NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
September
30, 2018
(Unaudited)
NOTE
1 - Summary of Significant Accounting Policies
Nature
of Business
-Sigma Labs, 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 and applicable rules and regulations of the Securities
and Exchange Commission (“SEC”) regarding interim reporting. 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 September 30, 2018 and 2017 and for the periods then ended have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been
condensed or omitted. The Company suggests these condensed financial statements be read in conjunction with the December 31, 2017
audited financial statements and notes thereto included in the Company’s Form 10-K. The results of operations for the periods
ended September 30, 2018 and 2017 are not necessarily indicative of the operating results for the full year.
Reclassification
- Certain amounts in prior-period financial statements have been reclassified for comparative purposes to conform to presentation
in the current-period financial statements. In addition, $153,013 of issuance costs associated with the February 2017 capital
raise have been reclassified from operating costs to a reduction in additional paid in capital and $35,680 reported as revenue
in the first nine months of 2017 has been reclassified to deferred revenue.
Continuing
Operations -
The Company has sustained losses and had negative cash flows from operating activities since its inception. In
2017 and the first nine months of 2018, management has reported a change of strategy under which the company ceased to make sales
and installations for research and development applications in order to focus its efforts entirely on potential customers already
manufacturing 3D metal parts and therefore, already in need of quality improvement. The result of this change between September
2017 and the third quarter of 2018 was a significant decrease in revenues which the Company hopes to replace with orders for serial
production use. The Company has raised significant equity capital as it continues to develop new products with commercial applications
that may increase future revenues. On February 21, 2017, the Company closed an underwritten public offering of equity securities
resulting in net proceeds of approximately $5,097,000, after deducting underwriting discounts and commissions and other offering
expenses payable by the Company. The Company was able to fund operations for 2017 with these funds and end the year with a cash
balance of $1,515,674. On March 28, 2018, Sigma received $535,000 in full payment of the Morf 3D note and related accrued interest
balance. In addition, on April 6, 2018, the Company closed a private placement offering of equity securities resulting in net
proceeds of approximately $877,500, after deducting commissions and other offering expenses payable by the Company. On June 26,
2018 the Company closed a public offering of equity securities resulting in net proceeds of approximately $2,068,900, after deducting
placement agent commissions and other offering expenses payable by the Company. As a result, the Company currently has sufficient
cash and working capital to fund operations through the first quarter of 2019 and is anticipating that proof of concept contracts
may be closed in the last quarter of fiscal 2018 generating additional cash flow in the near term.
Loss
Per Share -
The computation of loss per share is based on the weighted average number of shares outstanding during the period
in accordance with ASC Topic No. 260, “Earnings Per Share.” Shares underlying the Company’s outstanding
warrants, options or note conversion features were excluded from the diluted earnings per share computation due to the
anti-dilutive effect they would have on the computation. At September 30, 2018 the Company had 250 Convertible preferred stock
shares, 3,228,500 warrants, 697,207 stock options and a $50,000 Convertible Note Payable outstanding. The total number of shares
of common stock underlying these instruments is 4,200,707. At September 30, 2017 the Company had 1,701,500 warrants, 279,938 stock
options and $1,000,000 in Convertible Notes Payable outstanding. The total number of shares of common stock underlying these instruments
was 2,481,438.
The
following data shows 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 September 30, 2018 and 2017:
|
|
Three Months Ended
September 30
|
|
|
Nine months Ended
September 30
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per Common Share - Basic and Diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.24
|
)
|
|
|
(0.62
|
)
|
|
$
|
(0.68
|
)
|
Loss from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stockholders (numerator)
|
|
$
|
(1,320,825
|
)
|
|
$
|
(1,116,910
|
)
|
|
|
(3,880,505
|
)
|
|
$
|
(2,932,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares Outstanding used in loss per share during the Period (denominator)
|
|
|
8,281,338
|
|
|
|
4,574,460
|
|
|
|
6,295,658
|
|
|
|
4,330,565
|
|
Recently
Enacted Accounting Standards
- The FASB established the Accounting Standards Codification (“Codification” or “ASC”)
as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation
of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”).
Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) issued under authority of federal
securities laws are also sources of GAAP for SEC registrants.
Recent Accounting Standards Updates (“ASU”)
through ASU No. 2018-18 contain technical corrections to existing guidance or affects guidance to specialized industries
or situations. The Company has evaluated recently issued technical pronouncements and has determined that, other than ASU 2014-09
(Topic 606) and the related ASU 2018-18 (Topic 808), addressed below, these updates have no current applicability to the
Company or their effect on the financial statements would not have been significant.
In
May 2014, the FASB issued ASU 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic 606 supersedes the
revenue recognition requirements in Topic 605, “Revenue Recognition” (Topic 605), and requires entities to recognize
revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration
to which the entity expects to be entitled to in exchange for those goods or services. On January 1, 2018, we adopted Topic 606
and all related amendments (“new revenue standard”) to those contracts which were not completed as of January 1, 2018
using the modified retrospective method. The comparative information has not been restated and continues to be reported under
the accounting standards in effect for those periods. There is no adjustment to the opening balance of retained earnings due to
the cumulative effect of initially applying the new revenue standard determined to be immaterial. We expect the impact of the
adoption of the new revenue standard to be immaterial to our net income on an ongoing basis.
In November 2018, the FASB issued ASU 2018-18, C
ollaborative
Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606,
which, among other things, provides
guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606. The
amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2019, with early adoption permitted. The Company is in the process of evaluating the impact the standard will have on its financial
statements.
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.
NOTE
2 - Notes Receivable
On
May 1, 2017, the Company made a loan in the principal amount of $250,000 to Jaguar Precision Machine, LLC, a New Mexico limited
liability company, pursuant to a Secured Convertible Promissory Note dated May 1, 2017 delivered by Jaguar to the Company. The
loan bore interest at the rate of 7% per annum, was due and payable in full on May 1, 2018, was secured by certain assets of Jaguar,
and is convertible at the Company’s option into 10% of the outstanding shares of the common stock of Jaguar unless Jaguar
exercises its right under specified circumstances to repay all principal and accrued interest on the loan. The purpose of the
loan was to provide working capital to Jaguar to, among other things, start up a metallurgical laboratory and become ASM9100
certified for contracts related to AM of high-precision aerospace and defense components, in furtherance of our strategic alliance.
Sigma received from Jaguar priority for use of certain machines and services of Jaguar. On April 27, 2018, the promissory note
was amended whereby the due date of the note was extended to June 1, 2018 in exchange for a cash payment of $5,000 received on
May 1, 2018, 50% of which will be retained as payment for the 30-day extension. On June 6, 2018 the promissory note was amended
whereby the due date was extended to August 1, 2018 in exchange for cash payments of $10,000 by each of June 7, 2018 and July
1, 2018, $8,000 of which is to be retained as payment for the 60-day extension. The first of the $10,000 payments was received
by the Company on June 6, 2018. On June 15, 2018, the Company received a $150,000 payment from Jaguar, $17,803 of which was applied
to accumulated interest through that date and $132,197, the balance, of which, was applied to the principal balance of the note.
No payments have been received since that date. The holder of the promissory note has committed to paying the remaining
principal balance along with accumulated interest on or before December 31, 2018. The September 30, 2018 principal balance
of the note was $117,803 and the accumulated interest balance due was $2,346.
On
March 27, 2017, the Company made a loan in the principal amount of $500,000 bearing interest at the rate of 7% per annum to Morf3D,
Inc., an Illinois corporation, pursuant to a Secured Convertible Promissory Note dated March 27, 2017 delivered by Morf3D to the
Company. The $500,000 loan principal and $35,000 of accumulated interest was paid in full on March 27, 2018.
NOTE
3 - Inventory
At
September 30, 2018 and December 31, 2017, the Company’s inventory was comprised of:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Raw Goods
|
|
$
|
170,714
|
|
|
$
|
127,076
|
|
Work in Process
|
|
|
-
|
|
|
|
251
|
|
Finished Goods
|
|
|
65,808
|
|
|
|
65,378
|
|
Total Inventory
|
|
$
|
236,522
|
|
|
$
|
192,705
|
|
NOTE
4 - Notes Payable
At
September 30, 2018 the Company had a $50,000 convertible note bearing interest at a rate of 10% per annum outstanding which was
due on October 18, 2018. On October 18, 2018, the note was amended pursuant to which the due date was extended to April 18, 2019.
Under the amendment, Sigma paid the $3,444 total accrued interest balance as of October 18, 2018 and agreed to make future payment
dates of accrued interest on December 31, 2018 and April 18, 2019.
NOTE
5 - Stockholders’ Equity
Common
Stock
Effective
March 5, 2018, the Articles of Incorporation were amended to increase the authorized number of shares of common stock to 15,000,000.
Effective
October 18, 2018 the Articles of Incorporation were amended to increase the authorized number of shares of common stock to 22,500,000.
In
2017, the Company issued 40,934 shares of common stock to directors at an average value of $2.09 per share, or $85,408. Also in
2017, 7,750 shares previously issued to a director and 750 shares previously issued to an employee, with a combined carrying value
of $9,830, were forfeited.
In
January 2018, the Company issued 23,256 shares of common stock to directors valued at $1.72 per share, or $40,000.
In
April 2018, the Company issued 176,744 shares of common stock to directors valued at $1.2236 per share, or $216,264.
Between
May 29, 2018 and June 1, 2018, we issued an aggregate of 1,000,000 shares of common stock upon conversion of the 1,000 shares
of Series B Preferred Stock issued on April 6, 2018 (as described below under “Preferred Stock”).
On
June 26, 2018, as part of its public offering of equity securities described in Note 1, the Company issued 2,040,000 shares of
common stock and warrants to purchase a total of 717,000 shares of common stock (including the warrants described under “Preferred
Stock” below that were issued on June 26, 2018). Each warrant has an initial price of $1.08 per share. The net proceeds
to the company were approximately $2,068,900 after commissions and other offering expenses. The Company also issued Dawson James
Securities, Inc., its placement agent in the public offering, a Unit Purchase Option to acquire up to 191,200 Units, at an exercise
price of $1.25 per Unit, consisting of 191,200 shares of common stock and warrants to purchase up to 57,360 shares of common stock
at an exercise price of $1.08 as compensation.
On
August 31, 2018, the Company issued 100,000 shares of common stock upon conversion of 100 shares of Series C Preferred Stock issued
on June 26, 2018 (as described below under “Preferred Stock”).
Deferred
Compensation
In
previous years and in the nine months ended September 30, 2018, the Company issued to various employees, directors, and contractors
shares of the Company’s common stock, subject to restrictions, pursuant to the 2013 Equity Incentive Plan (the “2013
Plan”). Such shares were valued at the fair value at the date of issue. The fair value was expensed as compensation over
the vesting period and recorded as a reduction of stockholders’ equity. During the nine months ended September 30, 2018
and September 30, 2017, $213,449 and $192,248 respectively of the unvested compensation cost related to these issues was recognized.
As
of September 30, 2018 and December 31, 2017, the balance of unvested compensation to be recognized was $64,066 and $31,576, respectively
and is recorded as prepaid stock compensation as of those dates.
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of preferred stock, $0.001 par value. 250 and 0 shares of preferred stock were
issued and outstanding at September 30, 2018 and December 31, 2017, respectively.
On
April 6, 2018, Sigma issued 1,000 shares of the Company’s newly-created non-voting Series B Convertible Preferred Stock,
which were convertible into 1,000,000 shares of common stock and warrants to purchase an aggregate of 750,000 shares of the Company’s
common stock, for an aggregate purchase price of $1,000,000. The warrants have an initial exercise price of $1.47 per share, the
closing price of the Company’s Common Stock reported on The NASDAQ Capital Market on April 6, 2018, subject to adjustment
in certain circumstances. The net proceeds to the company were approximately $877,500 after commissions and other offering expenses.
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.
On
June 26, 2018, as part of the public offering described in Note 1, the Company issued 350 of the Company’s newly-created
non-voting Series C Convertible Preferred Stock, which were convertible into 350,000 shares of common stock, and warrants to purchase
an aggregate of 105,000 shares of the Company’s common stock. The warrants have an initial exercise price of $1.08 per share,
11% above the closing price of the Company’s Common Stock reported on The NASDAQ Capital Market on June 26, 2018, subject
to adjustment in certain circumstances.
Stock
Options
As
of September 30, 2018, an aggregate of 750 shares and 697,207 shares of common stock were reserved for issuance under the 2011
and the 2013 Plans, respectively.
On
February 21, 2018, the Company granted Mark Cola, a former officer of the company, two ten-year options under the 2013 Plan to
purchase an aggregate of 61,750 shares of common stock each, with each option having an exercise price of $1.49 per share. Pursuant
to Mr. Cola’s employment agreement, one of the options became fully-vested on the October 10, 2018 date that Mr. Cola retired
from the Company, and the other option vests and becomes 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 as a consultant.
On
February 26, 2018, the Company 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, and with vesting periods ranging
from 3 to 4 years beginning February 26, 2019.
On
April 19, 2018, Sigma granted John Rice, our President and Chief Executive Officer, three options to purchase up to 20,000 shares
of our common stock under our 2013 Plan. In addition, on each of April 30, May 31, June 30, 2018 and July 31, 2018, Sigma granted
Mr. Rice an option to purchase up to 20,000 shares of our common stock under our 2013 Plan. The foregoing options have an exercise
price per share equal to $1.88, $1.54, $1.48, $1.26, $1.47, $1.19 and $.87 respectively, which is at least the closing price of
our common stock on the respective date of grant, and each is fully vested as of the respective grant date.
On
April 19, 2018, Sigma granted Ron Fisher, our Vice President of Business Development, a five-year option to purchase an aggregate
of 28,750 shares of common stock, with such option having an exercise price of $1.22 per share, and with 1,438 shares vesting
upon grant and the balance vesting in four annual installments over four years following the date of grant (1,366 shares, 4,097
shares, 6,828 shares and 15,021 shares, respectively).
During
the nine months ended September 30, 2018, options to purchase 288,076 shares of common stock vested, and $569,718 of compensation
cost was recognized. As of September 30, 2018, there were options to purchase 697,207 shares issued and outstanding under the
2013 Plan. Of this amount, there are vested options exercisable for 373,689 shares of common stock. No options were exercised
during the nine months or the quarter ended September 30, 2018.
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 condensed statements of operations for the nine months ended September 30, 2018
and 2017 is $783,167 and $505,630, of which $569,718 and $313,382 is related to stock options, respectively. There was no capitalized
share-based compensation cost as of September 30, 2018 and 2017.
The
fair value of share-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for
the nine months ended September 30, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Dividend yield
|
|
|
0.00
|
|
|
|
0.00
|
|
Risk-free interest rate
|
|
|
2.68-3.05
|
%
|
|
|
1.89-2.45
|
%
|
Expected volatility
|
|
|
111.4-137.3
|
%
|
|
|
116.3-139.0
|
%
|
Expected life (in years)
|
|
|
5-10
|
|
|
|
5-10
|
|
Warrants
At
September 30, 2018, the Company had outstanding warrants to purchase a total of 3,228,500 shares of common stock; 1,621,500 warrants
at an exercise price of $4.00 per share, which if not exercised, will expire on February 21, 2022, 890,000 warrants at an exercise
price of $1.47 per share, which if not exercised, will expire on October 07, 2023, and 717,000 warrants at an exercise price of
$1.08 per share, which if not exercised, will expire on June 26, 2023.
On
May 31, 2018, 24,000 warrants with an exercise price of $2.00 were exercised in a cashless exchange transaction resulting in the
issuance of 4,800 shares of the Company’s common stock.
NOTE
6 - Subsequent Events
Between October 3, 2018 and October 9,
2018, the Company issued an aggregate of 250,000 shares of common stock upon the conversion of 250 shares of the Company’s
Series C Convertible Preferred.
Between October 18, 2018 and November 1,
2018 the Company issued 101,475 shares of common stock upon the exercise of warrants at an exercise price of $1.08 per share.
On
October 18, 2018, the 2013 Plan was amended to fix at 1,650,000 shares the aggregate number of shares of our common stock issued
or issuable under the 2013 Plan.
On
October 18, 2018, the Company increased the annual base salary of Darren Beckett, our Chief Technology Officer, from $135,000
to $180,000, effective retroactive to September 16, 2018, and granted Mr. Beckett an option to purchase 20,000 shares of common
stock under the 2013 Plan at an exercise price of $1.206 per share. The option has a term of five years and vests as follows:
1,000 shares will vest and become exercisable on September 16, 2019; 3,000 shares will vest and become exercisable on September
16, 2020; 5,000 shares will vest and become exercisable on September 16, 2021, and 11,000 shares will vest and become exercisable
on September 16, 2022, subject, in each case, to Mr. Beckett being in the continuous employ of the Company on the applicable vesting
date.
Effective
October 19, 2018, our Amended and Restated Articles of Incorporation, as amended, were amended pursuant to a Certificate
of Amendment filed with the Nevada Secretary of State to increase the authorized number of shares of our common stock to 22,500,000.
On
November 1, 2018, the Company granted Mr. Rice an option to purchase 68,750 shares of the Company’s common stock under the
2013 Plan at an exercise price of $1.79 per share, with such option having a term of five years and being fully vested on the
grant date.