SGLB Sigma Labs Inc

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-looking statements

This Quarterly Report, including any documents which may be incorporated by reference into this Report, contains “Forward-Looking Statements.” All statements other than statements of historical fact are “Forward-Looking Statements” for purposes of these provisions, including any projections of revenue or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All Forward-Looking Statements included in this document are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any Forward-Looking Statement. In some cases, Forward-Looking Statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the Forward-Looking Statements contained herein are reasonable, there can be no assurance that such expectations or any of the Forward-Looking Statements will prove to be correct, and actual results could differ materially from those projected or assumed in the Forward-Looking Statements. Future financial condition and results of operations, as well as any Forward-Looking Statements are subject to inherent risks and uncertainties, including any other factors referred to in our press releases and reports filed with the Securities and Exchange Commission (“SEC”). All subsequent Forward-Looking Statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Additional factors that may have a direct bearing on our operating results are described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and elsewhere in this report.

Corporation Information

Our principal executive offices are located at 3900 Paseo del Sol, Santa Fe, New Mexico 87507, and our telephone number 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 (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 Quarterly Report on Form 10-Q.

2019 Developments

In 2019, we reported several events, including the following (in reverse chronological order):

On August 13, 2019, we announced that we have been selected by a major international OEM machine manufacturer to install our proprietary PrintRite3D® products. As part of the agreement, the OEM will complete our Rapid Test and Evaluation program and will install the PrintRite3D® in two different countries for analysis and proof-of-performance purposes.

On August 2, 2019, we closed a public offering of equity securities in which we issued 2,875,000 shares of common stock resulting in net proceeds of approximately $1,971,000, after deducting placement agent commissions and other offering expenses payable by us.

On July 30, 2019, we announced that we will work with Airbus to complete a Test and Evaluation Program of our new PrintRite3D® version 5.0 hardware and software followed by a validation phase on a powderbed fusion printer.

On June 18, 2019, we announced that we signed a non-binding Memorandum of Understanding with Materialise NV to cooperate in the integration of their MCP Controller with our PrintRite3D ^® technology. Combining the sophisticated control technology with in-situ process monitoring for metal additive manufacturing will give customers maximal control on the production process, allowing them to become even more productive.

On May 14, 2019, we announced that we will launch Version 5.0 of our PrintRite3D ^® platform at the RAPID+TCT 2019 Additive Manufacturing Conference in Detroit on May 21-23, 2019.

On April 30, 2019, we announced that the Company’s PrintRite3D ^® software has been shown to ensure process consistency and product quality in metal additive manufacturing, according to a research study sponsored by the Defense Advanced Research Project Agency (DARPA) Open Manufacturing Program and conducted in tandem with Honeywell Aerospace at Honeywell’s Advanced Manufacturing Engineering Center. The paper, titled “LPBF [Laser Powder Bed Fusion] Right the First Time-the Right Mix Between Modeling and Experiments,” discusses the validation involved in manufacturing a challenging metal component.

On March 26, 2019, we announced the appointment of the Company’s new Business Development Manager, Americas, who will be responsible for developing key accounts through the Company’s Rapid Test and Evaluation Program and for bringing PrintRite3D INSPECT ^® into deployment across serial production operations in North and South America.

On March 15, 2019, we closed a public offering of equity securities resulting in net proceeds of approximately $1,679,230, after deducting placement agent commissions and other offering expenses payable by us.

On February 26, 2019, we announced that we were named a member of the Manufacturing Technology Centre (“MTC”) located at Ansty Park, Coventry, UK. Being a member of the MTC enables us to share and provide expertise and solutions for a number of MTC’s projects and also network with MTC’s existing members, including some of the UK’s leading aerospace companies.

On February 12, 2019, we announced that we were named a member of the Additive Alliance of Fraunhofer IAPT, a leading network for additive manufacturing (“AM”). As the first US company to be granted a membership in the Alliance, Sigma became part of the global research consortium to advance the development and implementation of AM. The membership enables us to demonstrate our PrintRite3D ^® technology to key players in the market of metal AM.

On February 5, 2019, we announced that the U.S. Patent and Trademark Office has issued a Notice of Allowance for U.S. Patent Application No. 15/276,452, “Optical Manufacturing Process Sensing and Status Indication System.” The patent application covers a system of sensors configured to measure optical emissions generated by a scanning heat source during an additive manufacturing (AM) process and to analyze the data collected.

On January 17, 2019, we announced we were awarded a Test and Evaluation Program contract with a leading global materials and service provider in AM. The program is designed to demonstrate the value of Sigma’s PrintRite3D ^® product capabilities and performance and to validate and quantify the repeatability and variability of AM production processes. So far we have had delays, diversions, and logistical alterations typical of many newly launched programs, yet importantly, there have been no negative performance issues in the RTE test results. The prototype RTE installation was with Materialise in 2018 and culminated in the project announced in June 2019 to integrate Sigma’s technology with Materialise’s MCP control system. As of the date of this Quarterly Report, of our two most advanced RTEs in process, one states an expectation to add a second PrintRite3D® installation, and the other expects to enter the phase two evaluation (multiple machines of differing OEM brands) over the next 60-120 days.

The size and quality of the demanding high technology ‘brand name’ companies currently participating in, along with those teed-up to enter the RTE program, appears to confirm that the program is Sigma’s most auspicious highway to success and material revenue driving into 2020 and beyond. The Airbus RTE announcement on July 30, 2019 followed by our OEM double-RTE announcement on August 13, 2019 demonstrates that the market’s uptake of this program initiative is accelerating.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the accompanying consolidated financial statements and related notes. These estimates and assumptions have a significant impact on our consolidated financial statements. Actual results could differ materially from those estimates. Critical accounting policies are those that require the most subjective and complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are disclosed in Note 1 to the Financial Statements included in this Quarterly Report on Form 10-Q. However, we do not believe that there are any alternative methods of accounting for our operations that would have a material effect on our financial statements.

Results of Operations

Three Months Ended June 30, 2019 and June 30, 2018

We expect to generate revenue primarily by selling and licensing our IPQA technologies, selling technical support services, contract manufacturing and selling specialty parts and studies to businesses that seek to improve their manufacturing production processes and production-run quality yields. Our ability to generate revenues in the future will depend on our ability to further commercialize and increase market presence of our PrintRite3D® technologies, and it will depend on whether key prospective customers continue to move from AM metal prototyping to production.

During the three months ended June 30, 2019, we recognized revenue of $33,582, as compared to $98,663 in revenue recognized during the same period in 2018, a reduction of $65,081. $10,000 of the reduction is directly attributable to the absence of any government program work in 2019, while the remaining 55,000 of it is attributable to the 100% dedication of our printer to Internal R&D in the second quarter of 2019 as we accelerated development of the Inspect product, as well as an overall decline in AM revenue.

Our Cost of Revenue for the three months ended June 30, 2019 and 2018 was $60,625 and $68,568, respectively, a reduction of $7,943. The decrease in our gross margin is primarily attributable to the additional travel and labor costs associated with the on-site and remote collaboration involved in initiation of the Company’s Rapid Test and Evaluation programs.

Sigma’s total operating expenses for the three months ended June 30, 2019 were $1,569,064 as compared to $1,422,511 for the same period in 2018, an increase of $146,553.

Salary and benefits costs were $581,356 for the three months ended June 30, 2019 compared to $426,049 for the same period in 2018, an increase of $155,307. This 36% cost increase correlates to a net increase of five full-time equivalent employees between the two periods which is a 31% increase in employee count.

Stock-based compensation was $220,360 for the three months ended June 30, 2019 compared to $423,067 for the same period in 2018, a $202,707, or 48%, decrease, primarily due to 2018 second quarter vesting of options granted to our former CEO in connection with his amended employment agreement.

Research and development expenditures of $118,845 were incurred during the three months ended June 30, 2019 compared to $95,049 in the same period of 2018, a 25% increase. The increase primarily results from the purchase of upgraded PrintRite3D ^® components and various pieces of specialized equipment as part of our continued acceleration of technology development.

Outside services fees incurred in the three months ended June 30, 2019 were $218,919 compared to $177,929 incurred during the same period in 2018, a 23% increase. The increase is primarily attributable to recruiting fees for senior employees.

Office expenses incurred during the three months ended June 30, 2019 were $184,068 compared to $110,936 incurred during the same period in 2018, an increase of $73,132, or 66%. The increase is primarily due to increased travel costs of $59,936, and other miscellaneous office expenses of $13,196.

Sigma’s net loss for the three months ended June 30, 2019 totaled $1,593,491 as compared to $1,388,804 for the same period of 2018, a $204,687 increase. The reduction in gross profit contributed $57,138 to the increased loss, while increased operating expenses contributed $146,553 to the increased loss.

Six Months Ended June 30, 2019 and 2018

During the six months ended June 30, 2019, we recognized revenue of $98,032 compared to $202,078 during the same period of 2018. The primary contributors to the $104,046 reduction were revenue decreases of $32,300 from the absence of any government work, $63,000 is attributable to the 100% dedication of our printer to Internal R&D in 2019, and the balance from an overall decline in AM revenue.

Our cost of revenue for the six months ended June 30, 2019 was $157,180 compared to $142,363 during the same period in 2018. The increase of $14,817 is primarily due to the additional travel and labor costs associated with the on-site and remote collaboration involved in initiation of the Company’s Rapid Test and Evaluation programs.

Sigma’s total operating expenses for the six months ended June 30, 2019 were $3,076,162 compared to $2,599,641 for the same period in 2018, a $476,521 increase.

Payroll costs for the six months ended June 30, 2019 were $1,093,916 compared to $824,706 for the same period in 2018. The $269,210 increases result primarily from the earlier mentioned addition of five employees since the end of the second quarter of 2018. Stock-based compensation for the six months ended June 30, 2019 was $474,566 compared to $584,589 for the same period in 2018, a $110,023 decrease, primarily due to the vesting of options granted to our former CEO in connection with his amended employment agreement in 2018.

During the six months ended June 30, 2019, Sigma incurred research and development expenditures of $264,177 compared to $217,022 in the same period of 2018. The $47,155 increase in these expenditures during the first six months of 2019 resulted primarily from the purchase of upgraded servers and various pieces of specialized equipment as part of our continued acceleration of technology development, as well as $35,333 of consulting fees paid in connection with the development of Version 5.0 of our PrintRite3D ^® platform.

Sigma’s public company and investor relation fees incurred in the six months ended June 30, 2019 were $315,107, compared to $283,596 during the same period in 2018. The $31,511 increase in the six-month comparative expenditures results primarily from an increase in advertising expenses of $64,600, partially offset by a decrease in shareholder services expenses of $37,100.

Outside services fees incurred in the six months ended June 30, 2019 were $403,489, compared to $316,352 incurred during the same period in 2018, a 28% increase. Consulting fees increased by $67,552 due to the addition of an application engineer consultant, and recruiting fees increased by $19,428.

During the six months ended June 30, 2019, Sigma’s office expenses were $350,178 compared to $206,042 in the same period of 2018. The $144,136 increase in these expenditures primarily resulted from additional travel expense related to both a more aggressive outreach to prospective OEM, service bureau and end user customers and our expansion into the European market.

In the six months ended June 30, 2019, our net other income & expense was net income of $57,707, as compared to net expense of $19,754 during the same period in 2018. The six-month 2019 net other income is primarily comprised of $52,000 in New Mexico state job incentive credits received. The net other expense for the same period in 2018 is primarily due to a $36,733 write-off of accounting software, partially offset by interest income of $17,086 on the then outstanding notes receivable.

Sigma’s net loss for the six months ended June 30, 2019 totaled $3,077,603 as compared to $2,559,680 for the same period in 2018, a $517,923 increase. Contributing to this increase was an increase in our operating loss of $595,384, consisting of a decrease in gross profit of $118,863, together with an increase in operating expenses of $476,521. This was partially offset by an increase in other income and expense of $77,461.

We financed our operations during the three and six months ended June 30, 2019 and 2018 primarily from revenue generated from PrintRite3D® system sales and engineering consulting services we provided to third parties during these periods and through sales of our common and preferred stock. We expect that our revenue will increase in future periods as we seek to further commercialize and expand our market presence for our PrintRite3D®-related technologies and obtain new contract manufacturing orders in connection with our EOS M290.

Liquidity and Capital Resources

As of June 30, 2019, we had $696,390 in cash and working capital of $685,409, as compared with $1,279,782 in cash and working capital of $1,052,017 as of December 31, 2018.

Our major sources of funding have been proceeds from public and private offerings of our equity securities (both common stock and preferred stock), and from warrant exercises.

In March 2019, the Company closed a public offering of equity securities in which it issued 1,400,800 shares of common stock and warrants to purchase a total of 420,240 shares of common stock resulting in net proceeds of approximately $1,679,330, after deducting placement agent commissions and other offering expenses payable by the Company.

In May 2019, the Company closed a private placement of equity securities in which it issued 400,000 shares of common stock and warrants to purchase a total of 220,000 shares of common stock resulting in net proceeds of approximately $515,000, after deducting placement agent commissions and other offering expenses payable by the Company.

In August 2019, the Company closed a public offering of equity securities in which it issued 2,875,000 shares of common stock resulting in net proceeds of approximately $1,971,000, after deducting placement agent commissions and other offering expenses payable by the Company.

During the remainder of 2019, we expect to sustain our operations and our commercialization and marketing efforts without a material increase in our cash burn rate. We expect that enhancements of our IPQA®-enabled PrintRite3D® technology that were developed substantially in fiscal 2018 and 2019 and brought to market will enable us to further commercialize this technology for the AM metal market in 2019 and beyond. However, until commercialization of our full suite of PrintRite3D® technologies, we plan to continue funding our development activities and operating expenses by licensing our PrintRite3D® systems and supporting field services, as applicable, and providing PrintRite3D®-enabled engineering consulting services concerning our areas of expertise (materials and manufacturing quality assurance and process control technologies) and contract manufacturing for metal AM, and through the use of proceeds from sales of our securities.

Net Cash Used in Operating Activities

Net cash used in operating activities during the six months ended June 30, 2019 increased to $2,737,650 from $1,472,519 during the same period in 2018, a $1,265,131 increase. Increased net loss contributed $517,923 toward this use of cash, increased inventory purchases contributed $377,440 as a result of our finished goods ramp program, and a net decrease of accounts payable and accrued expenses contributed $164,370.

Net Cash Used/Provided by Investing Activities

Net cash used by investing activities during the six months ended June 30, 2019 was $115,920, which compares to $530,082 of cash provided by investing activities during the same period of 2018, a decrease of $646,002. This is primarily attributable to the March 2018 receipt of payment in full of a then outstanding $500,000 loan receivable.

Net Cash Used/Provided by Financing Activities

Cash provided by financing activities during the six months ended June 30, 2019 decreased to $2,270,178 from $2,946,400 during the same period in 2018 due to lower proceeds from our public and private securities offerings in 2019.

The Company anticipates continued losses in 2019, with any expected increased revenues offset by increased salaries and related expenses in connection with additional employees.

We have no credit lines as of August 14, 2019, nor have we ever had a credit line since our inception.

Based on the funds we have as of August 14, 2019, and the proceeds we expect to receive from rapid test and evaluation engagements for our updated PrintRite3D® hardware and software technology, sales of contract AM manufacturing for metal AM parts, possible sales of our securities and from the repayment of loans made by Sigma, we believe that we will have sufficient funds to pay our administrative and other operating expenses through 2019. Our ability to continue to fund our liquidity and working capital needs will be dependent upon the success of and revenues from existing and future PrintRite3D®-proof of concept contracts, follow-on contracts resulting from successful proof of concept engagements, possible strategic partnerships, contract manufacturing orders in connection with our EOS M290, and possibly by obtaining additional capital from the sale of securities or by borrowing funds from lenders to fulfill our business plans. If we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. There is no assurance that we will be successful in obtaining additional funding. If we require and fail to obtain sufficient funding when needed, we may be forced to delay, scale back or eliminate all or a portion of our commercialization efforts and operations.

We have no off-balance sheet arrangements as defined in Item 303(a) of Regulation S-K.