NextTrip, Inc.: Form 10-K for the period ended Dec 31, 2022

The Company:

Sigma Additive Solutions, Inc. (the “Company,” “Sigma,” “Sigma Additive,” “we,” “us” and “our”) is a software company that was founded by scientist-engineers composed of physicists and metallurgists then working at Los Alamos National Labs for the purpose of developing sophisticated metallurgical products. Since 2016, the Company’s focus has been on solving the complex and challenging problem of how to best assure the high quality of metal parts manufactured in laser powder bed additive manufacturing, or 3D, printing, machines. Sigma and many others believe that until this problem was solved, 3D manufacturing of metal parts would not be scalable enough to grow past prototyping and mature into a major industry enjoying high quality yields and cost-efficient production runs. The solution that Sigma developed to solve this problem is In-Process-Quality-Assurance (“IPQA®”) software known as PrintRite3D®.

In 2018, the Sigma team enhanced and added user features to its PrintRite3D® technology. In 2019, the Company began to productize and test PrintRite3D® on various 3D metal printers at customers’ sites through the Company’s Rapid Test and Evaluation (“RTE”) program. Upon receiving favorable responses from the various RTEs, in 2020 the Company began to market PrintRite3D®. Although the worldwide COVID-19 pandemic adversely affected capital spending within the Company’s targeted industries, the Company moved forward with its plan to market PrintRite3D® to the following industry segments: (1) global manufacturing companies with Additive Manufacturing (“AM”) initiatives; (2) 3D printer Original Equipment Manufacturers (“OEMs”) for purchases of licenses and generating fees and royalties thereafter; (3) additive manufacturing software venders for alliances and licenses for co-sales; and (4) research foundations, standards organizations and universities, all in service of Sigma’s potential for setting the industry standard of measurement by providing data and analytics as a metrics-based quality standard of metal quality for all 3D laser powder bed manufactured parts, notwithstanding the design, metal, or brand of equipment upon which parts are manufactured. In 2022, we shifted our business model from selling perpetual licenses of our combined hardware and software solution to subscription-based licenses and began the development of a suite of software-only product offerings, which we believe will transform our business by providing a scalable, cost-effective solution to our customers that can be more broadly connected to OEM’s, hardware, and software partners. With the change to our business model, and the desire to connect more fully to the full digital quality landscape, the business began to explore potential strategic investments and mergers and acquisitions. This is a major focus in 2023, as management seeks capital for operations, and to provide runway to future options, and to take Sigma to the next phase of our business.

Additive Metal Manufacturing and the role and need for Sigma’s technology:

The use of 3D printing technology dates to the 1980s for polymer applications, but the ability to print functional parts from metal alloys has spurred significant interest and investment in AM in recent years. AM is now reshaping the product design process, entire supply chains, and the vast landscape of manufacturing. Engineers are embracing new design freedoms to realize valuable product performance improvements and cost efficiencies with lighter weight, better thermal management capability, better fluid mixing, customization, and the ability to make different structures and textures that yield better part integration.

We believe that there are several significant hurdles to be overcome for broader adoption of additive technologies for the production of industrial metal and polymer parts. Among these are lack of quality, consistency, and industry standards along with cost. The Company believes PrintRite3D® has the potential to contribute to widespread industrialization of 3D metal and polymer printing. Additionally, the disruption in complex and rigid supply chains caused by COVID-19 exposed the country’s vulnerability to shortages in times of crisis. In response, manufacturers are devising strategies to be able to be more agile, increase their ability to manufacture mission critical parts on demand, with more customization, and closer to where the end part will be needed, and we believe quality systems to ensure consistency will play a critical role. Additionally, we believe that in-process data will play an important role in connecting the full digital quality landscape from raw materials to final part.

PrintRite3D® Technology and Product Family

The current version of PrintRite3D® is an integrated hardware and software edge computing platform, or in-process quality assurance system, that combines inspection, feedback, data collection and critical analysis. It is a 3D printer platform-independent solution that can be installed as a retrofit to an existing 3D printer or requested as a factory option from select 3D printer OEMs. PrintRite3D® provides a high-fidelity, accurate system that can confidently scale to multi-laser 3D metal and polymer printers. The PrintRite3D® system detects potential anomalies in real-time and incorporates machine learning in conjunction with developed metrics to map those metrics to live post-process data. This provides the ability to reduce manufacturing costs by identifying problems before post-production testing, while creating a certification framework that serves the needs of end-users, printer manufacturers, and standards organizations.

PrintRite3D was initially developed to work with industrial 3D metal printers using the Powder Bed Fusion (“PBF”) process, which is the most widely used process for industrial metal applications. In 2020, we announced PrintRite3D for Direct Energy Deposition, or DED, for metal parts. PrintRite3D DED opened another segment of the industrial metal market for Sigma to sell and distribute our technology. In 2021, the Company introduced PrintRite3D Selective Laser Sintering, or SLS, for polymer materials. The polymer market is larger and more advanced than the metal market. There is an increasing need for quality and standards within the polymer market to support mission critical parts such as those being used in aerospace, space exploration, and defense. The Company’s entry into this market was customer driven by a supplier of critical equipment to the space exploration market. The Company believes that PrintRite3D’s ability to work across a different 3D printers, processes and materials gives it a competitive advantage and will help accelerate the adoption of 3D printing for industrial applications.

In 2022, we began the development of a new suite of software-only products, which we believe will allow us to scale into production across enterprises with large installations of production printers. These machine-health, process health, and part-health modules will be built into the PrintRite3D suite. These products will combine streaming health data from major OEM’s and off-axis camera data, and thermal on-access melt pool technology to provide a centralized home for in-process quality solutions and reporting that can be connected to the broader digital quality ecosystem. We believe the connected and open data we are creating will allow users to simplify their quality operations, identify gross defects, utilize machine-learning and artificial intelligence platforms, and significantly improve production quality while lowering the cost of development.

Distribution Methods

Sigma employs a multi-channel distribution model for its IPQA products, including a direct sales force, value added resellers (“VARs”) software and hardware partners, and 3D printer OEMs. In 2022, the majority of the Company’s revenue was generated by direct sales in North America and Europe and through OEM relationships. VARs are currently used in Japan and India. The Company plans to extend its VAR channel outside of North America and Europe. Since 2020, the Company has moved to establish and extend relationships with 3D printer OEMs, software partners, and integrated hardware partners to expand our footprint and ability to scale our business.

The Company markets its products through webinars, email and social media campaigns, and participation, both in person and virtually, in industry events and tradeshows. In addition, the Company collaborates with international standards organizations in the establishment of standards for AM.

Sources and Availability of Parts and Materials

We have important relationships with several suppliers for critical components of our PrintRite3D® systems, in particular optics and data acquisition components, and development of our user interface. To-date, we have not experienced shortages of components; however, in some cases COVID-19 has resulted in increased lead times and cost for certain parts. We manage the risk of component shortages by sourcing backup suppliers, and in the case of our user interface, hiring engineers in-house and contractors to support the ongoing development and maintenance.

Dependence on a Few Major Customers and Partners

The Company has established agreements with several international 3D printer OEMs, software, and integrated hardware companies. The Company supports the OEM, software, and hardware relationships with joint marketing programs, field sales and technical support personnel to assist in the sale of its technology. It is the Company’s intent and focus to expand our OEM and software channels through distribution relationships with existing and additional 3D printer OEMs, hardware, and software relationships in the future.

Competition

PrintRite3D® is a third-party, agnostic In-Process Quality Assurance system designed to provide a consistent, standards-based measurement and prediction of quality across a heterogeneous collection of 3D printers. Competition historically has been viewed as printer OEMs with their own monitoring system, usually as a separately priced option to its printers. However, with the move to software-only solutions and API connection options to machines, Sigma believes it can provide machine agnostic analytics and reporting software tools that help standardize digital quality in the industry. Additionally, we plan to work with OEMs to reduce costs of hardware, grow and expand their quality monitoring as a standard machine option, and provide a standard language for quality. We believe that the future of AM will consist of factories with various generations of printers from various manufacturers. The primary reasons that global manufacturers will have machines from various vendors is that certain machines and technologies are better suited for different applications than others. Additionally, as the industry progresses, innovation will accelerate, and new leaders will emerge. Finally, many believe that there will be a consolidation of 3D metal manufacturers and the number of vendors will decrease over the next decade from approximately 50 at present. Although standards for monitoring are slowly being set by various international standards organizations, it is highly unlikely that printer OEMs will modify their monitoring systems to work with other OEMs machines. Therefore, we believe that the best way to produce parts with a consistent level of quality is with a third-party, agnostic, standards based IPQA system, such as PrintRite3D®. Over the past year or so, new competitors have entered the market with monitoring technology that follows Sigma’s lead as a third-party agnostic system capable of working across 3D printer machine types. However, most of these solutions are point solutions addressing one specific item of quality. These have value, but do not provide the end user the full quality picture for regulators or customer needs. Sigma has expanded its quality footprint to be a home for holistic in-process quality data. We see a path to integrate with other point solutions if customers find interest in them, while still ensuring holistic quality for our end customers. Point solutions are useful; however, they fall short of determining root cause, and unlike PrintRite3D, are not capable of instructing the printer, through closed-loop control, to vary certain machine variables such as laser power to avoid creating the defects in the first place.

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 tables below summarize our issued patents. We are currently prosecuting foreign and U.S. patent applications related to our IPQA® technology and rapid qualification of additive manufacturing for metal parts. There is no guarantee, however, that the patent applications will result in issued patents or that if issued, any patents will offer adequate protection under applicable law.

Sigma Additive Solutions, Inc. Patent Portfolio as of December 31, 2022

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The Company believes that its patented PrintRite3D® technology is a significant barrier to entry to competitors attempting to replicate the Company’s strategy.

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Government Regulations

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, our sales to U. S. government agencies are driven by pricing based on costs incurred to produce products or perform services. U.S. government contracts generally are subject to Federal Acquisition Regulations (“FAR”), agency-specific regulations that implement or supplement FAR, such as the se 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. Our 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 temporary or permanent suspension or debarment from government contracting or subcontracting. In addition, government contractors are subject to routine audits and investigations by U.S. government agencies such as the Defense Contract Audit Agency (“DCAA”). These agencies review a contractor’s performance, cost structure, and compliance with applicable laws, regulations, and standards. The DCAA also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation, and information systems.

As of March 29, 2023, we have several active contracts with government agencies, and, funding permitting, we plan to seek to increase government contracting in the future.

Human Capital

As of December 31, 2022, we had 25 full-time employees. We continue to balance a search for additional, qualified personnel to support our targeted growth in the area of IPQA® for AM, while ensuring that our operations are aligned towards our software focus and corresponding cost structure. We believe that our future success will depend, in part, upon our ability to attract and retain highly skilled employees and management and technical personnel. Employee engagement is important to us, and we strive to continuously enhance our corporate culture and further the growth and development of our employees.

All employees are responsible for upholding the Sigma Code of Ethics and Business Conduct, which is important in delivering on our strategy. We maintain a compliance hotline for the confidential reporting of any suspected policy violations or unethical business conduct on the part of our businesses, employees, officers, directors, suppliers, or customers.

Compensation and Benefits

We strive to provide competitive compensation and benefits to our employees. Our benefit programs include bonuses, stock-based compensation awards, a 401(k) plan with employer matching, healthcare and insurance benefits, flexible paid time off and other employee assistance programs.

COVID-19 Pandemic

The health and wellness of our employees is important to our success. We continue to follow guidance from health officials, and while COVID-19 restrictions have been relaxed in the U.S. and Europe, we have maintained a number of health-related measures including, but not limited to, a flexible work-from-home policy.

There continue to be isolated COVID-19 outbreaks in certain regions of the world, but these outbreaks have not had a significant impact on our operations. The extent to which the COVID-19 epidemic may impact our business, operations, financial condition, liquidity and results of operations in 2023 and beyond remains uncertain and unpredictable.

Russia - Ukraine Conflict

In February 2022, Russian forces invaded Ukraine. In response, the U.S., the European Union (“EU”), and several other countries imposed economic and trade sanctions and other restrictions (collectively, “global sanctions”) targeting Russia and Belarus. Russia then imposed retaliatory economic measures against the U.S., the EU, and several other countries. We have no sales to Russia or Ukraine, nor do we have any assets, employees or third-party contractors in Russia or Ukraine. The duration of the conflict and further sanctions could have further impact on the global economy, financial markets and inflation. Due to the uncertainty around the duration or outcome of the conflict, we cannot predict its effect on our business.

Corporate Information

We were 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 to Sigma Labs, Inc., and on August 9, 2022, we changed our name to Sigma Additive Solutions, Inc.

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.sigmaadditive.com (http://www.sigmaadditive.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 Report.

Recent Developments

On March 20, 2023, we announced the expansion of our collaboration with Materialise, a global leader in 3D printing software and service solutions, to provide additive manufacturing (AM) users automated quality control by integrating the PrintRite3D® quality assurance solution into the new software solution Materialise Process Control. Combining multiple complementary data sources and analytic methods allows businesses to make faster, data-driven decisions, improving operational efficiency and driving revenue growth. Materialise Process Control allows manufacturers to analyze and correlate layer data from the 3D printing process. Sigma and Materialise collaborated to integrate PrintRite3D® into Process Control and to make it available in CO-AM, Materialise’s end-to-end software platform for 3D printing. Sigma’s PrintRite3D® suite provides in-process data, including thermal data from the melt pool, yielding layer data that can enable users to find the root cause of defects faster.

On March 6, 2023, we announced that we will partner with DyeMansion, the global leader in connected and integrated post-processing solutions for industrial polymer 3D-printing, to add an integrated hardware/software solution option that offers extra quality assurance for DyeMansion’s post-processing solutions: DM60, Powershot Performance and Powerfuse S. DyeMansion’s comprehensive solution, the Print-to-Product workflow and all components are applicable for Industry 4.0 and can be integrated seamlessly into various production processes. The real-time monitoring and data analytics from Sigma’s Machine Health module will complement DyeMansion’s systems by offering reduced cost per part, unmatched quality, and high sustainability.

On March 1, 2023, we announced that we had retained Lake Street Capital Markets as the Company’s financial advisor in connection with our consideration of a range of strategic alternatives designed to enhance shareholder value, including a possible strategic investment, acquisition, merger, business combination, or similar transaction.

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 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 Report or our other public statements. 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. 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 will require additional financing to continue our operations, and there is substantial doubt regarding our ability to continue as a going concern.

As of December 31, 2022, we had cash of $2,845,931. Our existing cash on hand and anticipated revenues are sufficient to fund our remaining anticipated operating costs and capital expenditure requirements only through May 2023. We will need to raise additional financings to fund our operations, maintain compliance with the NASDAQ listing requirements and implement our business plan. There is no assurance as to the amount and availability of any required future financing or the terms thereof. Such financing, if in the form of equity, may be highly dilutive to our existing stockholders and may otherwise include onerous terms. If in the form of debt, such financing may include covenants and repayment obligations which may be difficult to meet and that could adversely affect our business operations. We have no current understanding or arrangement to obtain any additional financing. To the extent that funds are not available to us, we may be required to delay, limit, or terminate our business operations and may lose our NASDAQ listing.

In light of the foregoing, there is substantial doubt our ability to continue as a going concern, and the report of our registered independent public accounting firm on our financial statements as of and for the year ended December 31, 2022 contains a going concern qualification.

We are not profitable and may never become profitable.

We have incurred losses in every reporting period since we commenced business operations in 2010 and expect to continue to incur significant losses for the foreseeable future. Our net loss applicable to common stockholders for the years ended December 31, 2022 and 2021 was $8,749,304 and $7,488,172, respectively. As of December 31, 2022, our accumulated deficit was $49,342,484. 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, 2022 and December 31, 2021 were $630,428 and $1,651,765, respectively, and our operating expenses for those periods were $9,029,502 and $9,571,185, 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.

Our operating history makes evaluation of our business difficult.

We are continuing to develop our technologies and to implement our business plan. Our ability to implement a successful business plan remains unproven, and there is no assurance that we will ever generate sufficient revenues to sustain our business. Our operating history, together with the other risks discussed in this “Risk Factors” section, may make it difficult for prospective investors and others to evaluate our business.

We face the risks normally associated with a new business.

We face all of the risks inherent in a business based upon emerging technologies, 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 expanding our customer base, among others. If we are not effective in addressing these risks, we will not be able to achieve profitability 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 and geopolitical 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 maintain 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.

Some 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 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 eleven years, and we expect to grow in the future as our business develops and becomes further established. If our business grows as we anticipate, it will be necessary for us to manage our expansion in an orderly fashion. Any significant growth in our activities or in the market for our services will require extension of our managerial, operational, marketing and other resources. Future growth will also impose significant additional responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees. Our failure to manage growth effectively may lead to operational inefficiencies that will have a negative effect on our profitability. Additionally, if our growth comes at the expense of providing quality service and generating reasonable profits, our ability to successfully bid for contracts and our profitability will be adversely affected. We cannot assure investors that we will be able to effectively manage any future growth we may experience.

Failure to obtain adequate insurance coverage could put us at risk for uninsured losses.

Some or all of our customers may require insurance as a requirement to conduct business with us. Although we currently have product 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 uninsured loss, which would have a material adverse effect on our business and financial condition.

We are dependent on key personnel, and the loss of any of these individuals could harm our business.

We depend on key scientific and other personnel. The loss of any of these individuals could harm our business and significantly delay or prevent the achievement of our business objectives. In addition, our delivery of services will be labor-intensive: when we are awarded a contract, we may need to quickly hire project leaders and project management personnel. The additional staff may also create a concurrent demand for increased administrative personnel. The success of our business will require that we attract, develop, motivate and retain:

• experienced and innovative executive officers;
• senior managers who have successfully managed or designed programs in the public sector; and
• information technology professionals who have designed or implemented complex information technology projects.

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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:

• the progression of contracts;
• the rate of customer adoption of our new subscription pricing program;
• the commencement, completion or termination of contracts during any particular quarter;
• the schedules of government agencies and large multinational corporations for awarding contracts;
• the failure of our customers to fulfill their obligations under contracts with us; and
• the term of awarded contracts and potential acquisitions.

Changes in the volume of activity and the number of contracts commenced, completed or terminated during any quarter may cause significant variations in our cash flow from operations because a significant portion of our expenses are fixed. Fixed expenses include, rent, payroll, insurance, employee benefits, taxes and other administrative costs and overhead. Moreover, we expect to incur significant operating expenses during the start-up and early stages of large contracts and typically do not receive corresponding payments in that same quarter.

We may make acquisitions in the future that we are unable to effectively manage given our limited resources.

We may choose to grow our business by acquiring other entities. We may be unable to manage businesses that we acquire or to integrate them successfully without incurring substantial expenses, delays or other problems that could negatively impact our results of operations. Moreover, business combinations involve additional risks, including:

• diversion of management’s attention;
• loss of key personnel;
• our becoming significantly leveraged as a result of the incurrence of debt to finance an acquisition;
• assumption of unanticipated legal or financial liabilities;
• unanticipated operating, accounting or management difficulties in connection with the acquired entities;
• amortization of acquired intangible assets, including goodwill; and
• dilution to existing stockholders and our earnings per share.

Also, client dissatisfaction or performance problems with an acquired firm could materially and adversely affect our reputation as a whole. Further, the acquired businesses may not achieve the revenues and earnings that we anticipated.

We may be unable to develop or commercialize new and rapidly evolving technologies.

Many of our activities involve developing products or processes that are based upon new, rapidly evolving technologies. The ability to commercialize or further develop these technologies could fail for a variety of reasons, both within and outside of our control.

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. There can be no assurance that our program for protection of intellectual property and proprietary technology will be sufficient to protect our intellectual property and proprietary technology from competitors. Our business is also subject to the risk that our issued patents will not provide us with significant competitive advantages if, for example, a competitor was to independently develop or obtain similar or superior technologies. In addition, our issued patents may be challenged or infringed upon by third parties. The enforcement of intellectual property rights is subject to considerable uncertainty and can be expensive and time-consuming. Patent reform laws and court decisions interpreting such laws, may create additional uncertainty around our ability to obtain and enforce patent protection. Any significant impairment of our intellectual property rights could harm our business and our ability to compete. The unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results. Proprietary trade secrets and unpatented know-how are also very important to our business; however, trade secrets are difficult to protect. Our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential or proprietary information.

We may be sued by third parties who claim that we have infringed their intellectual property rights.

We may be exposed to future litigation by third parties based on claims that our research, development and commercialization activities infringe the intellectual property rights of third parties to which we do not hold licenses or other rights, or that we have misappropriated the trade secrets of others. Any litigation or claims against us, whether or not valid, could result in substantial costs, and could place a significant strain on our financial and human resources. In addition, if successful, such claims could cause us to pay substantial damages. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

Our bylaws contain provisions for indemnifying our officers and directors.

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 or she 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. The consequences of such loss, possible misuse of our proprietary and confidential information, or operational disruptions could include, among other things, unfavorable publicity, damage to our reputation, difficulty marketing our products, customer allegations of breach-of-contract, claims and litigation by affected parties, investigations by and other proceedings involving governmental authorities and possible financial liabilities for damages, any of which could materially adversely affect our business, financial condition, reputation and relationships with customers and partners. We also rely on a number of third-party service providers to host, store or otherwise process information for us, or to provide other facilities or infrastructure that we make use of, including “cloud-based” providers of corporate infrastructure services relating to, among other things, human resources, electronic communication services and some financial functions, and we are therefore dependent on the security systems of these providers. Any security breaches or incidents or other unauthorized access to, or disruptions of, our service-providers’ systems or viruses, loggers, ransomware or other malfeasant code in their data or software, or unauthorized access to or acquisition of any data they process or otherwise maintain for us could expose us to information loss, corruption and unavailability, operational disruptions, and misappropriation of confidential information, and could have similar consequences to us as any incidents affecting our own systems or the data we process or maintain. We and our third parties face these threats from a variety of sources, including attacks from hackers, phishing and other forms of social engineering, and human error or employee or contractor malfeasance. Because the techniques used to obtain unauthorized access to or sabotage security systems change frequently and are often not recognized until after an attack, we and our third-party service providers may be unable to anticipate the techniques or implement adequate preventative measures, thereby exposing us to material adverse effects on our business, financial condition, results of operations and growth prospects. A security breach or other security incident impacting us or our third-party service providers could require a substantial level of financial resources to rectify and otherwise respond to, may be difficult to identify or address in a timely manner, and could result in claims, investigations, and inquires by private parties or governmental entities that may divert management’s attention and require the expenditure of significant time and resources, and which may cause us to incur substantial fines, penalties, or other liability and related legal and other costs. Any actual or perceived security breach or other security incident may also harm our reputation and market position. Any of the foregoing matters could harm our operating results and financial condition. Although to-date we have not experienced any losses relating to cyber-attacks, there is no assurance that we will not suffer such losses in the future. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.

Our results of operations may be negatively impacted by the COVID-19 epidemic.

The potential reemergence of the coronavirus, which has caused a broad impact globally, including restrictions on travel and quarantine policies put in place by businesses and governments, may have a material economic effect on our business. Additionally, the coronavirus may result in disruption of financial markets, which may reduce our ability to access capital on favorable terms or at all.

Risks Related to Our Securities

The price of our securities is subject to volatility related or unrelated to our operations, which could result in substantial losses for our stockholders.

Between January 1, 2022 and December 31, 2022, the trading price of our common stock has ranged from a low of $0.40 to a high of $2.42 and could be subject to wide fluctuations in the future in response to various factors, some of which are beyond our control. These factors include those discussed previously in this “Risk Factors” section and others, such as:

• delays or failures in the commercialization of our current or future products and services;
• quarterly variations in our results of operations or those of our competitors;

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• changes in our earnings estimates or recommendations by securities analysts or adverse publicity about us or our products or services;
• announcements by us or our competitors of new products and services, significant contracts, commercial relationships, acquisitions or capital commitments;
• adverse developments with respect to our intellectual property rights;
• commencement of litigation involving us or our competitors;
• any major changes in our Board of Directors or management;
• market conditions in our industry; and
• general economic conditions in the United States and abroad.

In addition, the stock market, in general, may experience broad market fluctuations, which may adversely affect the market price or liquidity of our securities.

We could be subject to securities class action litigation.

Any sudden decline in the market price of our securities could trigger securities class action lawsuits against us. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the time and attention of our management would be diverted from our business and operations. We also could be subject to damages claims if we are found to be at fault in connection with a decline in our market price of our securities.

Historically, there has been a limited trading market in our common stock, and you may therefore have difficulty selling your securities at a price that you determine is satisfactory.

Our common stock is listed on The Nasdaq Capital Market. Historically, there has been a limited trading market for our common stock. There is no assurance that our common stock will actively trade in the public market at or above a price that you consider acceptable. If an active market for our common stock is not maintained, it may be difficult for you to sell your shares of common stock when you wish to sell them or at a price that you consider satisfactory. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling securities and may impair our ability to acquire other companies or technologies by using our securities as consideration.

There is no assurance that we will satisfy the continued listing requirements of The NASDAQ Capital Market.

On October 14, 2022, Nasdaq notified us that the closing bid price for our common stock had been below $1.00 per share for 30 consecutive business days, and that the Company therefore is not in compliance with the minimum bid price requirement for continued inclusion on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). The notice indicates that the Company has 180 calendar days, or until April 12, 2023, to regain compliance with this requirement. The Company can regain compliance with the $1.00 minimum bid price requirement if the closing bid price of the Company’s common stock is at least $1.00 for a minimum of ten consecutive business days during the 180-day compliance period. If the Company does not regain compliance during the initial compliance period, the Company may be eligible for additional time to regain compliance. To qualify, the Company will be required to meet the continued listing requirement for market value of its publicly held shares and all other Nasdaq initial listing standards, except the bid price requirement, and will need to provide written notice to Nasdaq of the Company’s intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If the Company meets these requirements, we expect that Nasdaq will grant the Company the additional 180 calendar days to regain compliance with the minimum bid price requirement.

If we fail to satisfy a Nasdaq requirement for continued listing, Nasdaq could provide notice that our common stock will become subject to delisting. In such event, Nasdaq rules would permit us to appeal the decision to reject our proposed compliance plan or any delisting determination to a Nasdaq Hearings Panel. If our securities are de-listed from The Nasdaq Capital Market, our stockholders could incur material adverse consequences such as reduced liquidity for their securities and reduced market prices for their securities. Following such de-listing, we could encounter increased difficulty in issuing additional securities at an attractive price, or at all, in order to fund our operations.

You may experience additional dilution as a result of future equity offerings.

In order to raise additional capital, we may sell 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 securities offerings and may not use them effectively.

We intend to use our cash for the development of our products and services, and to pursue a possible strategic investment or other transaction. 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.

Our outstanding warrants may result in further dilution to our stockholders.

Certain of our outstanding warrants to purchase a total of up to approximately 898,806 shares of our common stock contain so-called full-ratchet anti-dilution adjustments in the event we sell or issue shares of common stock or common stock equivalents at an effective price less than the exercise price of such warrants, subject to certain exceptions. Of these warrants, warrants with an aggregate exercise price of $956,015 also provide for a ratable increase in the number of shares purchasable upon exercise of the warrants in the event the exercise price per share of the warrants is reduced. These anti-dilution adjustments resulted in a reduction in the exercise price of such warrants to $0.58 per share and an increase of 1,265,896 shares in the number of underlying warrant shares due to the grant of stock options to our directors and officers in January 2023. The anti-dilution adjustments of our outstanding warrants would be triggered by future issuances of shares of our common stock at a price per share below the then-exercise price of such warrants, which adjustments would have a further dilutive effect on our stockholders.

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.

Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.

As of December 31, 2022, we had 10,498,802 outstanding shares of common stock. Future sales of a large number of our shares or shares issuable upon exercise of our outstanding warrants and stock options, or the perception that a large number of shares may be sold, could have a material adverse effect on the trading price of our common stock.

We will incur significant costs to ensure compliance with U.S. and Nasdaq reporting and corporate governance requirements.

We incur significant costs associated with compliance with our SEC public company reporting requirements and with applicable U.S. and Nasdaq corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002. These rules and regulations may also make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as executive officers.

If we fail to maintain effective internal control over financial reporting, the market price of our securities may be adversely affected.

As a public reporting company, we are required to establish and maintain effective internal control over financial reporting. Failure to establish such internal control, or any failure of such internal control once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of our internal control over financial reporting could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds.

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting. The standards that must be met for management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. If we cannot assess our internal control over financial reporting as effective, investor confidence and share value may be negatively impacted. In addition, management’s assessment of internal control over financial reporting may identify weaknesses and conditions that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting (including those weaknesses identified in our periodic reports), or disclosure of management’s assessment of our internal control over financial reporting may have an adverse impact on the price of our securities.

Provisions in our articles of incorporation and bylaws could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.

Our articles of incorporation and bylaws contain provisions that could delay or prevent changes in control or changes in our management without the consent of our Board of Directors. These provisions include the following:

• a classified Board of Directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our Board of Directors;
• no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
• the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors;
• the ability of our Board of Directors to alter our bylaws without obtaining stockholder approval;
• the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our articles of incorporation and bylaws regarding the election and removal of directors;
• a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
• the requirement that a special meeting of stockholders may be called only by the chairman of the Board of Directors, the chief executive officer, the president (in the absence of a chief executive officer) or the Board of Directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
• advance notice procedures that stockholders must comply with in order to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

These provisions could inhibit or prevent possible transactions that some stockholders may consider attractive.

We could issue one or more additional series of shares of preferred stock with the effect of diluting existing stockholders and impairing their voting and other rights.

Our Board of Directors is authorized to issue up to 10,000,000 shares of preferred stock and may determine the terms of future preferred stock offerings without further action by our stockholders. If we issue preferred stock, it could affect your rights or reduce the value of our outstanding common stock. In particular, specific rights granted to future holders of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion, and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. As of December 31, 2022, 465 shares of our preferred stock are outstanding, consisting of 132 shares of Series D Preferred Stock and 333 shares of Series E Preferred Stock. In addition to the possible negative effect on the market price of our common shares resulting from the public sale or perceived sale of common shares issuable upon conversion or exercise of these securities, the Certificate of Designations for the Series D Preferred Stock provides that upon occurrence of certain triggering events described in the Certificate, including but not limited to, payment defaults, breaches of the transaction documents pertaining to the Series D Preferred Stock and failure to maintain listing on The Nasdaq Capital Market, the Series D Preferred Shares would become subject to redemption, at the option of the holder, at a 125% premium to the underlying value of the Series D Shares being redeemed.

We lease approximately 3,300 square feet of space at 3900 Paseo del Sol, Santa Fe, New Mexico 87507, including 1,376 square feet of office space and 1,928 square feet of warehouse and production space, for a monthly rent expense of approximately $5,315. The leases expire on July 31, 2023, and are cancelable at any time upon 45 days written notice. We believe that our facilities are suitable for our current needs.

We are not currently a party to any legal proceedings. However, we may become subject to legal proceedings and claims that arise in the ordinary course of our business.

Overview

Sigma is a leading provider of in-process quality assurance (IPQA®) software to the additive manufacturing industry. Sigma specializes in the development and commercialization of real-time monitoring solutions known as PrintRite3D® for 3D metal and polymer advanced manufacturing technologies. PrintRite3D detects and classifies defects and anomalies real-time during the manufacturing process, enabling significant cost-savings and production efficiencies. We work closely with international standards organizations, renowned universities, research organizations, advanced manufacturers, OEMs, and leading software companies. PrintRite3D is printer agnostic and works with most of the leading 3D metal printers, as well as a growing base of polymer printers.

Strategic Direction

2022 was a year of significant change for our Company, from our symbolic name change to the execution of a new approach to the market. We have a mission to accelerate the adoption of additive manufacturing by setting the industry standard for quality, and we have charted our path to deliver the first holistic digital quality experience for the additive industry with the following objectives:

• Simplifying the quality experience from up to twelve disparate software licenses and multiple manual spreadsheets, to a single user experience that is holistic and integrated with production workflow.
• Building strategic partnerships, expanding our partner ecosystem, and best ensuring success of existing customers as they move into production.
• Offering products that are easier to use and less expensive, both for initial purchases and as expansion opportunities.
• Attracting a strategic corporate investment partner with clear product, customer, and financial synergies.

A holistic digital quality experience connects in-process data upstream to CAD/CAM through the downstream inspection and material data. This digital quality journey begins by creating a new qualification framework for in-process data. The path to qualified parts and continued production relies on more than just melt pool monitoring; it also covers machine health, process health, and part health. Our customers require specific data for qualification and certification of parts and need a holistic approach to production quality, and further, require a way to simplify quality from 8-12 disparate software licenses and several manual spreadsheets to one user experience that is integrated into their production workflow.

In order to expand the number of OEMs distributing our technology, we launched a three-tiered OEM program directed to: (1) new OEMs without their own quality assurance or monitoring solution; (2) established OEMs with a quality monitoring offering, but who have customers with multiple printers from multiple OEMs and want a single third party quality and analytics solution with consistent quality metrics across printers, processes and materials; and (3) OEMs building open application programming interfaces, or APIs, to integrate components of Sigma’s proprietary technology with their current offerings. We are now working with OEMs on their next generation printers to offer a software-only solution that will utilize the printer’s computing infrastructure and dramatically reduce the overall cost of its technology, enabling the opportunity to move towards a software only embedded solution on every printer sold by partner OEMs. To further augment this initiative, we have also begun integrating with industry wide hardware providers, such as our recently announced relationship with a laser scanner provider.

We began offering our current PrintRite3D integrated hardware and software solution on a subscription basis in 2022. Among other things, the change reduced the initial upfront cost to a new user from over $100,000 to approximately $3,000-$5,000 per month. The combination of subscription pricing and the new software-only products that can be embedded into OEM and software partner offerings are intended to make our technology more affordable to acquire and easier to bundle, distribute and support in an effort to become the industry standard.

The shift in our business model adversely affected our revenues and near-term revenue growth as we increased our focus on building strategic partnerships, expanding our partner ecosystem, and ensuring the success of our existing customers as they move into production. In 2022, we relied primarily on retrofit work while the software only products were still under development. We expect that the percentage of the Company’s revenue coming from OEMs will increase in 2023 and beyond, especially with the availability of a software-only product as we work to integrate into existing hardware, such as laser scanner technology and OEM’s upstream designs for next generation systems. Our ability to generate revenues in the future will depend on our ability to further commercialize and increase market presence of our traditional PrintRite3D® technology, along with our new software-only offerings that start to link industry quality together. Additionally, it will depend on whether key prospective customers continue to move from additive manufacturing prototyping to production, which our products are intended to accelerate. However, we believe these changes to our business model will contribute to faster adoption of our product by end users and will result in more predictable and profitable revenues over the longer term.

Over the past twelve years, Sigma has invested its resources to solve the problem of in-process AM quality: melt pool analytics for the “part”, which originated as a retrofit lab solution. Our prior product offering met the needs of materials scientists, but overlooked the production needs of shop floor technicians, process engineers, and operations teams. The addition of our “machine” and “process” software products for additive manufacturing will provide a holistic in-process quality base for us to connect to the broader digital quality ecosystem.

As part of our vision to build the future of connected digital quality and enhance shareholder value, we have undertaken an initiative to evaluate a range of strategic alternatives, including possible strategic investment, acquisition, merger, business combination, or similar transaction with clear product, customer, and financial synergies to Sigma. This work is focused on identified companies that connect to our long-term quality vision. This strategic initiative is focused on synergies and potential product integration to accelerate market visibility and customer adoption. To execute Sigma’s vision and realize our potential, we will need to raise additional capital, or execute a strategic transaction, which may include, a possible strategic investment, acquisition, merger, business combination, or similar transaction.

We believe the industry is evolving. Application Programming Interfaces, or APIs, are opening up as some of our relationships with OEMs have become public. There is also a trend toward consolidation in additive manufacturing as companies align for profitability. Sigma has made demonstrable progress in 2022 connecting to other products in the AM digital quality stream, and a connection to a strategic partner paired with near term execution can augment our ability to scale, support the market, and create value. Further, alignment with a strategic investor or acquirer allows for common growth, vision, and funding of the Company to achieve its mission, but also provides an opportunity for other strategic relationships, including potential acquisitions that can further accelerate the execution of our digital quality vision.

To facilitate our ability to execute our strategic initiatives on the product, pricing, and partner fronts, we have taken several steps to conserve our cash by reducing our operating expenses. Compensation and benefits are our single largest expense, comprising approximately 53% of our total operating expenses for 2022. We reduced our total full-time headcount by a net of eight employees in 2022 and experienced a further reduction of six employees in 2023 as a result of furloughs and departures from the Company. As of March 29, 2023, our full-time employee headcount was 19. In addition to headcount reductions, we have reduced our spend on advertising, marketing and investor relations, consultants, and employee travel. We continue to evaluate our expenses and will consider further reductions as appropriate. Lastly, Sigma has developed a deep patent portfolio which we believe is widely applicable to the 3D printing industry. We have recently begun exploring an intellectual property licensing program, which we believe may facilitate a strategic transaction.

Covid-19 Business Update

The worldwide COVID-19 pandemic caused a reduction, and in some cases a freeze, in capital spending within the Company’s targeted industries, which negatively affected our revenue in 2021. Additionally, this slowed the development of our technology based on prolonged budget reductions and delays at development partner sites. With slowed customer interaction, Sigma experienced some slowing of planned integrations and qualification into 2022. With the relaxing of COVID-19 restrictions in the U.S. and Europe in 2022, business activity began to return to near pre-pandemic levels, and we have resumed qualification and integration of our technology with partners and customers who experienced such prior delays. Regarding our supply chain, however, the Company continues to experience increased lead times for certain hardware components of PrintRite3D. The future impact of the outbreak, including variations of the virus, is highly uncertain so that no assurance can be given that the outbreak will not have a material adverse impact on the future results of the Company. It is also uncertain as to any further disruption of the financial markets, which may reduce our ability to access capital, either at all, or on favorable terms.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported assets, liabilities, sales and expenses in the accompanying financial statements. Critical accounting policies are those that require the most subjective and complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. By their nature, changes in these assumptions and estimates could significantly affect our financial position or results of operations. Significant accounting estimates that may materially change in the near future are revenue recognition, 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. Such critical accounting policies, including the assumptions and judgments underlying them, are disclosed in Note 1 to the Financial Statements included in this Annual Report. However, we do not believe that there are any alternative methods of accounting for our operations that would have a material effect on our financial statements.

The critical accounting policies and estimates addressed below reflect our most significant judgements and estimates used in the preparation of our financial statements.

Revenue Recognition - The Company’s revenue is derived primarily from sales of our software and related hardware suite under perpetual licenses and from providing engineering services under contracts. The Company recognizes revenue in accordance with ASC Topic No. 606. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance under prior GAAP and replaced it with a principles-based approach for determining revenue recognition. The core principle of the standard is the recognition of revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In general, we determine revenue recognition by: (1) identifying the contract, or contracts, with our customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to performance obligations in the contract; and (5) recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services.

In January 2022, the Company began offering a subscription option to its customers pursuant to which we lease our PrintRite3D platform for terms between 12 and 36 months and provide technical support and maintenance for the term of the arrangement, as well as installation and training. The Company has determined these are leases because they relate to discrete pieces of equipment to which customers have the right to substantially all the economic benefit and exclusive right to use during the term of the arrangement. These leases are classified as operating leases and the Company retains title to the underlying equipment.

The leases may be renewed for successive one-year terms unless notice is given by either party of its intent not to renew at least 30 days before the end of the lease term. For leases with 36-month terms, the lessee may terminate the agreement after the first 18 months with 30-days written notice. Some, but not all, of the leases permit lessees to purchase the asset at any time at an amount that approximates fair value and are not reasonably certain to be exercised at the inception of the lease. There are no anticipated variable lease payments at the inception of the lease.

There are two non-lease components in the arrangement that consist of technical support and maintenance, and installation and training. The Company has elected the single component practical expedient to combine the technical support and maintenance with the lease as they have the same pattern of transfer. The installation and training component does not have the same pattern of transfer; therefore, this component is not eligible for the single component practical expedient. The lease consideration is allocated on a relative fair value basis of the underlying lease and non-lease components. The Company has estimated the residual value of the leased equipment based on its useful life, and the ability to refurbish and sell the equipment, as well as the Company’s ability to componentize the hardware and utilize subassemblies in other products.

The Company is depreciating assets over their useful life of 7 years, but certain subassemblies and components may have a longer economic life.

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.

Inflation - While we do not believe that inflation had a material effect on our business, financial condition or results of operations during the year ended December 31, 2022, we experienced increases in wages and other compensation costs, and costs for certain components of our PrintRite3D product. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could materially adversely affect our business, financial condition and results of operations.

Inventory Valuation - Inventories consist of raw materials used in the production of customized parts, work-in-process and finished goods components which will be sold to customers. Inventories are valued at the lower of cost or net realizable value, using the first-in, first-out (FIFO) method. Charges for obsolete inventory are based on specific identification of inventory items resulting from regular, on ongoing reviews of our build of materials.

Leases - The Company primarily leases office space from third parties. The Company determines if a contract is a lease at inception. A contract contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease term begins on the commencement date, which is the date the Company takes possession of the asset and may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Leases are classified as operating or finance leases based on factors such as the lease term, lease payments, and the economic life, fair value and estimated residual value of the asset. Where leases include an option to purchase the leased asset at the end of the lease term, this is assessed as a part of the Company’s lease classification determination. The Company only has short-term leases, with remaining lease terms of less than one year. The leases are cancelable at any time upon 45 days written notice. Therefore, the Company has elected the short-term lease recognition exemption for all leases, whereby leases are not recorded on the Company’s balance sheet and lease payments are recognized as lease expense on a straight-line basis over the lease term.

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. Utility patents are amortized over a 17-year period. Patents which are pending are not amortized.

Stock-Based Compensation – We measure the compensation costs of stock-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. Stock-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. Stock-based compensation is measured on the date of grant at its fair value.

Equity instruments issued to non-employees are recorded on the basis of the grant date fair value of the instruments. 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.

The grant date fair value of stock-based compensation and other equity instruments is calculated using the Black Scholes valuation model, and requires estimates of several inputs to the model, including risk-free interest rates, dividends, and expected volatility of our stock price.

Results of Operations

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

We generate revenues through hardware and 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 development work utilizing our metal AM equipment and engineering team. 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.

Employees and Headcount

At December 31, 2022, our full time employee headcount was 25, as compared to 33 at December 31, 2021. The decrease of 8 employees was primarily related to the shift in our business model as we move away from selling expensive perpetual licenses for PrintRite3D, in which most of the cost comes from physical hardware, to setting up for our future software-only subscription model.

The labor market is extremely competitive, and our highly trained, skilled, and talented employees are heavily recruited by others. To that end, we have made additional investments in our employees designed to ensure we remain competitive in the marketplace. This also aligns well with, and reinforces, our “employee first” culture. In addition to salaries, we improved our benefits by offering a premium health care plan option and increasing the Company’s contribution to premiums. We have also added a Company paid short-term disability insurance plan and optional long-term disability insurance plan. And finally, we have increased equity related compensation to everyone in our Company, from non-employee directors to executive management to employees and consultants. We believe that this is an important component of aligning shareholder, company, and employee interests and vests everyone in the growth and success of Sigma.

Infrastructure

In addition to the investments made to improve our manufacturing processes and engineering designs, in fiscal 2021 we added new software applications to assist us in achieving the leverage we need in our operations, both now and for the future. In particular, we added software subscriptions for a customer relationship management system (CRM”), a product lifecycle management system (“PLM”), and a project tracking and management system, all of which we believe will help us improve controls, efficiency and communication throughout the Company.

Revenue and Cost of Revenue

During the fiscal year ended December 31, 2022 (“fiscal 2022”), we generated $630,428 in revenues, as compared to $1,651,765 in the fiscal year ended December 31, 2021 (“fiscal 2021”). The decrease was due to a decrease in perpetual license sales of our PrintRite3D® units of $1,141,323 and decreased contract additive manufacturing revenue of $11,189. Partially offsetting these decreases were an increase in revenues of $31,177 from our subscription-based pricing program, increased revenues from our legacy Rapid Test and Evaluation (“RTE”) program of $33,000, increased on-site installation and support revenue of $35,035, an increase in consulting service revenue of $4,500, and an increase in annual maintenance contract revenue of $27,463. Our cost of revenue for fiscal 2022 was $349,930, as compared to $559,965 for fiscal 2021, a decrease of $210,035, or 37.5%. The decrease was primarily attributable to fewer unit sales in 2022, partially offset by increased travel costs incurred related to installations from 2021 sales.

Gross Margin

In fiscal year 2022, our gross margin decreased to 44% from 66% in 2021 due primarily to an increase in the price of certain PrintRite3D system components as a result of configuration changes, discounted sales to universities and research institutions as members of our AcGovDustrial Network, and the aforementioned increase in travel costs incurred related to system installations.

Operating Expenses

Sigma’s operating expenses for fiscal 2022 were $9,029,502 as compared to $9,571,185 for fiscal 2021, a decrease of $541,683, or 5.7%. The decrease was primarily attributable to a decrease in stock-based compensation, a decrease in operating and research and development costs, partially offset by increases in salary and benefits, office expenses due to a company-wide global conference held in May of 2022, and increased business travel in 2022 as further described below.

Salary and benefits costs were $4,740,437 for fiscal 2022, as compared to $4,286,368 for fiscal 2021, an increase of $454,069, or 10.5%. The increase was comprised of: (a) $534,963 in employee salary increases and average full-time employee headcount increasing by two; (b) a $79,289 increase in severance due to the termination of employment of six employees; and (c) increased taxes and benefits of $174,616. Partially offsetting these increases were: (1) a decrease in commissions of $24,815; (2) a decrease in incentive bonuses of 215,490; and (3) a decrease in stock appreciation rights expense of $94,494 due to the revaluation of the compensation liability as a result of the decrease in our stock price in fiscal 2022.

Stock-based compensation was $793,251 for fiscal 2022, as compared to $1,066,455 for fiscal 2021, a decrease of $273,204, or 25.6%. This decrease was primarily due to fewer stock options granted in fiscal 2022.

We incurred operations and research and development costs of $653,194 during fiscal 2022, as compared to $890,553 in fiscal 2021, a decrease of $237,359, or 26.7%. The decrease was primarily due to a decrease in operations costs of $224,335 and a decrease in research and development costs of $13,024. The decrease in operations expense was due to: (a) a decrease in charges for inventory obsolescence of $81,544; (b) equipment upgrades in 2021 in both our manufacturing facility and our 3D metal printer totaling $14,777; (c) a decrease in parts and material purchases of $107,936; and (d) a decrease in purchase of lab supplies of $20,078. The decrease in research and development costs was due to expenses associated with a simulation project in 2021 of $97,188, partially offset by an increase in consulting costs of $64,164 in connection with ongoing PrintRite3D software development and $20,000 for research on laser application of PrintRite3D for a new OEM.

We incurred investor, public relations, and marketing expenses of $422,645 during fiscal 2022, as compared to $503,823 during the same period in 2021. The decrease of $81,178, or 16.1%, was due to a decrease in investor relations consulting costs of $84,832 resulting from a revaluation of SARs at December 31, 2022 and lower advertising expenses of $11,301. Partially offsetting these decreases was an increase in tradeshow expenses of $14,955 as compared to 2021, when COVID-19 travel restrictions precluded attendance at such events.

Organizational costs for fiscal 2022 were $311,606, compared to $726,147 for fiscal 2021. The decrease of $414,541, or 57%, was primarily attributable to: (a) a decrease in non-employee director fees of $369,830, mostly as a result of a decrease in stock options issued; and (b) a decrease in stockholder services of $43,832, primarily due to expenses incurred in 2021 in connection with a special stockholders meeting.

Legal and professional fees in fiscal 2022 were $725,285, as compared to $915,530 during fiscal 2021, a decrease of $190,245, or 20.8%. This decrease was a result of a decrease in legal expenses of $25,757 due to one less stockholder meeting and fewer regulatory filings in fiscal 2022, a decrease in recruiting expenses of $109,061 related to new hires in 2021, a decrease in consulting expenses of $38,915 and a decrease in accounting fees of $16,089 due to the fulltime hire of former outside accounting personnel.

Office expenses for fiscal 2022 were $914,802, as compared to $734,386 for fiscal 2021, an increase of $180,416, or 24.6%. The increase resulted from: (a) an increase in travel and entertainment of $82,241 related to increased travel as compared to fiscal 2021 as a result of the easing of COVID-19 related travel restrictions; (b) an increase in expenses of $109,435 related to a Company-wide, global conference held in May of 2022; (c) an increase in payroll service fees of $10,735 related to new hires; (d) an increase in dues and subscriptions of $38,847 for new customer relationship management, product lifecycle management, and project management software; and (e) an increase in utilities expenses of $2,459. Partially offsetting these increases were decreases in postage and shipping of $47,580, and decreases in office supplies of $11,998 and education expenses of $3,723.

Other operating expenses were $352,115 for fiscal 2022, as compared to $353,818 for fiscal 2021, a decrease of $1,703. The decrease was due to: (a) a decrease in SEC filing fees of $6,102; (b) a decrease in licensing fees of $2,166; and (c) a decrease in bank fees, primarily credit card transaction fees of $9,325. These decreases were partially offset by an increase in insurance policy premiums for fiscal 2022 of $15,890.

In fiscal 2022, we realized net other income of $56,580, as compared to $1,094,780 in fiscal 2021. The decrease of $1,038,200, or 94.8%, was due to a gain in fiscal 2021 of $1,092,441 from the revaluation of the derivative liability related to our private placement of warrants, a foreign currency exchange loss of $15,927 in fiscal 2022 due to the strengthening of the US dollar against the Euro, and a decrease in interest income of $6,460. Partially offsetting these decreases was an increase of $76,628 in New Mexico state incentives in fiscal 2022.

Sigma’s net loss before preferred dividends for fiscal 2022 increased by $1,307,819 and totaled $8,692,424, as compared to a net loss before preferred dividends of $7,384,605 for fiscal 2021. Net loss applicable to common stockholders for fiscal 2022 was $8,749,304, as compared to $7,488,172 for fiscal 2021. The fiscal 2022 net operating loss component of the overall loss was $269,619 higher than in fiscal 2021 and the other income component was $1,038,200 lower. Preferred stock dividends were $56,880 in fiscal 2022 and $103,567 in fiscal 2021.

Liquidity and Capital Resources

Due to uncertainties regarding our ability to meet our current and future operating and capital expenses, there is substantial doubt about our ability to continue as a going concern for 12 months from the date of the filing of this Annual Report, and the report of our registered independent public accounting firm on our financial statements as of and for the year ended December 31, 2022 included in Item 15 of this Annual Report contains a going concern qualification.

As of December 31, 2022, we had $2,845,931 in cash and working capital of $3,644,522, as compared to $11,447,047 in cash and working capital of $ 11,702,358 as of December 31, 2021.

We currently have no arrangement to obtain any additional financing. We have taken several steps to conserve our cash, including furloughing non-essential employees, reducing or eliminating certain marketing and advertising programs, limiting employee travel, and reducing investor relations expenses and certain consulting expenses. Our existing cash on hand and anticipated revenues are sufficient to fund our remaining anticipated operating costs and capital expenditure requirements only through May 2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect, or extend such resources longer than we expect.

Because of the numerous risks and uncertainties associated with the research, development, and commercialization of our products, we are unable to estimate the exact amount of our working capital requirements. Our future capital requirements will depend on many factors, including:

• The cost of expending, maintaining, and enforcing our intellectual property portfolio, including filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;
• The effect of competing technological and market developments;
• The revenue from the sales of our existing and future products;
• The cost of operating as a public company; and
• The other factors listed under Item 1A “Risk Factors.”

Our major sources of funding have been proceeds from public and private offerings of our equity securities (both common stock and preferred stock), and from warrant exercises. In 2022, we did not raise any funds. In January 2021, the Company closed a public offering of 1,711,783 shares of common stock at $3.00 per share, resulting in net proceeds of approximately $4,532,444 after deducting underwriting discounts and commissions and other offering expenses payable by the Company. In March 2021, the Company closed a public offering of 2,190,000 shares of common stock at $4.445 per share, resulting in net proceeds to the Company of approximately $8,736,488 after deducting placement agent commissions and other offering costs payable by the Company. Concurrent with the public offering, the Company issued warrants to investors to purchase an aggregate of 2,190,000 shares of common stock to holders in a private placement. The warrants entitle the holders to purchase one share of our common stock at an exercise price equal to $4.32 per share commencing on May 24, 2021 and will expire two years from such date.

We will need to raise additional amounts to fund our operations, maintain compliance with the NASDAQ listing requirements and implement our business plan. There is no assurance as to the amount and availability of any required future financing or the terms thereof. Such financing, if in the form of equity, may be highly dilutive to our existing stockholders and may otherwise include onerous terms. If in the form of debt, such financing may include covenants and repayment obligations which may be difficult to meet and that could adversely affect our business and operations. To the extent that funds are not available to us, we may be required to delay, limit, or terminate our business and operations and lose our NASDAQ listing.

While we expect that continued enhancements of our IPQA®-enabled PrintRite3D® technology, together with transitioning to a subscription-based, software-only product offering will enable us to further commercialize this technology into the AM metal market in 2023, we will be unable to do so without additional funding. Should we be able to secure such funding, we plan to seek to continue funding our development activities and operating expenses by licensing our PrintRite3D® systems and supporting field services, as applicable, and providing PrintRite3D®-enabled engineering consulting services concerning our areas of expertise (materials and manufacturing quality assurance and process control technologies) and through the use of proceeds from sales of our securities and potential exercises of our outstanding warrants.

Net Cash Used in Operating Activities

During fiscal 2022, net cash used in operating activities was $8,212,154, which was the result of a net loss of $8,692,424 before preferred dividends and the use of cash for working capital of $543,280, partially offset by non-cash expenses of $1,023,550 related to depreciation and amortization of $116,167, and stock-based compensation of $907,383. Changes in working capital were driven by an increase in inventory of $240,863, a decrease in deferred revenue of $28,782, and a decrease in accounts payable and accrued expenses of $323,259, partially offset by a decrease in accounts receivable of $40,572. The increase in inventory was primarily due to stocking of certain components of our PrintRite3D systems with long order lead times, and an increase in contract assets resulting from PrintRite3D systems on our lease program. The decrease in accounts payable and accrued expenses was primarily due to a decrease in accrued bonuses in 2022.

During fiscal 2021, net cash used in operating activities was $6,298,959, driven by a net loss of $7,384,605 before preferred dividends, partially offset by non-cash expenses of $769,787 and cash generated from working capital of $315,859. Non-cash expenses were comprised of: (1) depreciation and amortization of $94,105; and (2) stock-based compensation of $1,768,123; partially offset by a gain on derivative liability of $1,092,441. Cash generated from working capital was driven by an increase in accounts payable and accrued expenses of $373,563 primarily as a result of increased accrued bonuses in 2021, and an increase in deferred revenue of $70,898, partially offset by increases in accounts receivable of $80,630 and inventory of $50,429. The increase in accounts receivable was due to increased sales, and the increase in inventory was primarily due to stocking of certain components of our PrintRite3D systems with long order lead times.

Net Cash Used by Investing Activities

Net cash used by investing activities in fiscal 2022 was $388,962, as compared to $359,750 in fiscal 2021. The increase was due to increased patent costs of $47,112, partially offset by a decrease in purchases of property, plant and equipment of $17,900.

Net Cash Provided by Financing Activities

No cash was provided by financing activities in fiscal 2022. In fiscal 2021, cash provided by financing activities was $14,404,942, consisting of net proceeds of $13,268,932 from financings and $1,136,010 in proceeds from the exercise of warrants.

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

Evaluation of Disclosure Controls and Procedures

Rule 13a-15(e) under the Exchange Act defines the term “disclosure controls and procedures” as those controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Exchange Act. Our management, with the participation of our Chief Executive Officer, and Chief Financial Officer, conducted an evaluation of the effectiveness of our control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework, management has concluded that our internal control over financial reporting was effective as of December 31, 2022.

We continuously seek to improve and strengthen our control processes to ensure that our controls and procedures are adequate and effective. Any failure to implement and maintain improvements in the controls over our financial reporting could cause us to fail to meet our reporting obligations under the SEC’s rules and regulations. Any failure to improve our internal controls to address the weakness we have identified could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our common stock.

This Report does not include an attestation report of the Company’s registered independent public accounting firm regarding internal control over financial reporting, which is not required for smaller reporting companies.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the fourth quarter of the year ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.