one day after Section 16(a) applied to the Company on February 14, 2017, and (ii) Nannette Toups filed a Form 4
one day late relating to her acquisition of a stock option as compensation in her capacity as an officer.
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, (ii) for each executive officer, other
than our Chief Executive Officer, who was employed with the Company on December 31, 2017 and who earned over $100,000 during the
fiscal year ended December 31, 2017, and (iii) for any officer who earned over $100,000 during the December 31, 2017 fiscal year
but was no longer employed with the Company on December 31, 2017 (the foregoing executives are herein collectively referred to
as the “named executive officers”).
Summary
Compensation Table
Name
and Principal Position
|
|
Year
|
|
|
Salary
($)
(1)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
All
Other Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Rice - Chief Executive Officer (Principal Executive Officer) and
Director
|
|
|
2017
|
|
|
|
40,500
|
|
|
|
—
|
|
|
|
17,001
|
(4)
|
|
|
—
|
|
|
|
10,925
|
(3)
|
|
|
68,426
|
|
(Chairman
of the Board)
(2)
|
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mark
J. Cola - President
|
|
|
2017
|
|
|
|
204,863
|
|
|
|
17,644
|
(5)
|
|
|
—
|
|
|
|
445,352
|
(6)
|
|
|
—
|
|
|
|
667,859
|
|
Chief
Technology Officer
|
|
|
2016
|
|
|
|
180,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
180,000
|
|
Ronald
Fisher - Vice President
|
|
|
2017
|
|
|
|
180,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
180,000
|
|
of Business
Development
|
|
|
2016
|
|
|
|
180,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,497
|
(7)
|
|
|
—
|
|
|
|
205,497
|
|
Amanda
Cola - Former Vice
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
of Finance and
|
|
|
2017
|
|
|
|
77,604
|
|
|
|
—
|
|
|
|
—
|
|
|
|
63,686
|
(8)
|
|
|
29,229
|
(9)
|
|
|
170,519
|
|
Business
Operations
(8)
|
|
|
2016
|
|
|
|
90,000
|
|
|
|
10,000
|
(10)
|
|
|
—
|
|
|
|
85,824
|
(11)
|
|
|
—
|
|
|
|
185,824
|
|
Murray
Williams – Former Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Officer and
|
|
|
2017
|
|
|
|
143,450
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
143,450
|
|
Treasurer
|
|
|
2016
|
|
|
|
57,900
|
|
|
|
—
|
|
|
|
91,760
|
(12)
|
|
|
148,012
|
(13)
|
|
|
—
|
|
|
|
297,672
|
|
(1)
|
Actual
amounts paid or accrued.
|
(2)
|
John
Rice was appointed as our interim Chief Executive Officer on July 24, 2017. Prior to such appointment, Mark Cola served as
our Chief Executive Officer.
|
(3)
|
Of
the amount shown, a total of $
10,925
was paid to Mr. Rice prior to his appointment as
interim Chief Executive Officer in connection with the additional services as a director that Mr. Rice provided the Company
with respect to the Company’s operations.
|
(4
)
|
On
February 15, 2017, in connection with his appointment to our Board of Directors, we granted Mr. Rice 5,231 shares of common
stock of the Company, under the 2013 Equity Incentive Plan, with such shares to vest in four equal, successive quarterly installments.
|
(5)
|
Under
Mr. Cola’s employment agreement (“Mr. Cola’s Employment Agreement”), effective
as of July 24, 2017, during each 12-month period during the term of Mr. Cola’s employment,
Mr. Cola is entitled to a nondiscretionary annual founder’s bonus in the total amount
of $40,000, payable and earned in 24 equal bi-monthly installments.
|
(6)
|
On
February 21, 2017, an option to purchase up to 123,750 shares of the Company’s common
stock at an exercise price per share equal to $3.48 (the “Original Option”),
was granted to Mr. Cola under his then employment agreement. The option had an aggregate
grant date fair value of $445,352, calculated in accordance with FASB ASC Topic 718.
The amount recognized for this award was calculated using the Black Scholes option-pricing
model. Under Mr. Cola’s Employment Agreement, the Original Option was amended such that
(a) any unvested portion of the Original Option will immediately and automatically vest
if Mr. Cola’s employment is terminated as a result of a Termination Event (as defined
in Mr. Cola’s Employment Agreement), and (b) upon the occurrence of a Corporate Transaction
(as defined in the 2013 Equity Incentive Plan of the Company), the Original Option, if
outstanding as of the date of such applicable Corporate Transaction, will remain outstanding
and exercisable in accordance with its terms, except as provided in Mr. Cola’s Employment
Agreement.
|
(7)
|
In
2016, an option to purchase up to 5,000 shares of common stock of the Company, subject to vesting restrictions, at an exercise
price equal to $5.28 per share was granted to Mr. Fisher under his employment with the Company. The option had an aggregate
grant date fair value of 25,497, calculated in accordance with FASB ASC Topic 718. The amount recognized for this award was
calculated using the Black Scholes option-pricing model.
|
(8)
|
An
option to purchase up to 20,000 shares of common stock of the Company, subject to vesting
restrictions, at an exercise price of $3.27 per share was granted to Ms. Cola on April
19, 2017. The option had an aggregate grant date fair value of $63,686, calculated in
accordance with FASB ASC Topic 718. The amount recognized for this award was calculated
using the Black Scholes option-pricing model.
|
(9)
|
Ms.
Cola separated from our Company on October 2, 2017. The amount shown was paid to Ms.
Cola as severance in connection with her separation from the Company.
|
(10)
|
On
July 14, 2016, Ms. Cola was awarded a bonus in the amount of $10,000 in recognition of
Ms. Cola’s services during 2016 and the various milestones that she helped the
Company achieve, including in relation to a company-wide DCAA government audit, along
with implementing state-funded programs which in turn provides cash payments to the Company.
|
(11)
|
An
option to purchase up to 15,000 shares of common stock of the Company, subject to vesting
restrictions, at an exercise price of $5.92 per share was granted to Ms. Cola on July
22, 2016. The option had an aggregate grant date fair value of $85,824, calculated in
accordance with FASB ASC Topic 718. The amount recognized for this award was calculated
using the Black Scholes option-pricing model.
|
(12)
|
Under
Mr. Williams employment agreement, he was granted effective as of July 22, 2016, under our 2013 Plan, 15,500 shares of restricted
common stock of the Company, which shares vested on the one-year anniversary of the effective date of Mr. Williams’
employment (the “First Anniversary Date”), provided, however, that vesting as to 50% of the shares accelerated
effective as of the closing of our underwritten public offering (i.e., February 21, 2017).
|
(13)
|
Effective
July 22, 2016, an option to purchase up to 31,500 shares of common stock of the Company, subject to vesting restrictions,
at an exercise price equal to $5.92 per share, was granted to Mr. Williams under his employment agreement with the Company,
with 10,500 shares vesting and becoming exercisable on the First Anniversary Date, and the balance of the shares underlying
the option are to vest and become exercisable in eight equal installments of 2,625 shares each on a quarterly basis following
the First Anniversary Date. The option had an aggregate grant date fair value of $148,012, calculated in accordance
with FASB ASC Topic 718. The amount recognized for this award was calculated using the Black Scholes option-pricing model.
|
Executive
Officer Employment Agreements
John
Rice
On
August 8, 2017, we entered into an “at will” unwritten employment arrangement with Mr. Rice, effective as of August
1, 2017, pursuant to which Mr. Rice serves as our interim Chief Executive Officer and interim principal executive officer. Under
his employment arrangement, Mr. Rice is entitled to receive a monthly salary of $9,000, and he is eligible to receive medical
and dental benefits, life insurance, and long term and short term disability coverage. Further, Mr. Rice is eligible under his
employment arrangement to participate in the Company’s 2013 Equity Incentive Plan, with equity compensation to Mr. Rice
to be determined by our Compensation Committee at a later date. Effective as of Mr. Rice’s appointment as interim Chief Executive
Officer, Mr. Rice is no longer entitled to receive compensation for his service as a director of the Company during his service
as our interim Chief Executive Officer.
Mark
J. Cola
Prior
to February 21, 2017, Mr. Cola, our President and Chief Technology Officer, was party to an “at will” unwritten employment
arrangement with the Company. Under Mr. Cola’s employment arrangement, Mr. Cola’s salary was $15,000 per month, and
he was eligible to receive medical and dental benefits, life insurance, and long term and short term disability coverage. Further,
Mr. Cola was eligible under his employment arrangement to participate in the Company’s 2011 Equity Incentive Plan and 2013
Equity Incentive Plan.
Effective
as of February 21, 2017, the Company and Mr. Cola entered into an employment agreement (the “Original Agreement”),
pursuant to which, among other things reported in our previous filings with the Securities and Exchange Commission, Mr. Cola agreed
to serve as the Company’s President, Chief Executive Officer and Chief Operating Officer, and was entitled to receive an
annual base salary of $220,000.
Effective
as of July 24, 2017 (the “Effective Date”), the Company and Mr. Cola entered into a new employment agreement (the “Employment
Agreement”) for a two-year term (unless earlier terminated as provided in the Employment Agreement), pursuant to which Mr.
Cola has agreed to serve as the Company’s Chief Technology Officer and continue to serve as the Company’s President (with
the title of Co-Founder, President and Chief Technology Officer).
Effective
as of immediately prior to the Effective Date, the Original Agreement was terminated by the parties, and Mr. Cola resigned as
Chief Executive Officer, Chief Operating Officer and as a director of the Company. The parties agreed that the Company has no
obligation to Mr. Cola to grant stock options to him pursuant to the Original Agreement, and that (i) the Nonqualified Stock Option
Agreement, dated as of February 21, 2017, between the Company and Mr. Cola evidencing the grant to Mr. Cola under the Original
Agreement of a stock option to purchase up to 123,750 shares of the Company’s common stock at an exercise price per share equal
to $3.48 (the “Original Option”) was amended under the Employment Agreement such that (a) any unvested portion of the
Original Option will immediately and automatically vest if Mr. Cola’s employment is terminated as a result of a Termination Event
(as defined below), (b) the definition of “Termination For Cause” under the Original Option was replaced with the definition
of “Cause” under the Employment Agreement, and (c) upon the occurrence of a Corporate Transaction (as defined in the
2013 Equity Incentive Plan of the Company), the Original Option, if outstanding as of the date of such applicable Corporate Transaction,
will remain outstanding and exercisable in accordance with its terms, except as provided in the Employment Agreement, and (ii)
the Original Option will otherwise remain outstanding and exercisable in accordance with its terms.
Under
the Employment Agreement, Mr. Cola is (i) entitled to receive (a) an annual base salary of $180,000 (the “Base Salary”),
which will be subject to increase in the discretion of our Board of Directors or Compensation Committee based on its annual assessment
of Mr. Cola’s performance and other factors, and (b) during each 12-month period during the term of Mr. Cola’s employment,
a nondiscretionary annual founder’s bonus (the “Annual Bonus”) in the total amount of $40,000, payable and earned in
24 equal bi-monthly installments, and (ii) eligible to receive one or more additional bonuses (“Discretionary Bonuses”)
in recognition of extraordinary accomplishments, provided that the decision to provide any Discretionary Bonuses and the amount
and terms of any Discretionary Bonuses will be in the sole and absolute discretion of the Board of Directors.
Pursuant
to the Employment Agreement, on February 21, 2018, the Company granted Mr. Cola under the Company’s 2013 equity incentive plan
(i) a ten-year non-qualified stock option to purchase 61,750 shares of the Company’s common stock (“Option A”),
and (ii) a ten-year non-qualified stock option to purchase 61,750 shares of the Company’s common stock (“Option B”,
and together with Option A, the “Options”), with the Options each (a) to have an exercise price equal to the closing
price of the Company’s common stock on the date of grant (i.e., February 21, 2018), (b) to vest and become exercisable in
seventeen equal (as closely as possible) monthly installments on the 15th day of each month commencing on March 15, 2018, subject
in each case to Mr. Cola’s continuing employment, and (c) to be on such other terms set forth in the Company’s standard form of
non-qualified stock option agreement (except that the definition of “Termination For Cause” under such agreement was
replaced with the definition of “Cause” under the Employment Agreement). Additionally, (x) upon the occurrence of a
Corporate Transaction, all stock options of the Company held by Mr. Cola as of the date of such applicable Corporate Transaction
will remain outstanding and exercisable in accordance with their terms (except as provided in the Employment Agreement and as
set forth in (y) below), and (y) upon the occurrence of a Change of Control (as defined in the Employment Agreement), his unvested
stock options will fully vest.
Under
the Employment Agreement, Mr. Cola will be entitled to participate in any employee benefit and welfare plans and programs of the
Company in which any C-level senior officer of the Company or its subsidiaries are eligible to participate. The Employment Agreement
provides that in the event (i) the Company’s terminates Mr. Cola’s employment without “Cause” (as defined),
(ii) Mr. Cola resigns from the Company for “Good Reason” (as defined), (iii) Mr. Cola resigns from the Company after
the nine-month anniversary of the effective date of the Employment Agreement (the “Nine Month Period”) for any reason
or no reason, or (iv) Mr. Cola dies or becomes disabled during the Nine Month Period in the performance of his duties for the
Company (each of (i)-(iv), a “Termination Event”), subject to entering into a general release of all claims, (x) he
will be entitled to continue to receive the Base Salary, Annual Bonus and benefits which he was receiving as of the time of termination
for the greater of the remaining term of employment or a period of twelve months, with such compensation to be payable in equal
installments in accordance with the Company’s normal payroll practices, but no less frequently than bi-monthly, and (y) any unvested
portion of Option A and the Original Option will fully vest.
Ronald
Fisher
We
have entered into an “at will” employment agreement, effective as of August 10, 2015, with Mr. Fisher under which
he was engaged to serve as our Vice President of Business Development. Mr. Fisher is entitled to receive an annual base salary
of $180,000. Pursuant to the employment agreement, Mr. Fisher also was granted, as a signing bonus, a stock option to purchase
up to 23,750 shares of common stock of the Company, at an exercise price equal to $11.80 per share, which was the closing market
price of the Company’s common stock on August 10, 2015 (i.e., the date of grant), under the 2013 Equity Incentive Plan.
Such option vested and became exercisable as to 1,375 shares on the first anniversary of the grant date, and as to 3,375 shares
on the second anniversary of the grant date, and will vest and become exercisable as to (i) 6,375 shares on the third anniversary
of the grant date, and (iii) 12,625 shares on the fourth anniversary of the grant date, provided, in each case, that Mr. Fisher
remains an employee of the Company through such vesting date. The option has a ten
-
year term and is on such other terms
set forth in the Company’s standard form of non-qualified stock option agreement. Additionally, the Company granted Mr.
Fisher under the 2013 Equity Incentive Plan, effective as of August 11, 2016, a stock option to purchase up to 5,000 shares of
common stock of the Company. Such option has an exercise price equal to the closing price of our common stock on the date of grant,
and vests and becomes exercisable as to (i) 300 shares on August 11, 2017, (ii) 700 shares on August 11, 2018, (iii) 1,350 shares
on August 11, 2019, and (iv) 2,650 shares on August 11, 2020, provided Mr. Fisher is in the employ of the Company on August 11,
2017, 2018, 2019 and 2020. Further, Mr. Fisher is eligible to participate in the Company’s 2011 Equity Incentive Plan and
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. No such bonuses were earned as of December 31, 2017. On February
21, 2018, the Company and Mr. Fisher entered into Amendment No. 2 to Mr. Fisher’s employment agreement, pursuant to which
the foregoing February 11, 2018 date was extended to December 31, 2018.
Former
Executive Officer’s Employment Agreements
Murray
Williams
We
entered into an employment letter agreement with Murray Williams, effective July 18, 2016, pursuant to which Mr. Williams served
as our Chief Financial Officer, Treasurer, principal accounting officer and principal financial officer on an “at-will”
basis. Under the employment letter agreement, Mr. Williams was entitled to (i) be paid at the rate of $200 per hour, (ii) a grant,
effective as of July 22, 2016, under our 2013 Plan of 15,500 shares of restricted common stock of the Company, which shares vested
on the one-year anniversary of the effective date of Mr. Williams’ employment (the “First Anniversary Date”),
provided, however, that vesting as to 50% of the shares accelerated effective as of the closing of our underwritten public offering
(i.e., February 21, 2017), and (iii) a grant, effective as of July 22, 2016, under our 2013 Plan of a non-qualified stock option
to purchase up to 31,500 shares of our common stock. The option has an exercise price equal to the closing price of our common
stock on the date of grant, will vest and become exercisable as follows: 10,500 shares vested and became exercisable on the First
Anniversary Date, and the balance of the shares underlying the option will vest and become exercisable in eight equal installments
of 2,625 shares each on a quarterly basis following the First Anniversary Date, and is on the other terms set forth in our standard
form of nonqualified stock option agreement. Mr. Williams agreed to resign from his positions with the Company effective September
28, 2017. Mr. Williams and the Company entered into a consulting agreement under which Mr. Williams will continue to provide services
to the Company on an as needed basis.
Amanda
Cola
Effective
as of July 21, 2014, we entered into an “at will” employment agreement with Ms. Cola, under which Ms. Cola was engaged
to serve as our Business Operations Manager, which agreement was amended effective July 21, 2015 to convert Ms. Cola’s position
to a full-time position. Under the employment agreement, Ms. Cola was entitled to receive an annual base salary of $90,000, and
the Company issued her as of the effective date of her employment agreement 10,000 shares of common stock under the Company’s
2013 Equity Incentive Plan. Of these shares, 2,500 vested on the date of grant, 2,500 shares vested on the first annual anniversary
of Ms. Cola’s employment agreement, 2,500 shares vested on the second annual anniversary of Ms. Cola’s employment
agreement, and the balance of the shares vested on the third annual anniversary of the employment agreement. On September 11,
2015, Ms. Cola’s title was changed to Vice President of Finance and Business Operations of the Company. Effective as of
July 22, 2016, the Company granted Ms. Cola, under the Company’s 2013 Equity Incentive Plan, a non-qualified stock option
to purchase up to 15,000 shares of our common stock. The option has an exercise price equal to the closing price of our common
stock on the date of grant, and will vest and become exercisable in four annual installments over four years. Effective as of
April 19, 2017, Mrs. Cola’s salary was increased to $115,000 per annum and she was granted a non-qualified stock option
to purchase up to 20,000 shares of our common stock at an exercise price equal to $3.27 per share, which was the closing market
price of our common stock on April 19, 2017 (i.e., the date of grant), which is subject to vesting. Effective October 2, 2017,
we entered into a transition and separation agreement (the “Separation Agreement”) with Ms. Cola, pursuant to which
we and Ms. Cola agreed that she would voluntarily resign as our Vice President of Finance and Business Operations based on an
internal organizational change. Under the Separation Agreement, we agreed to pay Ms. Cola any and all accrued and unpaid salary,
together with all accrued and unpaid vacation pay and other paid time off, and her then current base monthly salary for a period
of six months following the effective date of the Separation Agreement. Under the Separation Agreement, Ms. Cola’s July 22, 2016
stock option
to
purchase
up to
15,000
shares
of the
Company’s
common
stock and her April 19, 2017 stock option to purchase up to 20,000 shares of the Company’s common stock were
amended
to provide that the shares underlying such options, once exercisable, will remain exercisable as to such shares for the term of
the options, unless the options are terminated pursuant to a Corporate Transaction (as defined in our 2013 Equity Incentive Plan).
Outstanding
Equity Awards at 2017 Fiscal Year-End
The
following table sets forth outstanding equity awards issued under our 2013 Equity Incentive Plan as of December 31, 2017 that
are held by our named executive officers.
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number
of securities underlying unexercised options (#) exercisable
|
|
|
Number
of securities underlying unexercised options (#) unexercisable
|
|
|
Option
exercise price ($)
|
|
|
Option
expiration date
|
|
|
Number
of shares of stock that have not vested (#)
|
|
|
Market
value of shares of stock that have not vested ($)
|
|
|
Equity
incentive plan awards: Number of unearned shares that have not vested (#)
|
|
|
Equity
incentive plan awards: Market value of unearned shares that have not vested ($)
|
|
John
Rice(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,307
|
|
|
|
2,810
|
|
Mark
J. Cola(2)
|
|
|
61,875
|
|
|
|
61,875
|
|
|
|
3.48
|
|
|
|
2/20/27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald Fisher(3)
|
|
|
4,750
|
|
|
|
19,000
|
|
|
|
11.80
|
|
|
|
8/10/25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
4,700
|
|
|
|
10.56
|
|
|
|
8/22/26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amanda Cola(4)
|
|
|
750
|
|
|
|
14,250
|
|
|
|
5.92
|
|
|
|
8/11/26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
2.83
|
|
|
|
4/19/27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Murray Williams(5)
|
|
|
13,125
|
|
|
|
18,375
|
|
|
|
5.92
|
|
|
|
7/22/21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
On February 15, 2017, in connection with his appointment to our Board of Directors, the Company granted Mr. Rice 5,231 shares
of common stock, under the Company’s 2013 Equity Incentive Plan, with such shares to vest in four equal, successive quarterly
installments.
(2)
Effective as of February 21, 2017, the Company granted Mr. Cola under his employment agreement a stock option to purchase up to
123,750 shares of our common stock under the Company’s 2013 Equity Incentive Plan, vesting in equal quarterly installments
over an 18-month period.
(3)
In August 2015, in conjunction with the hiring of Ronald Fisher, the Company’s Vice President of Business Development, the
Company granted to Mr. Fisher a stock option (the “Option”) to purchase up to 23,750 shares of common stock of the
Company, at an exercise price equal to $11.80 per share, which was the closing market price of the Company’s common stock
on August 10, 2015 (i.e., the date of grant), under the 2013 Plan. The Option vested and became exercisable as to 1,375 shares
on the first anniversary of the grant date and as to 3,375 shares on the second anniversary of the grant date, and will vest and
become exercisable as to (i) 6,375 shares on the third anniversary of the grant date, and (ii) 12,625 shares on the fourth anniversary
of the grant date, provided, in each case, that Mr. Fisher remains an employee of the Company through such vesting date. The Option
has a ten-year term and is on such other terms set forth in the Company’s standard form of non-qualified stock option agreement.
The Company granted Mr. Fisher under the 2013 Equity Incentive Plan, effective as of August 11, 2016, a stock option to purchase
up to 5,000 shares of common stock of the Company. Such option has an exercise price equal to the closing price of our common
stock on the date of grant, and vested and became exercisable as to 300 shares on August 11, 2017, and vests and becomes exercisable
as to (i) 700 shares on August 11, 2018, (ii) 1,350 shares on August 11, 2019, and (iii) 2,650 shares on August 11, 2020, provided
Mr. Fisher is in the employ of the Company on August 11, 2017, 2018, 2019 and 2020.
(4)
On July 21, 2014 the Company issued to Ms. Cola, as of the effective date of her employment agreement, 10,000 shares of common
stock under the Company’s 2013 Equity Incentive Plan. Of these shares, 2,500 vested on the date of grant, and 2,500 shares
vested on each of the three successive anniversary dates of the employment agreement. Effective as of July 22, 2016, the Company
granted Ms. Cola, under the Company’s 2013 Equity Incentive Plan, a non-qualified stock option to purchase up to 15,000
shares of our common stock. The option has an exercise price equal to the closing price of our common stock on the date of grant,
and will vest and become exercisable in four annual installments over four years On April 19, 2017 Ms. Cola was granted a non-qualified
stock option to purchase up to 20,000 shares of our common stock at an exercise price equal to $3.27 per share, which was the
closing market price of our common stock on April 19, 2017 (i.e., the date of grant), which is subject to vesting. Effective October
2, 2017, we entered into a transition and separation agreement (the “Separation Agreement”) with Ms. Cola. Under the
Separation Agreement, Ms. Cola’s July 22, 2016 stock option to purchase up to 15,000 shares of the Company’s common stock and
her April 19, 2017 stock option to purchase up to 20,000 shares of the Company’s common stock were amended to provide that the
shares underlying such options, once exercisable, will remain exercisable as to such shares for the term of the options, unless
the options are terminated pursuant to a Corporate Transaction (as defined in our 2013 Equity Incentive Plan).
(5)
Effective as of July 22, 2016, Mr. Williams received, under our 2013 Plan, a grant of 15,500 shares of restricted common stock
of the Company, which shares vested on the one-year anniversary of the effective date of Mr. Williams’ employment (the “First
Anniversary Date”), provided, however, that vesting as to 50% of the shares accelerated effective as of the closing of our
underwritten public offering (i.e., February 21, 2017), and a grant of a non-qualified five year stock option to purchase up to
31,500 shares of our common stock. The option has an exercise price equal to the closing price of our common stock on the date
of grant, will vest and become exercisable as follows: 10,500 shares vested and became exercisable on the First Anniversary Date,
and the balance of the shares underlying the option will vest and become exercisable in eight equal installments of 2,625 shares
each on a quarterly basis following the First Anniversary Date, and is on the other terms set forth in our standard form of nonqualified
stock option agreement. Mr. Williams agreed to resign from his positions with the Company effective September 28, 2017. Mr. Williams
and the Company entered into a consulting agreement under which Mr. Williams will continue to provide services to the Company
on an as needed basis.
Equity
Awards
We
offer stock options and stock awards to certain of our employees, including our executive officers, as the long-term incentive
component of our compensation program. We generally grant equity awards to new hires upon their commencing employment with us.
Our stock options allow employees to purchase shares of our common stock at a price per share equal to the fair market value of
our common stock on the date of grant and may or may not be intended to qualify as “incentive stock options” for U.S.
federal income tax purposes. We sometimes also offer stock options and stock awards to our consultants in lieu of cash. Our stock
options allow consultants to purchase shares of our common stock at a price per share equal to the fair market value of our common
stock on the date of grant and are not intended to qualify as “incentive stock options” for U.S. federal income tax
purposes. Stock options and stock awards granted to our executive officers may be subject to accelerated vesting in certain circumstances.
Retirement
Plans
We
maintain a qualified 401(k) plan, in which all eligible employees may participate. We have elected to match 100% of each participant’s
contribution up to 3% of salary, and 50% of the next 2% of salary contributed. We may also elect, on an annual basis, to make
a discretionary contribution to the plan, but have not done so to date. Our matches and elective contributions vest to participant
accounts as follows: 20% after two years of service, and 20% per year thereafter until the participant reaches 6 years of service,
at which time, employer contributions vest 100%. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings
on those contributions are not taxable to the employees until distributed from the 401(k) plan.
No
Tax Gross-Ups
We
do not make gross-up payments to cover our executive officers’ personal income taxes that may pertain to any of the compensation
paid or provided by our company.
2011
Equity Incentive Plan
On
March 9, 2011, our Board of Directors approved the Company’s 2011 Equity Incentive Plan, which was approved on March 31,
2011 by holders of at least a majority of the issued and outstanding shares of common stock of the Company. As of December 31,
2016, an aggregate of 750 shares of our common stock were subject to the 2011 Equity Incentive Plan. The terms and conditions
of the 2011 Equity Incentive Plan are substantially similar to the terms and conditions of our 2013 Equity Incentive Plan (the
“2013 Plan”).
2013
Equity Incentive Plan
Purpose
Our
Board of Directors adopted the 2013 Plan to (1) encourage selected employees, officers, directors, consultants and advisers to
improve our operations and increase our profitability, (2) encourage selected employees, officers, directors, consultants and
advisers to accept or continue employment or association with us, and (3) increase the interest of selected employees, officers,
directors, consultants and advisers in our welfare through participation in the growth in value of our common stock. All of our
12 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 750,000 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.
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.
Purchase
Price Payment
Unless
otherwise determined by the Administrator, the purchase price of Common Stock acquired under the 2013 Plan is payable by cash
or check at the time of an Option exercise or acquisition of a Stock Award. The Company does not charge participants any fees
or commissions in connection with their acquisition of Common Stock under the 2013 Plan. The Administrator also has discretion
to accept the following types of payment from participants:
|
●
|
A
secured or unsecured promissory note, provided that this method of payment is not available to a participant who is a director
or an executive officer;
|
|
|
|
|
●
|
Shares
of our Common Stock already owned by the Option or Stock Award holder as long as the surrendered shares have a fair market
value that is equal to the acquired stock and have been owned by the participant for at least six months;
|
|
|
|
|
●
|
The
surrender of shares of Common Stock then issuable upon exercise of an Option; and
|
|
|
|
|
●
|
A
“cashless” option exercise in accordance with applicable regulations of the SEC and the Federal Reserve Board.
|
Withholding
Taxes
At
the time of his or her exercise of an Option or Stock Appreciation Right, an employee is responsible for paying all applicable
federal and state withholding taxes. A holder of Stock Awards is responsible for paying all applicable federal and state withholding
taxes once the shares covered by the award cease to be forfeitable or at any other time required by applicable law.
Securities
Law Compliance
Shares
of Common Stock will not be issued pursuant to the exercise of an Option or the receipt of a Stock Award unless the Administrator
determines that the exercise of the Option or receipt of the Stock Award and the issuance and delivery of such shares will comply
with all relevant provisions of law, including, without limitation, the Securities Act of 1933 (the “Securities Act”),
applicable state and foreign securities laws and the requirements of any stock exchange on which our Common Stock is traded.
Effects
of Certain Corporate Transactions
Except
as otherwise determined by the Administrator, in the event of a “corporate transaction,” all previously unexercised
Options and Stock Appreciation Rights will terminate immediately prior to the consummation of the corporate transaction and all
unvested Restricted Stock awards will be forfeited immediately prior to the consummation of the corporate transaction. The Administrator,
in its discretion, may permit exercise of any Options or Stock Appreciation Rights prior to their termination, even if those awards
would not otherwise have been exercisable, or provide that outstanding awards will be assumed or an equivalent Option or Stock
Appreciation Right substituted by a successor corporation. The Administrator, in its discretion, may remove any restrictions as
to any Restricted Stock awards or provide that all outstanding Restricted Stock awards will participate in the corporate transaction
with an equivalent stock substituted by the successor corporation subject to the restrictions. In general, a “corporate
transaction” means:
|
●
|
Our
liquidation or dissolution;
|
|
|
|
|
●
|
Our
merger or consolidation with or into another corporation as a result of which we are not the surviving corporation;
|
|
|
|
|
●
|
A
sale of all or substantially all of our assets; or
|
|
|
|
|
●
|
A
purchase or other acquisition of more than 50% of our outstanding stock by one person, or by more than one person acting in
concert.
|
Other
Adjustment Provisions
If
the stock of the Company is changed by reason of a stock split, reverse stock split, stock dividend, recapitalization, combination
or reclassification, appropriate adjustments shall be made by the Administrator, in its discretion, in (1) the number and class
of shares of stock subject to the 2013 Plan and each Option and grant of Stock Awards outstanding under the 2013 Plan, and (2)
the purchase price of each outstanding Option and (if applicable) Stock Award. For example, if an Option is for 1,000 shares for
$2.00 per share and there is a 2-for-1 stock split, the Option would be adjusted to be exercisable for 2,000 shares at $1.00 per
share.
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 April 12, 2018, there were 370,126 shares previously issued or subject to outstanding awards under the 2013 Plan and 379,874
shares were available for future issuance under the 2013 Plan.
Director
Compensation
We
believe that a combination of cash and equity compensation is appropriate to attract and retain the individuals we desire to serve
on our Board of Directors. Our cash compensation policies are designed to encourage frequent and active interaction between directors
and our executives both during and between formal meetings as well as compensate our directors for their time and effort. Further,
we believe it is important to align the long-term interests of our non-employee directors (i.e. directors who are not employed
by us as officers or employees) with those of the Company and its stockholders, and that awarding equity compensation to, and
thereby increasing ownership of our common stock by, our non-employee directors is an appropriate means to achieve this alignment.
Directors who are also employees of our company do not receive compensation for their service on our Board of Directors.
Under
our director compensation program, each non-employee director will receive annual compensation of $25,000, which amount will be
paid $15,000 in cash, and $10,000 through the grant of restricted common stock. In addition, the Chairperson of the Audit Committee
will receive a $5,000 annual retainer in cash. All cash fees are to be paid quarterly. In addition, prior to Mr. Rice’s appointment
as interim Chief Executive Officer, he received an aggregate of $10,925 in connection with the additional services as a director
that Mr. Rice provided the Company with respect to the Company’s operations. Also, each non-employee director may be reimbursed
for his reasonable expenses incurred in the performance of his duties as a director as our Board of Directors determines from
time to time. Our Compensation Committee intends to evaluate our director compensation program and determine whether any changes
should be recommended to the Board.
The
following table sets forth certain information concerning the compensation paid to non-employee directors in 2017 for their services
as directors of the Company. The compensation of Mr. Rice, who serves as a director and serves as our interim Chief Executive
Officer, is described in the Summary Compensation Table of Executive Officers. Our non-employee directors do not receive fringe
or other benefits.
Name
|
|
Fees
Earned or Paid in Cash ($)
|
|
|
Stock
Awards ($)
(6)
|
|
|
Option
Awards ($)
|
|
|
Total
($)
|
|
Salvatore
Battinelli
(1)
|
|
|
6,250
|
|
|
|
17,000
|
|
|
|
—
|
|
|
|
23,250
|
|
Samuel
Bell
(2)
|
|
|
5,000
|
|
|
|
4,300
|
|
|
|
—
|
|
|
|
9,300
|
|
Dennis
Duitch
(3)
|
|
|
8,333
|
|
|
|
17,000
|
|
|
|
—
|
|
|
|
25,333
|
|
Frank
Garofalo
(4)
|
|
|
15,000
|
|
|
|
17,202
|
|
|
|
—
|
|
|
|
4,202
|
|
Kent
Summers
(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
The
fees shown were paid to Mr. Battinelli for services as a director. In August 2017, the Company issued 8,213 shares of the
Company’s common stock to Mr. Battinelli, pursuant to the Company’s 2013 Equity Incentive Plan, in connection
with his appointment to our Board of Directors, with such shares to vest in four equal, successive quarterly installments.
Such shares were valued at $17,000 or $2.07 per share.
|
(2)
|
The
fees shown were paid to Mr. Bell for services as a director, including $1,250 as a retainer for serving as the Chairman of
the Audit Committee. In January 2017, the Company issued 10,000 shares of the Company’s common stock to Mr. Bell, pursuant
to the Company’s 2013 Equity Incentive Plan, in connection with his appointment to our Board of Directors, with such
shares to vest in four equal, successive quarterly installments. Such shares were valued at $17,202 or $1.72 per share. Mr.
Bell resigned from the Board of Directors in June 2017 resulting in the forfeiture of 7,500 unvested shares of common stock.
|
(3)
|
The
fees shown were paid to Mr. Duitch for services as a director, including $2,083 as a retainer for serving as the Chairman
of the Audit Committee. In August 2017, the Company issued 7,489 shares of the Company’s common stock to Mr. Duitch,
pursuant to the Company’s 2013 Equity Incentive Plan, in connection with his appointment to our Board of Directors,
with such shares to vest in four equal, successive quarterly installments. Such shares were valued at $17,000 or $2.27 per
share.
|
(4)
|
The
fees shown were paid to Mr. Garofalo for services as a director. In January 2017, the Company issued 10,000 shares of the
Company’s common stock to Mr. Garofalo, pursuant to the Company’s 2013 Equity Incentive Plan, in connection with
his appointment to our Board of Directors, with such shares to vest in four equal, successive quarterly installments. Such
shares were valued at $17,202 or $1.72 per share.
|
(5)
|
Mr.
Summers was not a director of the Company in 2017.
|
(6)
|
This
column represents the aggregate grant date fair value of stock awards computed in accordance with FASB ASC Topic 718. These
amounts do not correspond to the actual value that will be recognized by the named directors from these awards.
|
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 April 12, 2018 (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 5,025,118 shares of our common stock outstanding on April 12, 2018. 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
April 12, 2018 are considered outstanding, although these shares are not considered outstanding for purposes of computing the
percentage ownership of any other person.
Unless
otherwise stated, the address of each 5% or greater beneficial holder is c/o Sigma Labs, Inc., 3900 Paseo del Sol, Santa Fe, New
Mexico 87507. We believe, based on information provided to us, that each of the stockholders listed below has sole voting and
investment power with respect to the shares beneficially owned by the stockholder unless noted otherwise, subject to community
property laws where applicable.
Name
and Address of Beneficial Owner
|
|
Number
of
Shares
Beneficially
Owned
|
|
|
Percentage
of
Shares Beneficially
Owned
|
|
Named
Executive Officers and Directors
|
|
|
|
|
|
|
Mark
J. Cola
(1)
|
|
|
293,750
|
|
|
|
5.85
|
%
|
Ronald
Fisher
(2)
|
|
|
6,600
|
|
|
|
*
|
|
John
Rice
(3)
|
|
|
5,232
|
|
|
|
*
|
|
Salvatore
Battinelli
(4)
|
|
|
14,027
|
|
|
|
*
|
|
Dennis
Duitch
(5)
|
|
|
13,303
|
|
|
|
*
|
|
Frank
J. Garofalo
(6)
|
|
|
15,814
|
|
|
|
*
|
|
Kent
J. Summers
(7)
|
|
|
5,814
|
|
|
|
*
|
|
Amanda
Cola
(1)
|
|
|
293,750
|
|
|
|
5.85
|
%
|
Murray
Williams
(8)
|
|
|
33,875
|
|
|
|
*
|
|
All
executive officers and directors as a group (10 persons)
(9)
|
|
|
684,665
|
|
|
|
13.62
|
%
|
*Less
than 1%.
(1)
|
The
shares shown are owned of record by The Mark & Amanda Cola Revocable Trust, U/A August 31, 2012. The shares shown also
include (i) 124,920 shares that may be acquired now or within 60 days of April 12, 2018 upon the exercise of an outstanding
stock option held by Mr. Cola, and (ii) 8,750 shares that may be acquired upon the exercise of an outstanding stock options
held by Ms. Cola.
|
(2)
|
Includes
1,250 shares that may be acquired now upon the exercise of outstanding stock options.
|
(3)
|
The
shares vest in four equal installments of 1,308 shares each, beginning on May 15, 2017.
|
(4)
|
Includes
(i) 8,213 shares that vest in four equal (as closely as possible) installments, beginning on November 15, 2017, and (ii) 5,814
shares that vest in four equal (as closely as possible) installments, beginning on April 18, 2018.
|
(5)
|
Includes
(i) 7,489 shares that vest in four equal (as closely as possible) installments, beginning on November 8, 2017, and (ii) 5,814
shares that vest in four equal (as closely as possible) installments, beginning on April 18, 2018.
|
(6)
|
Includes
(i) 10,000 shares vest in four equal installments of 2,500 shares each, beginning on April 10, 2017, and (ii) 5,814 shares
that vest in four equal (as closely as possible) installments, beginning on April 18, 2018.
|
(7)
|
The
shares vest in four equal (as closely as possible) installments, beginning on April 18, 2018.
|
(8)
|
The
shares shown include 18,375 shares that may be acquired now or within 60 days of April 12, 2018 upon the exercise of an outstanding
stock option held by Mr. Williams.
|
(9)
|
Includes
159,895 shares that may be acquired now or within 60 days of April 12, 2018 upon the exercise of outstanding stock options.
|
Equity
Compensation Plan Information
The
following table provides certain information with respect to our equity compensation plans as of December 31, 2017.
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Plan
Category
|
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
|
|
|
Weighted-average
Exercise Price of Outstanding Options, Warrants and Rights
|
|
|
Number
of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column
(a))
|
|
2011
Equity Incentive Plan(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
750
|
|
2013
Equity Incentive Plan(2)
|
|
|
1,783,938
|
|
|
$
|
4.13
|
|
|
|
450,602
|
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
(1)
On March 9, 2011, the Company’s board of directors approved the Company’s 2011 Equity Incentive Plan, which was approved
on March 31, 2011 by holders of at least a majority of the issued and outstanding shares of common stock of the Company. As of
December 31, 2016, the Company issued an aggregate of 154,250 shares of the Company’s common stock pursuant to the Company’s
2011 Equity Incentive Plan.
(2)
On March 15, 2013, the Company’s board of directors approved the Company’s 2013 Equity Incentive Plan. The 2013 Equity
Incentive Plan was approved by holders of at least a majority of the issued and outstanding shares of common stock of the Company
on October 10, 2013. Pursuant to the 2013 Equity Incentive Plan, the Company is authorized to grant “incentive stock options”
and “non-qualified stock options”, grant or sell common stock subject to restrictions or without restrictions, and
grant stock appreciation rights to employees, officers, directors, consultants and advisers of the Company and its subsidiaries.
Incentive stock options granted under the 2013 Equity Incentive Plan are intended to qualify as “incentive stock options”
within the meaning of Section 422 of the Internal Revenue Code (the “Code”). Non-qualified stock options granted under
the 2013 Equity Incentive Plan are not intended to qualify as incentive stock options under the Code. As of December 31, 2017,
the Company issued an aggregate of 114,847 shares of the Company’s common stock, as well as options to purchase up to 299,938
shares of the Company’s common stock, some of which are subject to vesting restrictions, pursuant to the Company’s
2013 Equity Incentive Plan. On October 2, 2017, 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 750,000.
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
The
following summarizes transactions by us in which any of our directors, director nominees, executive officers or, to our knowledge,
beneficial owners of more than 5% of our capital stock or any member of the immediate family of any of the foregoing persons had
or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control
and other arrangements, which are described under “Executive Compensation” and “Director Compensation”
above.
Transactions
with Directors and Officers
On
August 8, 2017, we engaged Garofalo & Associates, LLC, a limited liability company owned and controlled by Mr. Garofalo, a
director of the Company, to provide services to the Company as corporate development consultant and financial advisor. Under the
engagement letter agreement, Garofalo & Associates, LLC, is entitled to receive in consideration for its services a monthly
retainer of $3,000 in cash during the term of the engagement (the engagement may be terminated by both parties upon 30 days’ written
notice), and (i) 105,000 shares of common stock of the Company upon the closing of an acquisition by the Company of all or substantially
all of the equity or assets (or a controlling interest therein) (the “Closing”) with respect to a specified entity (the
value of such shares would have been $238,350 if such shares would have been issued on August 8, 2017, based on a closing price
per share of $2.27 on such date), and (ii) 75,000 shares of common stock of the Company upon the Closing with respect to at least
one of two other specified entities (the value of such shares would have been $170,250 if such shares would have been issued on
August 8, 2017, based on a closing price per share of $2.27 on such date). As of the date of this Annual Report, there are no
agreements with respect to the acquisition by the Company of any third party, and there can be no assurance that any agreements
will be entered into or, if entered into, that any acquisition or other transaction will be consummated.
On
September 14, 2017, we) entered into an employment letter agreement with Nannette Toups, effective September 28, 2017 (the “Effective
Date”), pursuant to which Ms. Toups agreed to serve as our Chief Financial Officer, Treasurer, principal accounting officer,
principal financial officer and Secretary on an “at-will” basis. Under the employment letter agreement, Ms. Toups is
entitled to (i) an annual base salary of $110,000 (such base salary is not subject to decrease, but may be increased in the discretion
of the Company’s Compensation Committee of the Board of Directors based on an annual assessment of Ms. Toups’ performance
and other factors), (ii) all benefits that we elect in our sole discretion to provide from time to time to our other executive
officers, and (iii) a grant under our 2013 Equity Incentive Plan of (1) a five-year stock option to purchase up to 2,500 shares
of common stock of the Company, which has an exercise price equal to the closing price of the Company’s common stock on the Effective
Date, and vested and became exercisable in full on the Effective Date, and (2) a five-year stock option to purchase up to 47,500
shares of common stock of the Company, which will have an exercise price equal to the closing price of the Company’s common stock
on the Effective Date, and which will vest and become exercisable as follows: 3,065 shares will vest and become exercisable on
the one-year anniversary of the Effective Date, 7,125 shares will vest and become exercisable on the second-year anniversary of
the Effective Date, 11,185 shares will vest and become exercisable on the third-year anniversary of the Effective Date, and 26,125
shares will vest and become exercisable on the fourth-year anniversary of the Effective Date, provided, in each case, that Ms.
Toups’ remains an employee of the Company through such vesting date. The options are on such other terms and provisions as are
contained in the Company’s standard form nonqualified stock option agreement.
Indemnification
Agreements
We
have entered into indemnification agreements with each of our directors and executive officers. These agreements, among other
things, require us to indemnify each director and executive officer to the fullest extent permitted by Nevada law, including indemnification
of expenses such as attorneys’ fees, judgments, fines and settlement amounts incurred by the director or executive officer
in any action or proceeding, including any action or proceeding by or in the right of us, arising out of the person’s services
as a director or executive officer.
Policies
and Procedures for Related Person Transactions
Our
Audit Committee is responsible for reviewing and approving, as appropriate, all transactions with related persons (other than
compensation-related matters, which should be reviewed by our Compensation Committee), in accordance with its Charter and the
Nasdaq marketplace rules. In reviewing and approving any such transactions, our Audit Committee is tasked to consider all relevant
facts and circumstances, including, but not limited to, whether the transaction is on terms comparable to those that could be
obtained in an arm’s length transaction and the extent of the related person’s interest in the transaction.
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Our
Audit Committee approved Pritchett, Siler & Hardy, P.C. (“PSH”) to continue as our independent registered public
accounting firm to audit our financial statements for the fiscal year ending December 31, 2017. During our fiscal year ended December
31, 2017, PSH served as our independent registered public accounting firm. There have been no disagreements on any matter of accounting
principles or practices, financial statement disclosures or auditing scope or procedures, which disagreements if not resolved
to their satisfaction would have caused PSH to refer to in their respective opinions. On January 11, 2018, we were informed by
PSH that Haynie & Company (“H&C”) acquired certain assets of PSH. Effective January 11, 2018, we engaged H&C
to serve as our independent registered public accounting firm for the year ending December 31, 2018. The engagement of H&C
was approved by our Audit Committee.
Fees
Paid to the Independent Registered Public Accounting Firm
The
following table sets forth fees billed by PSH and H&C with respect to the years ended December 31, 2017 and 2016:
|
|
PSH
|
|
|
H&C
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Audit
Fees
|
|
$
|
52,173
|
|
|
$
|
48,304
|
|
|
$
|
39,000
|
|
Audit
Related Fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Tax
Fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
All
Other Fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
52,173
|
|
|
$
|
48,304
|
|
|
$
|
39,000
|
|
In
the above table, in accordance with the SEC’s definitions and rules, “audit fees” are fees that Sigma Labs,
Inc. paid for professional services for the audit of our financial statements included in our Form 10-K and for services that
are normally provided by the registered public accounting firm in connection with statutory and regulatory filings or engagements;
“audit-related fees” are fees for assurance and related services that are reasonably related to the performance of
the audit or review of our financial statements; and “tax fees” are fees for tax compliance, tax advice and tax planning.
Our
Board of Directors established an Audit Committee written charter in February 2017. The Audit Committee’s pre-approval policies
and procedures and other protocols are discussed in its written charter which can be found at www.sigmalabsinc.com under the tab
“Investors.”
Auditor
Independence
In
our fiscal year ended December 31, 2017, there were no other professional services provided by PSH or H&C, other than those
listed above, that would have required our Audit Committee to consider their compatibility with maintaining the independence of
PSH or H&C.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2017
NOTE
1 – Summary of Significant Accounting Policies
Nature
of Business
–Sigma Labs, Inc., formerly named Framewaves, Inc., a Nevada corporation, was founded by a group of scientists,
engineers and businessmen to develop and commercialize novel and unique manufacturing and materials technologies. Sigma believes
that some of these technologies will fundamentally redefine conventional quality assurance and process control practices by embedding
them into the manufacturing processes in real time, enabling process intervention and ultimately leading to closed loop process
control. The Company anticipates that its core technologies will allow its clientele to combine advanced manufacturing quality
assurance and process control protocols with novel materials to achieve breakthrough product potential in many industries including
aerospace, defense, oil and gas, bio-medical, and power generation. The terms the “Company,” “Sigma,”
“we,” “us” and “our” refer to Sigma Labs, Inc.
Basis
of Presentation
– The accompanying financial statements have been prepared by the Company in accordance with Generally
Accepted Accounting Principles (“GAAP”) in the United States of America. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and
cash flows at December 31, 2017 and 2016 and for the periods then ended have been made.
Reclassification
– Certain amounts in prior-period financial statements have been reclassified for comparative purposes to conform to
presentation in the current-period financial statements.
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 Companies outstanding
warrants, options or note conversion features were excluded due to the anti-dilutive effect they would have on the computation.
At December 31, 2017 the Company had 1,434,000 warrants, 299,938 stock options and a $100,000 Convertible Note Payable outstanding.
The total number of shares of common stock underlying these instruments is 1,783,938.
Property
and Equipment –
Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend
the useful lives of property and equipment are capitalized upon being placed in service. Expenditures for maintenance and repairs
are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of
the assets. The estimated life has been determined to be five years unless a unique circumstance exists, which is then fully documented
as an exception to the policy.
In
accordance with its policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis. This
review indicated that the actual useful life of the leasehold improvements the Company made to the leased facilities at
3900 Paseo del Sol, Santa Fe, New Mexico in 2014, is less than the fifteen year estimated useful life that was being used
for amortization purposes in the Company’s financial statements. As a result, effective January 1, 2017, the Company changed
the estimated useful life of these improvements to seven years. The effect of this change in estimate was to increase 2017 amortization
expense by $12,291 and increase 2017 net loss by $8,509.
Fair
Value of Financial Instruments
- The Company applies ASC 820, “Fair Value Measurements
.
” This guidance
defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure
requirements for fair value measures. The three levels are defined as follows:
|
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
|
|
●
|
Level
3 inputs to valuation methodology are unobservable and significant to the fair measurement.
|
The
carrying amounts reported in the balance sheets for the cash and cash equivalents, prepaid stock compensation, receivables, accounts
payable, and accrued liabilities each qualify as financial instruments and are a reasonable estimate of fair value because on
the short period of time between the origination of such instruments and their expected realization and their current market rate
of interest.
Fair
value of financial instruments is as follows:
|
|
December
31, 2017
|
|
December
31, 2016
|
|
|
Fair
Value
|
|
|
Input
Level
|
|
Fair
Value
|
|
|
Input
Level
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability –Notes & Warrants
|
|
$
|
-
|
|
|
Level
3
|
|
$
|
93,206
|
|
|
Level
3
|
The
derivative liability was the result of the original $1 million of Notes, and the 80,000 warrants (post
reverse stock split), that were issued in October 2016, both of which contain anti-dilution provisions in the event the Company
engages in specified transactions which occurred in February 2017. As a result, the instruments no longer required derivative
treatment and were written off in February 2017. The following table presents a reconciliation of the derivative liability
measured at fair value on a recurring basis using significant unobservable input (Level 3):
|
|
Notes
& Warrants
|
|
Balance
December 31, 2016
|
|
$
|
93,206
|
|
Change
in fair value
|
|
|
186,908
|
|
Write-off
of derivative
|
|
|
(280,114
|
)
|
Balance
December 31, 2017
|
|
$
|
-
|
|
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, 2017 and 2016 for which the ultimate deductibility is highly certain 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, 2017 and 2016, the Company recognized no interest and penalties. All tax years starting with
2014 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, 2017 or 2016.
Long-Lived
and Intangible Assets –
Long-lived assets and certain identifiable definite life intangibles to be held and used by
the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company continuously evaluates the recoverability of its long-lived assets based on estimated future
cash flows and the estimated liquidation value of such long-lived assets, and provides for impairment if such undiscounted cash
flows are insufficient to recover the carrying amount of the long-lived assets. If impairment exists, an adjustment is made to
write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair
values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable.
Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value. No impairment was recorded
in the years ended December 31, 2017 or 2016.
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. 605 based on the following criteria: Persuasive evidence of an arrangement exists, services have been rendered, the price
is fixed or determinable, and collectability is reasonably assured. In general, the Company recognizes service revenue as significant
services under the relevant arrangement have been performed.
Deferred
Stock Offering Costs
– Costs related to stock offerings (if any) are deferred and will be offset against the proceeds
of the offering in additional paid-in capital. In the event a stock offering is unsuccessful, the costs relating to the offering
will be written-off directly to expense.
Inventory
– Inventories consisting of raw materials used in the production of customized parts totaled $192,705 and $187,241,
as of December 31, 2017 and 2016, respectively, and nominal work-in-process components which will be sold to customers. Inventories
are valued at the lower of cost or market, using the first-in, first-out (FIFO) method.
Research
and Development
– Research and development costs are expensed as they are incurred. Research and development costs for
the years ended December 31, 2017 and 2016 were $302,043 and $120,638, respectively.
NOTE
2 – Stockholders’ Equity
Common
Stock
Effective
March 17, 2016, our Articles of Incorporation were amended to provide for both a reverse stock split of the outstanding
shares of our common stock on a 1-for-100 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”). Pursuant to the Share
Decrease, the number of authorized shares of common stock decreased from 375,000,000 to 3,750,000 shares of common stock.
On
April 28, 2016, the Company’s Articles of Incorporation were amended to increase the number of authorized shares of the Company’s
common stock from 3,750,000 to 7,500,000 shares of common stock.
Effective
February 15, 2017, our Articles of Incorporation were again amended to provide for a reverse stock split of the outstanding shares
of our common stock on a 1-for-2 basis (the “Reverse Stock Split”), and a corresponding decrease in the number of
shares of our common stock that we are authorized to issue (the “Share Decrease”).
The
effects of both stock splits have been retroactively reflected to all periods presented.
Effective
March 5, 2018, the Articles of Incorporation were again amended to increase the authorized number of shares of common stock
to 15,000,000.
In
2016, the Company issued 23,687 shares of common stock to employees and consultants, valued at an average price of $6.43
per share, or $152,269.
In
2017, the Company issued 40,934 shares of common stock to directors at an average value of $2.09 per share, or $85,408.
On
February 14, 2017, The NASDAQ Stock Market LLC informed the Company that it had approved the listing of the Company’s
common stock on The NASDAQ Capital Market, effective as of February 15, 2017. The Company’s common stock ceased
trading on the OTCQB on February 15, 2017, and on such date the common stock commenced trading on The NASDAQ Capital Market
under the ticker symbol “SGLB”.
In
October 2017, pursuant to an advisory agreement with Dawson James Securities, the Company issued to Dawson James a total of 141,000
shares of the Company’s common stock in exchange for the surrender by Dawson James of its Unit Purchase Option to acquire
up to 70,500 Units that was issued by the Company in the 2017 public offering.
In
November 2017, the Company issued 56,000 shares of common stock as the result of the exercise of warrants resulting in cash proceeds
of $112,000.
In
December 2017, the Company issued 204,578 shares of common stock as the result of a conversion of the $400,000 principal
balance of Notes Payable and $8,556 of accrued interest.
Deferred
Compensation
In
2014 and 2015, 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 stockholder’s
equity. The $153,743 balance of unvested compensation cost related to these issues at December 31, 2016 was
recognized in fiscal 2017.
During
2017, the Company issued to directors 40,934 shares of the Company’s common stock, subject to restrictions, pursuant to
the 2013 Plan valued at $85,408. Such shares were valued at the fair value at the date of issue. The fair value is being expensed
as compensation over the vesting period and recorded as a reduction of stockholder’s equity. As of December 31, 2017, the
balance of unvested compensation to be recognized was $21,251 and is recorded as prepaid stock compensation.
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of preferred stock, $0.001 par value. No shares of preferred stock were issued
and outstanding at December 31, 2017 or 2016.
Stock
Options
On
April 28, 2016, 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 319,269
shares of our common stock to a total of 375,000 shares (on a post-Reverse Stock Split basis). As of December 31, 2016, an aggregate
of 750 shares and 199,669 shares of common stock were reserved for issuance under the 2011 Equity Incentive Plan (“The 2011
Plan”) and the 2013 Plan, respectively.
On
October 2, 2017, at the Annual Meeting of Stockholders of the Company, the Company’s stockholders approved an amendment to the
2013 Plan to increase the number of shares of the Company’s common stock reserved for issuance under the 2013 Plan by 375,000
shares of our common stock to a total of 750,000 shares. As of December 31, 2017, an aggregate of 750 shares and 450,062
shares of common stock were reserved for issuance under the 2011 and the 2013 Plan, respectively.
During
2017, the Company granted a total of 213,750 options to 5 employees with vesting periods ranging from 18 months to 4 years beginning
May 21, 2017. In 2017, 82,676 options vested, and $510,496 of compensation cost was recognized during the year. As of December
31, 2017, there were options to purchase 299,938 shares issued and outstanding under the 2013 Plan. Of this amount,
there are vested options exercisable for 85,614 shares of common stock. As of December 31, 2016, the Company had 200,419
shares reserved for future grant under its plans and there were no options exercised during the years ended December 31, 2017.
During
2016, the Company granted a total of 73,688 options to 10 employees with vesting periods ranging from 3 to 4 years beginning March
14, 2017. In 2016, 2,938 options vested, and $168,411 of compensation cost was recognized during the year. As of December 31,
2016, there were options to purchase 101,188 shares outstanding under the plans. Of this amount, there were vested options
exercisable for 2,938 shares of common stock. As of December 31, 2016, the Company had 200,419 shares reserved for future grant
under its plans and there were no options exercised during the years ended December 31, 2016.
The
Company generally grants stock options to employees and directors at exercise prices equal to the fair market value of the Company’s
stock on the dates of grant. Stock options are typically granted throughout the year and generally vest over four years of service
and expire ten years from the date of the award, unless otherwise specified. The Company recognizes compensation expense for the
fair value of the stock options over the requisite service period for each stock option award.
Total
share-based compensation expense included in the consolidated statements of operations for the years ended December 31, 2017 and
2016 is $719,796, of which $510,496 is related to stock options, and $341,558, of which $200,504 is related to stock options,
respectively. There was no capitalized share-based compensation cost as of December 31, 2017 and 2016, and there were no recognized
tax benefits during the years ended December 31, 2017 and 2016.
To
estimate the value of an award, the Company uses the Black-Scholes option-pricing model. This model requires inputs such as expected
life, expected volatility and risk-free interest rate. The forfeiture rate also impacts the amount of aggregate compensation.
These inputs are subjective and generally require significant analysis and judgment to develop. While estimates of expected life,
volatility and forfeiture rate are derived primarily from the Company’s historical data, the risk-free rate is based on
the yield available on U.S. Treasury constant maturity rates with similar terms to the expected term of the stock option awards.
The fair value of share-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions
for the years ended December 31, 2017 and 2016:
Assumptions:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0.00
|
|
|
|
0.00
|
|
Risk-free
interest rate
|
|
|
1.91-2.45
|
%
|
|
|
1.13-1.57
|
%
|
Expected
volatility
|
|
|
115.9-139
|
%
|
|
|
111.5-132.4
|
%
|
Expected
life (in years)
|
|
|
5-10
|
|
|
|
5-10
|
|
Option
activity for the year ended December 31, 2017 was as follows:
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
($)
|
|
|
Life
(Yrs.)
|
|
|
Value
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2016
|
|
|
101,188
|
|
|
|
8.39
|
|
|
|
9.29
|
|
|
|
-
|
|
Granted
|
|
|
213,750
|
|
|
|
2.95
|
|
|
|
7.72
|
|
|
|
16,600
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
or cancelled
|
|
|
-15,000
|
|
|
|
5.43
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2017
|
|
|
299,938
|
|
|
|
8.39
|
|
|
|
7.33
|
|
|
|
16,600
|
|
Options
expected to vest in the future as of December 31, 2017
|
|
|
214,324
|
|
|
|
4
.55
|
|
|
|
6.88
|
|
|
|
16,000
|
|
Options
exercisable at December 31, 2017
|
|
|
85,614
|
|
|
|
4.49
|
|
|
|
7.96
|
|
|
|
600
|
|
Options
vested, exercisable, and options expected to vest at December 31, 2017
|
|
|
299,938
|
|
|
|
4
.57
|
|
|
|
7.33
|
|
|
|
16,600
|
|
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 $2.15 closing price of our Common
Stock on December 31, 2017. Three of the 2017 option grants have an exercise price currently below
$2.15.
At
December 31, 2017 and 2016, there was $525,606 and $452,551, respectively, of unrecognized share-based
compensation expense related to unvested share options with a weighted average remaining recognition period of 7.33 and
9.29 years, respectively.
Warrants
At
December 31, 2017, the Company had outstanding warrants to purchase a total of 1,434,000 shares of common stock, 1,410,000 warrants
at an exercise price of $4.00 per share, which if not exercised, will expire on February 21, 2022, and 24,000 warrants at an exercise
price of $2.00 per share which, if not exercised, will expire on October 17, 2019.
NOTE
3 – Notes Payable
Effective
October 17, 2016, the Company entered into a Securities Purchase Agreement with two accredited investors (the “Investors”)
for the private placement by the Company of Secured Convertible Notes in the aggregate principal amount of $1,000,000 (the “Notes”)
and warrants (the “Warrants”) to purchase up to 80,000 shares (the “Warrant Shares”) of the Company’s common
stock (“Common Stock”) (subject to adjustment in certain circumstances), for aggregate gross proceeds, before expenses,
to the Company of $900,000 (the “Financing Transaction”). The Notes were convertible into Shares of Common Stock
registered on a Registration Statement for Resale filed with the Securities and Exchange Commission.
The
Notes carried an interest rate of 10% per annum, calculated on the basis of a 360-day year, based on the $1 million Notes Payable
effective balance. Such interest was payable every three months in cash, or, at the holder’s option, in unrestricted shares
of Common Stock, if a registration statement is then in effect for such shares of common stock.
On
September 29, 2017, the Company entered into amendments (the “Amendments”) to the October 17, 2016 Secured Convertible
Promissory Notes and Warrants to purchase shares of the Company’s common stock, pursuant to which, among other things set forth
in the Amendments, (1) the exercise price of the Warrants was reduced from $4.13 per share to $2.00 per share, and (2) the conversion
price of the Notes was reduced from $4.13 per share to $2.00 per share. Under the Amendments, we paid the Holders an aggregate
amount equal to $500,000 (representing 50% of the outstanding principal balance of the Notes) plus all accrued interest on the
Notes. In consideration of the foregoing, the Holders agreed to, among other things, extend the payment date of the remaining
50% of the outstanding principal balance of the Notes from October 17, 2017 to the earlier of May 18, 2018 or the closing of our
next underwritten public offering of securities in which we raise gross proceeds of at least $3,000,000 (should we elect to commence
and close such an offering of securities).
On
December 27 and 28, 2017 the Holders Converted $400,000 of the $500,000 Notes principal and $8,556 of accrued interest on one
of the notes into 204,278 shares of common stock and exercised 56,000 of the warrants @ $2.00 per share for 56,000 additional
shares of common stock.
At
December 31, 2017 the Company had the remaining $100,000 Convertible Note outstanding and due on the earlier of May 18, 2018 or
the closing of our next underwritten public offering of securities in which we raise gross proceeds of at least $3,000,000 (should
we elect to commence and close such an offering of securities).
NOTE
4 – Continuing Operations
The
Company has sustained losses and had negative cash flows from operating activities since its inception. The Company has
raised significant equity capital and is developing new products with commercial applications that may increase future revenues.
On February 21, 2017, the Company closed an underwritten public offering of equity securities resulting
in net proceeds of approximately $5.25 million
, after deducting underwriting discounts and commissions and other offering
expenses payable by the Company.
The Company was able to fund operations for 2017 with these funds
and end the year with a cash balance of $1,515,674. On March 28, 2018, Sigma received $535,000 in full payment of the Morf 3D
note and related accrued interest balance. In addition,
o
n April 6, 2018, the Company closed
a private placement offering of equity securities resulting in net proceeds of approximately $840,000
, after deducting
commissions and other offering expenses payable by the Company. As a result, the Company currently has sufficient cash and working
capital to fund operations through 2018 and is anticipating that significant sales contracts may be closed in the second
quarter and balance of the fiscal 2018 generating material additional cash flow in the near term.
NOTE
5 – 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, 2014 through 2016.
The
Company has available at December 31, 2017, unused operating loss carryforwards of approximately $8,617,000, which
may be applied against future taxable income and which expire in various years through 2037. However, if certain substantial
changes in the Company’s ownership should occur, there could be an annual limitation on the amount of net operating loss
carryforward which can be utilized. The amount of and ultimate realization of the benefits from the operating loss carryforwards
for income tax purposes is dependent, in part, upon the tax laws in effect, the future earnings of the Company and other future
events, the effects of which cannot be determined. Because of the uncertainty surrounding the realization of the loss carryforwards,
the Company has established a valuation allowance equal to the tax effect of the loss carryforwards and other temporary differences
of approximately $2,929,900 and $3,767,996 at December 31, 2017 and 2016, respectively, and, therefore,
no deferred tax asset has been recognized for the loss carryforwards.
Deferred
tax assets are comprised of the following:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
NOL
carryover
|
|
$
|
2,929,900
|
|
|
$
|
3,235,490
|
|
Impairments
|
|
|
-
|
|
|
|
33,931
|
|
Warrants
|
|
|
-
|
|
|
|
498,575
|
|
Valuation
allowance
|
|
|
(2,929,900
|
)
|
|
|
(3,767,996
|
)
|
Net
deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
reconciliation of the provision for income taxes computed at the U.S. federal statutory tax rate (34%) to the Company’s
effective tax rate for the period ended December 31, 2017 and 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Book
Loss
|
|
$
|
(
1,556.355
|
)
|
|
$
|
(
746,924
|
)
|
State
taxes
|
|
|
-
|
|
|
|
(
106,546
|
)
|
Meals & Entertainment
|
|
|
3,200
|
|
|
|
-
|
|
Change
in valuation allowance
|
|
|
1,553,200
|
|
|
|
853,470
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE
6 – 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, 2017 and 2016:
|
|
Year
Ended December 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Loss
from continuing
|
|
|
|
|
|
|
|
|
Operations
available to
|
|
|
|
|
|
|
|
|
Common
stockholders (numerator)
|
|
$
|
(4,577,516
|
)
|
|
$
|
(2,196,834
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
common
shares Outstanding
|
|
|
|
|
|
|
|
|
used
in loss per share during
|
|
|
|
|
|
|
|
|
the
Period (denominator)
|
|
|
4,403,479
|
|
|
|
3,125,022
|
|
Dilutive
loss per share was not presented as the Company’s outstanding warrants, stock options and note conversion features common
equivalent shares for the periods presented would have had an anti-dilutive effect. At December 31, 2017 the Company had outstanding
1,434,000 warrants which could be converted to 1,434,000 shares of common stock, a $100,000 note payable convertible into 50,000
shares of common stock, and 299,938 stock options exercisable for 299,938 shares of common stock resulting in a potential total
additional 1,783,938 common stock shares outstanding in the future.
NOTE
7 – Property and Equipment
The
following is a summary of property and equipment, purchased, used and depreciated over a five year period, less accumulated depreciation,
as of December 31, 2017 and 2016:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Property
and Equipment
|
|
$
|
1,027,966
|
|
|
$
|
993,843
|
|
Less:
Accumulated Depreciation
|
|
|
(616,322
|
)
|
|
|
(428,910
|
)
|
Net
Property and Equipment
|
|
$
|
411,643
|
|
|
$
|
564,933
|
|
Depreciation
expense on property and equipment was $193,892 and $172,315 for the years ended December 31, 2017 and 2016, respectively.
NOTE
8 – Intangible Assets
The
Company’s intangible assets consist of Patents, Patent Pending Applications and Customer Contacts.
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.
The
following is a summary of definite-life intangible assets less accumulated amortization as of December 31, 2017 and 2016, respectively:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Provisional
Patent Applications
|
|
$
|
254,570
|
|
|
$
|
183,574
|
|
Patents
|
|
|
59,701
|
|
|
|
59,701
|
|
Customer
Contacts
|
|
|
262,009
|
|
|
|
262,009
|
|
Less:
Accumulated Amortization
|
|
|
(281,884
|
)
|
|
|
(278,833
|
)
|
|
|
|
|
|
|
|
|
|
Net
Intangible Assets
|
|
$
|
294,396
|
|
|
$
|
226,450
|
|
Amortization
expense on intangible assets was $3,051 and $2,309 for the years ended December 31, 2017 and 2016.
The
estimated aggregate amortization expense for each of the succeeding years ending December 31 is as follows:
2018
|
|
|
3,051
|
|
2019
|
|
|
3,051
|
|
2020
|
|
|
3,051
|
|
2021
|
|
|
3,051
|
|
Thereafter
|
|
|
27,622
|
|
|
|
|
|
|
|
|
$
|
39,826
|
|
NOTE
9 – Commitments and Contingencies
Operating
Leases
– The Company leases office and laboratory space under operating leases. Expense relating to these operating
leases was $59,700 and $56,025 for the years ended December 31, 2017 and 2016, respectively. The future
minimum lease payments required under non-cancellable operating leases at December 31, 2017 was $44,550. The future
minimum lease payments are due during the year 2018.
NOTE
10 – Concentrations
Revenues
– During the years ended December 31, 2017 and 2016, 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 loss of the revenues generated
by these customers would have a significant effect on the operations of the Company.
Customer
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
A
|
|
|
28.75
|
%
|
|
|
29.97
|
%
|
B
|
|
|
19.83
|
%
|
|
|
40.93
|
%
|
C
|
|
|
14.23
|
%
|
|
|
4.61
|
%
|
D
|
|
|
12.85
|
%
|
|
|
-
|
|
Accounts
Receivable
– The Company had the following significant customers who accounted for more than 10% each of the Company’s
accounts receivable balance at December 31, 2017 and 2016, respectively.
Customer
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
A
|
|
|
44.34
|
%
|
|
|
78.92
|
%
|
B
|
|
|
23.21
|
%
|
|
|
5.24
|
%
|
C
|
|
|
21.33
|
%
|
|
|
1.15
|
%
|
NOTE
11 - Joint Venture
In
July 2015, we entered into a joint venture agreement with Arete Innovative Solutions LLC (“Arete”). The Joint Venture
was not consolidated, but rather was accounted for on the equity method of recording investments. There were no operating activities
during the fiscal 2017 and net operations resulted in a loss on the investment of $105 in fiscal 2016. The Company and Arete agreed
in 2017 to terminate the Joint Venture and are in the process of paying final costs. The remaining cash asset of the company will
be distributed to the former partners in 2018.
Note
12 - Defined Contribution Plan
In
2014, the Company adopted a qualified 401(K) plan (“the Plan”), in which all employees over the age
of 21 may participate. The Company has elected to match 100% of each participant’s contribution up to 3% of salary, and
50% of the next 2% of salary contributed. The Company may also elect, on an annual basis, to make a discretionary contribution
to the plan. Company matches and discretionary contributions vest to participant accounts as follows: 20% after two years
of service, and 20% per year thereafter until the participant reaches 6 years of service, at which time, employer contributions
vest 100%. The costs of matching contributions were $33,725 in 2017 and $35,488 in 2016.
NOTE
13 – Related Party Transactions
In
February 2017, the Company entered into an employment agreement (the “Original Agreement”) with Mr. Mark Cola pursuant
to which, Mr. Cola agreed to serve as the Company’s President, Chief Executive Officer and Chief Operating Officer, and
was entitled to receive an annual base salary of $220,000. In July, 2017,the Company and Mr. Cola entered into a new employment
agreement (the “Employment Agreement”) for a two-year term (unless earlier terminated as provided in the Employment
Agreement), pursuant to which Mr. Cola has agreed to serve as the Company’s Chief Technology Officer and continue to serve as
the Company’s President (with the title of Co-Founder, President and Chief Technology Officer). Under the Employment Agreement,
Mr. Cola is (i) entitled to receive (a) an annual base salary of $180,000 (the “Base Salary”), and (b) during each 12-month
period during the term of Mr. Cola’s employment, a nondiscretionary annual founder’s bonus (the “Annual Bonus”) in the
total amount of $40,000, payable and earned in 24 equal bi-monthly installments, and (ii) eligible to receive one or more additional
bonuses (“Discretionary Bonuses”) in recognition of extraordinary accomplishments, provided that the decision to provide
any Discretionary Bonuses and the amount and terms of any Discretionary Bonuses will be in the sole and absolute discretion of
the Board of Directors.
Effective
as of immediately prior to the Effective Date, the Original Agreement was terminated by the parties, and Mr. Cola resigned as
Chief Executive Officer, Chief Operating Officer and as a director of the Company. The parties agreed that the Company has no
obligation to Mr. Cola to grant stock options to him pursuant to the Original Agreement, and that (i) the Nonqualified Stock Option
Agreement, dated as of February 21, 2017, between the Company and Mr. Cola evidencing the grant to Mr. Cola under the Original
Agreement of a stock option to purchase up to 123,750 shares of the Company’s common stock at an exercise price per share equal
to $3.48 (the “Original Option”) was amended under the Employment Agreement such that (a) any unvested portion of the
Original Option will immediately and automatically vest if Mr. Cola’s employment is terminated as a result of a Termination Event
(as defined below), (b) the definition of “Termination For Cause” under the Original Option was replaced with the definition
of “Cause” under the Employment Agreement, and (c) upon the occurrence of a Corporate Transaction (as defined in the
2013 Equity Incentive Plan of the Company), the Original Option, if outstanding as of the date of such applicable Corporate Transaction,
will remain outstanding and exercisable in accordance with its terms, except as provided in the Employment Agreement, and (ii)
the Original Option will otherwise remain outstanding and exercisable in accordance with its terms.
Under
the Employment Agreement, Mr. Cola is (i) entitled to receive (a) an annual base salary of $180,000 (the “Base Salary”),
which will be subject to increase in the discretion of our Board of Directors or Compensation Committee based on its annual assessment
of Mr. Cola’s performance and other factors, and (b) during each 12-month period during the term of Mr. Cola’s employment,
a nondiscretionary annual founder’s bonus (the “Annual Bonus”) in the total amount of $40,000, payable and earned in
24 equal bi-monthly installments, and (ii) eligible to receive one or more additional bonuses (“Discretionary Bonuses”)
in recognition of extraordinary accomplishments, provided that the decision to provide any Discretionary Bonuses and the amount
and terms of any Discretionary Bonuses will be in the sole and absolute discretion of the Board of Directors.
Pursuant
to the Employment Agreement, on February 21, 2018, the Company granted Mr. Cola under the Company’s 2013 equity incentive plan
(i) a ten-year non-qualified stock option to purchase 61,750 shares of the Company’s common stock (“Option A”),
and (ii) a ten-year non-qualified stock option to purchase 61,750 shares of the Company’s common stock (“Option B”,
and together with Option A, the “Options”), with the Options each (a) to have an exercise price equal to the closing
price of the Company’s common stock on the date of grant (i.e., February 21, 2018), (b) to vest and become exercisable in
seventeen equal (as closely as possible) monthly installments on the 15th day of each month commencing on March 15, 2018, subject
in each case to Mr. Cola’s continuing employment, and (c) to be on such other terms set forth in the Company’s standard form of
non-qualified stock option agreement (except that the definition of “Termination For Cause” under such agreement was
replaced with the definition of “Cause” under the Employment Agreement). Additionally, (x) upon the occurrence of a
Corporate Transaction, all stock options of the Company held by Mr. Cola as of the date of such applicable Corporate Transaction
will remain outstanding and exercisable in accordance with their terms (except as provided in the Employment Agreement and as
set forth in (y) below), and (y) upon the occurrence of a Change of Control (as defined in the Employment Agreement), his unvested
stock options will fully vest.
Under
the Employment Agreement, Mr. Cola will be entitled to participate in any employee benefit and welfare plans and programs of the
Company in which any C-level senior officer of the Company or its subsidiaries are eligible to participate. The Employment Agreement
provides that in the event (i) the Company’s terminates Mr. Cola’s employment without “Cause” (as defined),
(ii) Mr. Cola resigns from the Company for “Good Reason” (as defined), (iii) Mr. Cola resigns from the Company after
the nine-month anniversary of the effective date of the Employment Agreement (the “Nine Month Period”) for any reason
or no reason, or (iv) Mr. Cola dies or becomes disabled during the Nine Month Period in the performance of his duties for the
Company (each of (i)-(iv), a “Termination Event”), subject to entering into a general release of all claims, (x) he
will be entitled to continue to receive the Base Salary, Annual Bonus and benefits which he was receiving as of the time of termination
for the greater of the remaining term of employment or a period of twelve months, with such compensation to be payable in equal
installments in accordance with the Company’s normal payroll practices, but no less frequently than bi-monthly, and (y) any unvested
portion of Option A and the Original Option will fully vest.
In
August 2017, we entered into an “at will” unwritten employment arrangement with Mr. John Rice, pursuant to which
Mr. Rice serves as our interim Chief Executive Officer and interim principal executive officer, will receive a monthly salary
of $9,000, and is eligible to receive medical and dental benefits, life insurance, and long term and short term disability coverage.
Further, Mr. Rice is eligible under his employment arrangement to participate in the Company’s 2013 Equity Incentive Plan,
with equity compensation to Mr. Rice to be determined by our Compensation Committee at a later date. Effective as of Mr. Rice’s
appointment as interim Chief Executive Officer, Mr. Rice is no longer entitled to receive compensation for his service as a director
of the Company during his service as our interim Chief Executive Officer.
In
August 2017, we engaged Garofalo & Associates, LLC, a limited liability company owned and controlled by Frank Garofalo, a
director of the Company, to provide services to the Company as corporate development consultant and financial advisor. Under
the engagement letter agreement, Garofalo & Associates, LLC, is entitled to receive in consideration for its services a
monthly retainer of $3,000 in cash during the term of the engagement (the engagement may be terminated by both parties upon
30 days’ written notice), and (i) 105,000 shares of common stock of the Company upon the closing of an acquisition by the
Company of all or substantially all of the equity or assets (or a controlling interest therein) (the “Closing”)
with respect to a specified entity (the value of such shares would have been $238,350 if such shares would have been issued
on August 8, 2017, based on a closing price per share of $2.27 on such date), and (ii) 75,000 shares of common stock of the
Company upon the Closing with respect to at least one of two other specified entities (the value of such shares would have
been $170,250 if such shares would have been issued on August 8, 2017, based on a closing price per share of $2.27 on such
date). As of the date of this Annual Report, there are no agreements with respect to the acquisition by the Company of any
third party, and there can be no assurance that any agreements will be entered into or, if entered into, that any acquisition
or other transaction will be consummated.
In
September 2017, we and Ron Fisher entered into Amendment No. 1 to Mr. Fisher’s employment agreement, effective August 10,
2015, pursuant to which, effective as of February 11, 2017, item 2, entitled “Performance Bonuses,” of Exhibit A of
Mr. Fisher’s employment agreement was deleted in its entirety and replaced with the new item 2 that was set forth in the
amendment to employment agreement. Such amendment provided that Mr. Fisher would become entitled to receive performance-based
stock and cash bonuses if certain milestones were satisfied by February 11, 2018, so long as Mr. Fisher remained an employee of
the Company as of the date the applicable milestone was satisfied. No such bonuses were earned as of December 31, 2017. On February
21, 2018, the Company and Mr. Fisher entered into Amendment No. 2 to Mr. Fisher’s employment agreement, pursuant to which
the foregoing February 11, 2018 date was extended to December 31, 2018.
In
September 2017, we entered into an employment agreement with Nannette Toups, pursuant to which Ms. Toups agreed to serve as our
Chief Financial Officer, Treasurer, principal accounting officer, principal financial officer and Secretary on an “at-will”
basis. Under the employment letter agreement, Ms. Toups is entitled to (i) an annual base salary of $110,000 (such base salary
is not subject to decrease, but may be increased in the discretion of the Company’s Compensation Committee of the Board
of Directors based on an annual assessment of Ms. Toups’ performance and other factors), (ii) all benefits that we elect in our
sole discretion to provide from time to time to our other executive officers, and (iii) a grant under our 2013 Equity Incentive
Plan of (1) a five-year stock option to purchase up to 2,500 shares of common stock of the Company with an exercise price equal
to the closing price of the Company’s common stock on the agreement effective date, and vested and became exercisable in full
on the Effective Date, and (2) a five-year stock option to purchase up to 47,500 shares of common stock of the Company with an
exercise price equal to the closing price of the Company’s common stock on the agreement effective date, and which will vest and
become exercisable on each successive anniversary date that Ms. Toups remains an employee of the Company as follows: 3,065, 7,125,
11,185, and 26,125 on the first, second, third and fourth anniversary, respectively.
NOTE
14 – Subsequent Events
In
January 2018, Sigma issued each of its four non-employee directors 5,814 shares of common stock, under the 2013 Equity Incentive
Plan, with such shares to vest ratably over four quarterly installments, subject in each case to such director’s continuing
service as a director.
In
February 2018, Sigma granted Mark Cola ten-year options under the 2013 Equity Incentive Plan to purchase an aggregate of 123,500
shares of common stock, with the options having an exercise price of $1.49 per share, and to vest and become exercisable ratably
over 17 monthly installments on the 15th day of each month commencing on March 15, 2018, subject in each case to Mr. Cola’s
continuing employment.
In
February 2018, the Company and Ron Fisher entered into Amendment No. 2 to Mr. Fisher’s Employment Offer Letter Agreement,
pursuant to which Mr. Fisher will become entitled to receive performance-based stock and cash bonuses if certain milestones are
satisfied by December 31, 2018, so long as Mr. Fisher remains an employee of the Company as of the date the applicable milestone
is satisfied. The maximum shares of stock potentially issuable under this agreement is 23,000 shares.
In
February 2018, Sigma granted nine employees ten-year options under the 2013 Equity Incentive Plan to purchase an aggregate of
70,188 shares of common stock, with each option having an exercise price of $1.56 per share, with each option to vest from and
after February 26, 2018 and in accordance with the vesting schedule of each such person’s existing stock option (i.e., vesting
in the same proportions (as closely as possible) and at the same rate), and if any such person did not have an existing stock
option, the vesting schedule of such person’s option is to conform to the vesting schedule of the stock option most recently granted
by the Company to a non-executive employee (i.e., vesting in the same proportions (as closely as possible) and at the same rate),
subject in each case to the employee’s continuing employment.
Effective
March 5, 2018, the Amended and Restated Articles of Incorporation, as amended, of Sigma was amended pursuant to a Certificate
of Amendment filed with the Nevada Secretary of State to increase the authorized number of shares of Sigma’s common stock
to 15,000,000.
In
March 2018, Morf3D, Inc. paid the Company $ 535,096 in full satisfaction of the Company’s loan made to Morf3D,
Inc. in 2017.
In
April 2018, Sigma issued 1,000 shares of the Company’s newly-created non-voting Series B Convertible Preferred Stock, which
are initially convertible into up to 1,000,000 shares of common stock, and warrants to purchase an aggregate of up to 750,000
shares of the Company’s common stock, for an aggregate purchase price of $1,000,000.The warrants have an initial exercise
price of $1.47 per share, the closing price of the Company’s Common Stock reported on The NASDAQ Capital Market on
April 6, 2018, subject to adjustment in certain circumstances. The net proceeds to the company were approximately $840,000
after commissions and other offering expenses. Sigma also issued Dawson James Securities, Inc., its placement agent in the foregoing
private placement, warrants to purchase up to 140,000 shares of common stock, at an exercise price of $1.47 per share,
as compensation.