NextTrip, Inc.: Form 10-Q for the period ended Sep 30, 2023

Forward-looking statements

This Quarterly Report contains “Forward-Looking Statements.” All statements other than statements of historical fact are “Forward-Looking Statements” including but not limited to, statements regarding the pending strategic transactions or the possible dissolution and liquidation or bankruptcy of the Company. All Forward-Looking Statements included in this Quarterly Report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any Forward-Looking Statement. In some cases, Forward-Looking Statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the Forward-Looking Statements contained herein are reasonable, there can be no assurance that such expectations or any of the Forward-Looking Statements will prove to be correct, and actual results could differ materially from those projected or assumed in the Forward-Looking Statements. Future financial condition and results of operations, as well as any Forward-Looking Statements are subject to inherent risks and uncertainties, including factors referred to in our press releases and reports filed with the Securities and Exchange Commission (“SEC”). All subsequent Forward-Looking Statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Additional factors that may have a direct bearing on our operating results are described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 and elsewhere in this Quarterly Report.

Corporation 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. We commenced our current business operations in 2010. On May 17, 2022, we began doing business as Sigma Additive Solutions, and on August 9, 2022, 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 telephone number 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 (the “Exchange Act”), and other information related to the Company, are available, free of charge, on our website. The Company’s website and the information contained therein, or connected thereto, are not and are not intended to be incorporated into this Quarterly Report.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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 of the Notes to Financial Statements included in this Quarterly 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 it leases its 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 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 upon at least 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 single component practical expedient accounting 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 single component practical expedient accounting. 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 estimated allowance 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. As of September 30, 2023 and September 30, 2022, the Company has established an allowance for doubtful accounts of $115,000 and $0, respectively.

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 method. Charges for obsolete inventory are based on identification of specific items resulting from regular, on ongoing reviews of our inventory.

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 periodically 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 or 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 vesting period of the stock-based compensation. Stock-based compensation arrangements may include stock options, grants of shares of common stock with and without restrictions, performance-based awards, and stock appreciation rights, or SARs. Compensation cost 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 vest. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant.

The fair value of common stock grants is based upon the closing price of our common stock as reported on The Nasdaq Capital Market on the date of the grant. The grant date fair value of stock options and SARs 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.

Business Overview

Sigma Additive Solutions, Inc. (“Sigma,” “we,” “us,” “our” and the “Company”) was founded by a group of scientists, engineers and businesspeople to develop and commercialize novel and unique manufacturing and materials technologies. The Company anticipated that its core technologies would allow its customers to combine advanced manufacturing quality assurance and process control protocols with novel materials to achieve breakthrough product potential in many industries, including aerospace, defense, oil and gas, bio-medical, and power generation.

Historically, we generated revenues through sales of our PrintRite3D® technology to customers that seek to improve their manufacturing production processes, and through ongoing annual software upgrades and maintenance fees. In 2022, we began offering our current PrintRite3D integrated hardware and software solution on a subscription basis, which 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 was 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.

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

In our Current Report filed with the SEC on October 13, 2023, we reported that we had entered into an Asset Purchase Agreement with Divergent Technologies, Inc., or Divergent, pursuant to which have agreed to sell to Divergent, and Divergent has agreed to purchase from us, certain assets consisting primarily of patents, software code and other intellectual property for a purchase price of $1,626,242, including a $37,000 earnest-money deposit previously paid to us by Divergent. The closing under the Asset Purchase Agreement is expected to occur subsequent to the closing or termination of our acquisition of NextTrip Holdings, Inc.

The parties’ respective obligations to close are subject to the accuracy of the parties’ respective representations and warranties and performance of their respective covenants and satisfaction or waiver of other customary conditions specified in the Asset Purchase Agreement.

In our additional Current Report filed with the SEC on October 13, 2023, On October 12, 2023, we reported that we had entered into a Share Exchange Agreement with NextTrip Holdings, Inc., pursuant to which we will acquire NextTrip (the “Acquisition”) in exchange for shares of our common stock, which we refer to as the Exchange Shares, subject to approval of our shareholders and other conditions described below. As a result, NextTrip will become a wholly owned subsidiary of Sigma, which is expected to change its corporate name to “NextTrip, Inc.” following the Acquisition.

Upon the closing of the Acquisition, the shareholders of NextTrip will be issued a number of Exchange Shares equal to 19.99% of our issued and outstanding shares of common stock immediately prior to the closing. Under the Share Exchange Agreement, the NextTrip shareholders will be entitled to receive additional shares of our common stock, referred to as the Contingent Shares, subject to NextTrip’s achievement of future business milestones specified in the Share Exchange Agreement.

Alternatively, independent of the aforementioned milestones, for each month during the fifteen (15) month period following the closing date that in which $1,000,000 or more in gross travel bookings are generated by the combined company, to the extent not previously issued, the Contingent Shares will be issuable up to the maximum Contingent Shares issuable under the Share Exchange Agreement.

The Contingent Shares, together with the shares of our common stock issued at the closing, will not exceed 6,000,000 shares of our common stock, or approximately 90.2% of our issued and outstanding shares of common stock immediately following the issuance of such shares. Assuming all the business milestones are achieved and no other change in our outstanding shares, Sigma shareholders will retain approximately 9.8% of the Company’s outstanding shares immediately following the issuance of such shares.

The parties’ respective obligations to close the Acquisition are subject to the satisfaction or waiver of various conditions specified in the Share Exchange Agreement. The conditions include approval by Sigma shareholders of the issuance of the Exchange Shares as required by applicable listing standards of Nasdaq, amendments to our amended and restated articles of incorporation to change our name as described above and to increase our authorized common stock, the continued listing or our common stock on Nasdaq, as well as customary other closing conditions.

The Agreement contains representations and warranties and covenants of the parties customary for a transaction of this nature which will not survive the closing of the Acquisition. The Share Exchange Agreement also contains customary covenants regarding the conduct of the respective businesses of Sigma and NextTrip pending the closing of the Acquisition. The Share Exchange Agreement permits us to sell our quality assurance software assets at or after the closing of the Acquisition as contemplated by our Asset Purchase Agreement with Divergent Technologies, Inc.

The Share Exchange Agreement may be terminated by the parties by mutual agreement or by a party in the event of a breach of the other party’s representations, warranties or covenants, subject to certain exceptions, or if the Acquisition is not completed by December 31, 2023.

Results of Operations

Three Months Ended September 30, 2023 and September 30, 2022

During the three months ended September 30, 2023, we recognized revenue of $141,988, as compared to $ 188,245 in the same period in 2022, a decrease of $46,257, or 25%. The decrease was due to decreased PrintRite3D sales of $41,595, and decreased annual maintenance contract revenue of $13,560, as compared to the third quarter of 2022. Partially offsetting the decreases were increases in PrintRite3D lease revenue of $5,669, and on-site development and support revenue of $3,229.

Our cost of revenue for the three months ended September 30, 2023 was $176,116, as compared to $79,713 for the same period in 2022, an increase of $96,403, or 121%. The increase was primarily attributable to the cost of a new quad laser intended for a lease that was sold at a discounted price in the third quarter of 2023 as compared to the third quarter of 2022.

Our total operating expenses for the three months ended September 30, 2023 were $866,199, as compared to $2,392,956 for the same period in 2022, a decrease of $1,526,757, or 64%. The decrease was primarily attributable to a decrease in salaries and benefits of $938,911, a decrease in stock-based compensation of $191,340, a decrease in operations and R&D costs of $152,000, a decrease in organization costs of $92,942, and a decrease in office expense of $119,531 primarily attributable to reduced headcount and travel as further described below.

Salary and benefits costs were $288,894 for the three months ended September 30, 2023, as compared to $1,227,805 for the same period in 2022, a decrease of $938,911, or 77%. The decrease was attributable to: (a) decreased salaries of $705,631 attributable to furloughed and terminated employees; (b) a decrease in commission and bonus expense of $37,405; (c) decreased taxes and benefits of $117,025; (d) decreased severance expense of $30,301; and (e) a decrease in stock appreciation rights of $48,549.

Stock-based compensation was $84,078 for the three months ended September 30, 2023, as compared to $275,418 for the same period in 2022, a decrease of $191,340, or 70%. This decrease was primarily a result of forfeitures of unvested options by former employees.

We incurred operations and research and development costs of $245 during the three months ended September 30, 2023, as compared to $152,245 in the same period in 2022, a decrease of $152,000. The decrease was due to decreasing operations and R&D work as we have shifted our focus to closing our two corporate transactions and supporting existing customers.

We incurred investor, public relations, and marketing costs of $15,797 during the three months ended September 30, 2023, as compared to $46,832 during the same period in 2022. The decrease of $31,035, or 66%, was due to a decrease in investor relations consulting costs of $22,609 as a result of renegotiated lower monthly fees and a decrease in marketing costs of $8,426.

We incurred organization costs of $47,580 during the three months ended September 30, 2023, as compared to $140,522 during the same period in 2022. The decrease of $92,942, or 66%, was primarily attributable to a decrease in non-employee director compensation of $21,359 primarily due to fewer stock options granted in 2023 and a decrease in shareholder services costs of $72,785 due to a change in timing of our annual shareholders’ meeting from the third quarter of 2022 to the fourth quarter of 2023. Partially offsetting these decreases was an increase in regulatory compliance fees of $1,202.

Legal and professional fees incurred in the three months ended September 30, 2023 were $251,265, as compared to $252,886 during the same period in 2022, a decrease of $1,621. This decrease was primarily a result of decreased recruiting fees of $74,250, and a decrease in consulting expenses of $47,754 for an advisor to the board of directors and a marketing consultant. Partially offsetting these decreases was an increase in legal expenses fees of $116,426 due to employment related matters and legal and financial advisors engaged to assist in Sigma’s evaluation of corporate transactions, and an increase in accounting expenses of $3,337.

Office expenses for the three months ended September 30, 2023, were $61,077 as compared to $183,608 for the same period in 2022, a decrease of $122,531, or 67%. The decrease resulted from: (a) decreased travel and entertainment expenses of $71,746; (b) decreased office supply expenses of $4,374; (c) decreased dues & subscriptions of $23,816; (d) decreased payroll services expense of $10,538; (e) decreased rent and utilities of $10,588; and (f) decreased training and education expense of $848. These decreases were the result of a reduction in the number of employees.

Depreciation and amortization expense for the three months ended September 30, 2023 was $24,554, as compared to $26,857 for the same period in 2022, a decrease of $2,303, or 9%. The decrease was primarily the result of returned and sold property and equipment.

Other operating expenses were $92,709 for the three months ended September 30, 2023, as compared to $86,783 for the same period in 2022. The $5,926 increase was primarily related to a FINRA filing fee.

In the three months ended September 30, 2023, we realized net other income of $28,666, as compared to net other expense of $7,884 in the same period in 2022. The increase in other income of $36,550 was primarily due to the net gain on the sale of our 3DPrinter.

Preferred dividends for the three months ended September 30, 2023 were $10,687, as compared to $14,220 for the same period in 2022. The decrease was due to fewer outstanding shares of preferred stock as a result of conversions to common shares.

Our net loss applicable to common stockholders for the three months ended September 30, 2023 was $882,348 as compared to $2,306,528 for the same period in 2022, a decrease of $1,424,180, or 62%. The decrease was due to the decrease in the loss from operations of $1,384,097, a decrease in preferred dividends of $3,533, and an increase in other income of $36,550.

Nine Months Ended September 30, 2023 and September 30, 2022

During the nine months ended September 30, 2023, we recognized revenue of $369,188, as compared to $476,749 in the same period in 2022, a decrease of $107,561, or 23%. The decrease primarily resulted from fewer PrintRite3D sales of $91,297, decreased annual maintenance and support of $19,389, and decreased on-site development and support of $52,815 as compared to the third quarter of 2022. Partially offsetting the decreases were an increase in PrintRite3D lease revenue of $19,840, an increase in PrintRite3D consulting services of $25,500, and an increase in Rapid Test and Evaluation, or RTE revenue of $10,600.

Our cost of revenue for the nine months ended September 30, 2023 was $276,270, as compared to $312,879 for the same period in 2022, a decrease of $36,609, or 12%. The decrease was primarily attributable to fewer unit sales and installations in the third quarter of 2023 as compared to the third quarter of 2022.

Our total operating expenses for the nine months ended September 30, 2023 were $4,078,912, as compared to $6,968,079 for the same period in 2022, a decrease of $2,889,167, or 42%. The decrease was primarily attributable to a decrease in salaries and benefits of $1,929,975, a decrease in stock-based compensation of 166,416, a decrease in operations and R&D of 210,332, a decrease in investor, public relations, and marketing expense of $164,893, a decrease in organization costs of 123,071 and a decrease in office expense of $382,875 primarily attributable to reduced headcount and travel as further described below.

Salary and benefits costs were $1,774,658 for the nine months ended September 30, 2023, as compared to $3,704,633 for the same period in 2022, a decrease of $1,929,975, or 52%. The decrease was comprised of: (a) decreased salaries of $1,517,791 attributable to furloughed and terminated employees; (b) a decrease in commission and bonus expense of $113,363 due to the reversal of 2022 year-end bonuses and fewer commissions on sales; (c) decreased taxes and benefits of $243,350; and (d) decreased stock appreciation rights expense of $70,800 due to the quarterly revaluation at September 30, 2023. Partially offsetting these decreases was an increase in severance expense of $15,408.

Stock-based compensation was $447,417 for the nine months ended September 30, 2023, as compared to $613,833 for the same period in 2022, a decrease of $166,416, or 27%. This decrease was primarily a result of the forfeiture of unvested options by former employees.

We incurred operations and research and development costs of $232,216 during the nine months ended September 30, 2023, as compared to $442,548 in the same period in 2022, a decrease of $210,332, or 48%. The decrease was due to a decrease in operations costs of $141,346 and a decrease in R&D costs of $68,986. The decrease in operations costs related to fewer parts and material purchases in the third quarter of 2023. The decrease in R&D costs was primarily due to suspending consulting work with a third-party software vendor in connection with the development of our software-only product suite.

We incurred investor, public relations, and marketing costs of $128,565 during the nine months ended September 30, 2023, as compared to $293,458 during the same period in 2022. The decrease of $164,893, or 56%, was primarily due to a decrease in investor relations consulting costs of $92,822 related to renegotiated lower fees, a decrease in attendance at tradeshows and conferences of $46,535 due to fewer employees, and a decrease in marketing costs of $25,536.

We incurred organization costs of $137,017 during the nine months ended September 30, 2023, as compared to $260,088 during the same period in 2022. The decrease of $123,071, or 47% was attributable to a decrease in non-employee director compensation of $51,278 primarily due to fewer stock options granted in 2023 and a decrease in shareholder services of $71,914 as a result of a change in the timing of our annual shareholders meeting from the third quarter of 2022 to the fourth quarter of 2023.

Legal and professional fees incurred in the nine months ended September 30, 2023 were $587,541, as compared to $608,830 incurred during the same period in 2022, a decrease of $21,289, or 3.5%. This decrease was a result of a decrease in consulting expenses from 2022 of $222,187 which were related to a manufacturing consultant, technical accounting support, HR consultant, and an advisor to the Board of Directors, a decrease in recruiting fees of $74,250, and a decrease in IT service fees of $6,539 related to new employee setup fees in 2022. Partially offsetting these decreases were an increase in legal fees of $272,302 due to employment related matters and legal and financial advisors engaged to assist in Sigma’s evaluation of strategic corporate transactions, and an increase in accounting fees of $9,385.

Office expenses for the nine months ended September 30, 2023, were $309,765 as compared to $692,640 for the same period in 2022, a decrease of $382,875, or 55%. The decrease resulted primarily from:(a) decreased travel and entertainment expenses of $247,989; (b) decreased office supply expenses of $24,531; (c) decreased dues & subscriptions of $36,496; (d) decreased payroll services expense of $14,640; (e) decreased rent and utilities of $24,196; and (f) decreased training and education expense of $33,559. These decreases were all the result of a reduction in the number of employees and no company-wide conference being held in 2023.

Depreciation and amortization expense for the nine months ended September 30, 2023 was $74,151, as compared to $88,302 for the same period in 2022, a decrease of $14,151, or 16%. The decrease was primarily the result of the increased life expectancy of our leased and consigned PrintRite3D systems, as well as returned and sold property and equipment.

Other operating expenses were $387,582 for the nine months ended September 30, 2023, as compared to $263,747 for the same period in 2022. The $123,835 increase was primarily due to an allowance for doubtful account of $115,600 related to a customer receivable for which collectability is uncertain.

In the nine months ended September 30, 2023, we realized net other income of $54,539, as compared to $57,336 in the same period in 2022. The decrease of $2,797 was primarily due to the New Mexico High Wage Tax credit of $76,628 received in 2022, partially offset by a net gain on the sale of our 3DPrinter and a write-off of accounts payable due to an unclaimed customer deposit in the third quarter of 2023.

Preferred dividends for the nine months ended September 30, 2023 were $33,122, as compared to $42,660 for the same period in 2022. The decrease was due to fewer outstanding shares of preferred stock as a result of conversions to common shares.

Our net loss applicable to common stockholders for the nine months ended September 30, 2023, was $3,964,577 as compared to $6,789,533 for the same period in 2022, a decrease of $2,824,956, or 41.6%. The decrease was primarily due to the decrease in the loss from operations of $2,818,215 and a decrease in preferred dividends of $9,538, partially offset by a decrease in total other income of $2,797.

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 Quarterly Report,

As of September 30, 2023, we had $556,087 in cash and working capital of $564,386I, as compared with $2,845,931 in cash and working capital of $3,644,522 as of December 31, 2022.

On October 13, 2023, we raised $772,468 in net proceeds by selling 128,887 common shares pursuant to our ATM Agreement. With these additional proceeds, the Company estimates that it has sufficient cash and working capital to fund its scaled-back operations as described below through the earlier of the closing of our asset sale to Divergent and acquisition of NextTrip, or March 2024. The Company reduced its employee headcount, and discontinued product development activities for the time being to ensure lowered expenses. The Company is continuing to operate and support its existing customers who have maintenance agreements and leases in place, supporting new installations in the field, and actively seeking potential sales of the PrintRite3D systems and software to customers who have lease agreements in place, systems on consignment, or otherwise express interest in Sigma’s products available for sale. The Company completed two such sales in the quarter ended September 30, 2023, and believes additional sales are achievable going forward as we progress towards closing the pending transactions. There is no assurance, however, that we will be able to close either transaction. If we fail to complete the acquisition of NextTrip Holdings, Inc., we intend to proceed with the sale of assets to Divergent Technologies, Inc. and may seek to undertake another strategic transaction, if possible, or the dissolution and liquidation or the bankruptcy of the Company. For these reasons, there is substantial doubt about our ability to continue as a going concern.

Net Cash Used in Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2023 was $2,586,884 as compared to $6,386,415 during the same period in 2022, a decrease of $3,799,531, or 59.5%.

During the nine months ended September 30, 2023, the net cash used in operating activities was the result of a net loss of $3,931,455 before preferred dividends, partially offset by changes in working capital of $832,808 and non-cash expenses of $511,763 related to depreciation and amortization of $74,151 and stock-based compensation of $466,244, partially offset by a gain on the sale of property and equipment of $28,632. Changes in working capital were driven by a decrease in accounts receivable of $312,620, a decrease in inventory of $175,877, a decrease in prepaid expenses of $67,393 an increase in accounts payable and accrued expenses of $285,909, partially offset by a decrease in deferred revenue of $8,991. The decrease in accounts receivable was a result of cash collections from 2022 sales and the establishment of an allowance for doubtful accounts of $115,000, and the decrease in inventory was due to the cessation of manufacturing activity. The increase in accounts payable and accrued expenses was due to extending payment times to vendors to conserve cash in advance of obtaining additional financing.

During the nine months ended September 30, 2022, the net cash used in operating activities was the result of a net loss of $6,746,873 before preferred dividends and the use of cash for working capital of $436,734, partially offset non-cash expenses of $797,192 related to depreciation and amortization of $88,302 and stock-based compensation of $708,890. Changes in working capital were driven by an increase in inventory of $257,352, an increase in prepaid expenses of $63,446, a decrease in deferred revenue of $19,166, and a decrease in accounts payable and accrued expenses of $141,192 partially offset by a decrease in accounts receivable of $44.422. The decrease in accrued expenses was largely driven by the payment of incentive bonuses, and the decrease in accounts receivable was a result of cash collections from 2021 sales. Increases in inventory and prepaid expenses resulted from the stocking of long lead-time parts for planned production and payment of our annual Nasdaq listing fee, respectively.

Net Cash Used in Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2023 was $67,515, which compares to $259,952 of cash used in investing activities during the same period of 2022, a decrease of $192,437, or 74.0%. The decrease resulted from a decrease in patent costs of $30,589, proceeds from the sale of our 3D printer of $78,000, and no purchases of property, plant and equipment during the first nine months of 2023.

Net Cash Provided by Financing Activities

The Company raised $364,555 in net proceeds through our ATM Agreement during the third quarter of 2023, and an additional $772,468 in net proceeds in October, 2023. There were no warrant exercises during the nine months ended September 30, 2023 or September 30, 2022.

Inflation, changing prices and rising interest rates have had no material effect on our continuing operations over our two most recent fiscal years.

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

Evaluation of disclosure controls and procedures and changes in internal controls over financial reporting.

Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), defines the term “disclosure controls and procedures” as those controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based upon an evaluation of the effectiveness of our disclosure controls and procedures performed by our management, with the participation of our President and Chief Executive Officer, and our Chief Financial Officer and Treasurer, as of the end of the period covered by this quarterly report, our management concluded that our disclosure controls and procedures are effective at a reasonable assurance level in ensuring that information required to be disclosed by us in our reports is recorded, processed, summarized and reported within the required time periods. No change in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the nine months ended September 30, 2023 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

You should consider the “Risk Factors” included under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 30, 2023, as well as the following updated Risk Factor:

We have curtailed certain business activities pending the completion of the Divergent and NextTrip transactions.

As of September 30, 2023, we had cash on hand of $556,087, and on October 13, 2023, we raised an additional $772,468 in net proceeds from the sale of common stock pursuant to our ATM Agreement. With these additional proceeds, the Company estimates that it has sufficient cash and working capital to fund its scaled-back operations as described below pending the completion our asset sale with Divergent Technologies, Inc. and our acquisition of NextTrip Holdings, Inc., or through March 2024. The Company reduced its employee headcount, and discontinued product development activities for the time being to ensure lowered expenses. The Company is continuing to operate and support its existing customers who have maintenance agreements and leases in place, supporting new installations in the field, and actively seeking potential sales of the PrintRite3D systems and software to customers who have lease agreements in place, systems on consignment, or otherwise express interest in Sigma’s products available for sale. The Company completed two such sales in the quarter ended September 30, 2023, and believes additional sales are achievable going forward as we progress towards closing both transactions. There is no assurance, however, that we will be able to close either transaction. If we fail to complete the acquisition of NextTrip Holdings, Inc., we intend to proceed with the sale of assets to Divergent Technologies, Inc. and may seek to undertake another strategic transaction, if possible, or the dissolution and liquidation or the bankruptcy of the Company. For these reasons, there is substantial doubt about our ability to continue as a going concern.

There is no assurance that we will satisfy NASDAQ’s continued listing requirements, and our common stock could be delisted.

On August 17, 2022, The Company received notice from Nasdaq that because our stockholders’ equity as of June 30, 2023 was $2,391,289, we no longer comply with Nasdaq Listing Rule 5550(b)(1), which requires companies listed on the Nasdaq Capital Market to maintain minimum stockholders’ equity of $2,500,000, and do not meet the alternatives of market value of listed securities or net income from continuing operations. The notice stated that under Nasdaq Rules, we have 45 calendar days to submit a plan to regain compliance and that if our plan is accepted, Nasdaq can grant us an extension of up to 180 calendar days from the date of the notice to evidence compliance.

On October 2, 2023, the Company submitted its plan to regain compliance to Nasdaq and requested an extension to February 13, 2023 to evidence compliance with the Rule and all other applicable criteria for continued listing on Nasdaq.

On October 23, 2023, Nasdaq informed the Company that based on the submission, it had granted the requested extension until February 13, 2024 to demonstrate compliance with the Rule. Nasdaq further informed the Company that if the Company fails to evidence compliance upon filing its periodic report for the quarter ended March 31, 2024 with the SEC and Nasdaq, the Company may be subject to delisting. In such an 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. Completion of the Acquisition is part of our plan submitted to Nasdaq to regain compliance with Nasdaq’s minimum stockholders’ equity requirement. If the Acquisition is not completed, it is likely that our common stock would be delisted from Nasdaq If our securities are delisted from Nasdaq, our stockholders could incur material, adverse consequences such as difficulty selling their shares of our common stock and reduced market prices for their shares. Delisting is also likely to have a material, adverse effect on our ability to sell and issue shares of our common stock in order to fund our operations, if any.