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SGLB > SEC Filings for SGLB > Form 10-Q on 14-Nov-2013All Recent SEC Filings

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Form 10-Q for SIGMA LABS, INC.


14-Nov-2013

Quarterly Report


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

Forward-looking statements

This Quarterly Report, including any documents which may be incorporated by reference into this Report, contains "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are "Forward-Looking Statements" for purposes of these provisions, including any projections of revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All Forward-Looking Statements included in this document are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any Forward-Looking Statement. In some cases, Forward-Looking Statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "intends," "believes," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the Forward-Looking Statements contained herein are reasonable, there can be no assurance that such expectations or any of the Forward-Looking Statements will prove to be correct, and actual results could differ materially from those projected or assumed in the Forward-Looking Statements. Future financial condition and results of operations, as well as any Forward-Looking Statements are subject to inherent risks and uncertainties, including any other factors referred to in our press releases and reports filed with the Securities and Exchange Commission. 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, 2012 and elsewhere in this report.

Introductory Comment

Our predecessor, Framewaves, Inc., a Nevada corporation, was incorporated in December 1985 as "Messidor Limited." In December 2000, Messidor Limited's shareholders approved a name change to "Framewaves, Inc." Framewaves, Inc. was a shell company (as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934) immediately prior to the September 2010 Reorganization (the "Reorganization") with no ongoing operations, and was focused on seeking a business opportunity. See further discussion of the Reorganization under the caption "The Reorganization" included under Item 1 ("Business"), Part I of our Annual Report on Form 10-K for the year ended December 31, 2012.

B6 Sigma, Inc., a Delaware corporation ("B6 Sigma"), was incorporated in February 2010. One member of our current management team worked at Technology Management Company, Inc., a New Mexico corporation ("TMC"), before leaving to form B6 Sigma. On September 13, 2010, Framewaves entered into a share exchange agreement with B6 Sigma and the shareholders of B6 Sigma pursuant to which Framewaves acquired all of the issued and outstanding shares of B6 Sigma. Following the closing of the transactions contemplated by the share exchange agreement, B6 Sigma became our wholly owned subsidiary.

On December 31, 2011, the Company completed its acquisition of Sumner & Lawrence Limited (dba Sumner Associates) ("Sumner"), and La Mancha Company, New Mexico corporations incorporated in 1985 and 1982, respectively, under an Exchange Agreement and Plan of Reorganization dated as of December 10, 2011. La Mancha Company has since ceased all operations and has been dissolved.s

Throughout this Quarterly Report on Form 10-Q, unless otherwise indicated or the context otherwise requires, the term "B6 Sigma" refers to B6 Sigma, Inc., a Delaware corporation and the operating company acquired in connection with the Reorganization; the term "Sumner" refers to Sumner & Lawrence Limited (dba Sumner Associates), a New Mexico corporation; and the terms the "Company," "Sigma," "we," "us" and "our" refers to Sigma Labs, Inc., together with B6 Sigma, Inc. and Sumner & Lawrence Limited, our wholly owned subsidiaries.

Overview of Business

B6 Sigma is a company that specializes in the development and commercialization of innovative manufacturing and materials technologies. Pursuant to an asset purchase agreement, B6 Sigma acquired certain assets from a division of TMC in exchange for the surrender of certain securities of TMC previously issued to the founders of B6 Sigma. The assets acquired include equipment, contracts, licenses and intellectual property relating to our "In Process Quality Assurance" or IPQA technology. See further discussion of our IPQA technology under the caption "Products and Services" included under Item 1 ("Business"), Part I of our Annual Report on Form 10-K for the year ended December 31, 2012.

We believe that our primary manufacturing quality control solutions technology, which we refer to as "IPQA," will redefine conventional manufacturing quality control practices primarily by embedding quality assurance protocols in real-time, in advanced manufacturing processes, thereby reducing the need for and cost of post-manufacturing quality control processes. The most promising application of IPQA to new and emerging markets is for the monitoring and control of additive manufacturing, also known as 3D printing. This is particularly true for the 3D printing of metal components for parts in aerospace, automotive, defense, biomedical, and general industrial applications. Sigma Labs, Inc. has and continues to develop a suite of applications known as PrintRite3D to address this rapidly growing and emerging market. As we previously announced, in April 2013, we entered into a Joint Technology Development Agreement with GE Aviation, an operating component of General Electric Company, to advance and implement in-process inspection technologies for additive manufactured metal jet engine components. In addition to PrintRite3D, we have other related technologies under development to address other emergent needs of the 3D Printing metals market. PrintRite3D is described in more detail below.

Although 3D printing is a rapidly expanding and emerging market, there are significant barriers which are holding back its rapid growth of 3D printing for metals in particular. First, the quality of 3D printed metals still varies significantly from day-to-day, from machine-to-machine, and from part-to-part. Therefore, a way of assuring the quality of 3D printed metal parts is needed. Second, the geometry of 3D printed metal parts can deviate from the desired shape due to thermal distortion caused by the high temperatures required to melt and fuse metal powders in order to form a part. Thus, a way of measuring and assuring the geometry of 3D printed metal parts is needed. Third, the current speed of 3D metal printing is too slow and therefore 3D metal printing for industries like automotive may not be cost effective until a higher speed or higher productivity metal printing solution is developed. PrintRite3D addresses the quality and geometry of 3D printed metal parts by offering an in-process, real-time non-destructive inspection (NDI) of verifying part quality in real-time and part geometry in the near future. This helps to minimize the need for costly post-process inspections. We are exploring opportunities with potential strategic partners to develop technologies to address the third barrier described above relating to the current speed of 3D metal printing.

We expect to generate revenues primarily by direct sales or licensing our technology solutions to businesses that seek to improve their manufacturing production processes and/or manipulate and improve the most functional characteristics of the materials and other input components used in their business operations. Our management anticipates that the Company's technology solutions will allow our clientele to combine advanced manufacturing quality control with innovative materials solutions to achieve breakthrough product potential in many industries including the following industries: aerospace, defense, oil and gas, biomedical prosthetic implants, sporting goods, and power generation. We are currently investigating and pursuing application of our PrintRite3D and other technologies in some of these markets, and we anticipate growth in both the breadth and depth of these offerings in the future.

Regarding our dental technology, we entered into an exclusive marketing agreement, effective May 24, 2013, with Manhattan Scientifics, Inc. Under the agreement, we have granted Manhattan Scientifics, Inc., a company that operates as a technology incubator that seeks to acquire, develop and commercialize life-enhancing technologies in various fields, with emphasis in the areas of nanotechnologies and nanomedicine, the exclusive right to seek to identify prospective licensees and strategic partners for the purpose of commercializing our dental technology.

With respect to our munitions technology, as described under Item 1 ("Business"), Part I of our Annual Report on Form 10-K for the year ended December 31, 2012, effective April 11, 2013, we entered into an exclusive license agreement with Allotrope Sciences Corporation ("Allotrope"), pursuant to which we granted Allotrope rights to market and sell Sigma Labs' ARMS and BAM technologies to U.S. and Foreign Government customers. Allotrope is obligated to pay specified license fees and royalties on sales relating to the licensed patents.

We anticipate that our primary business focus will continue to be in the (i) deployment and implementation of our PrintRite3D technologies to all appropriate manufacturing businesses, and (ii) development and commercialization of related IPQA breakthrough technologies and innovations in manufacturing and materials sciences. We will continue to expand our operations in this regard, including investigating additional opportunities for applications of our technology as well as undertaking further development efforts towards the commercialization of various technologies we have identified.

Our board of directors and management comprise scientists and business professionals with experience in the advanced manufacturing, advanced materials technology, and energy-related markets. These individuals have worked with some of the largest defense contractors in the world in varied projects such as advanced reactive munitions and nuclear weapons stewardship programs. These individuals collectively possess decades of experience working in the advanced manufacturing and materials technology space. As such, we believe we possess the resident expertise to provide consulting services to other companies regarding their advanced manufacturing needs, or to companies seeking to improve the design of their products by using alternative next-generation materials & processes or improving certain characteristics of the original input material, on a fee for services basis. Accordingly, in addition to our primary business focus, we intend to generate revenues by providing such consulting services to businesses seeking the same. Such consulting services may not necessarily involve deployment of our own technologies and may be limited to consulting with respect to the development, exploitation or improvement of the client's own technology.

Moreover, some members of our management team and Board of Directors have worked at or with United States Department of Energy ("DOE") national laboratories (including the Los Alamos National Laboratory ("LANL") and Sandia National Laboratory ("SNL")) over the last 30 years. Due to their work with the DOE, members of our management team and Board of Directors have developed extensive relationships with the DOE and its network of national laboratories. Accordingly, we expect to leverage these relationships in connection with licensing and developing technologies created at such national laboratories for commercialization in the private sector.

Sumner, based in Santa Fe, New Mexico, provides consulting services to the public sector, especially with regard to emerging technologies and alternative applications of established technologies. Sumner holds ongoing contracts with government agencies and the appropriate levels of security clearance for those contracts. Sumner's current clients include, but are not limited to, the State Department, the Department of Defense, the Department of Energy, various military services and affiliated agencies, the National Laboratories, and contractors to these organizations.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported 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. Such critical accounting policies, including the assumptions and judgments underlying them, are disclosed in Note 1 to the Consolidated 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.

Results of Operations

We expect to generate revenues primarily by direct sales or licensing our technology solutions to businesses that seek to improve their manufacturing production processes and/or manipulate and improve the most functional characteristics of the materials and other input components used in their business operations. However, we presently make no sales of these technologies and generate no revenues therefrom, except for license fees payable to the Company under the exclusive license agreement with Allotrope, and sales of two of our PrintRite3D systems to a leading aerospace company for use for test and evaluation purposes with respect to 3D metal printing. During the three months and nine months ended September 30, 2013, we recognized revenues of $280,831 and $753,080, respectively, as compared to $456,369 and $650,094, respectively, in revenues that we generated during the same periods in 2012. The revenues we generated during the three months and nine months ended September 30, 2013 and 2012 were primarily generated from consulting services we provided to third parties during these periods. Our costs of service revenue for the three months and nine months ended September 30, 2013 were $159,367 and $395,846, respectively, as compared to $265,946 and $440,507, respectively, for the same periods in 2012.

Our general and administrative expenses for the three and nine months ended September 30, 2013 were $181,562 and $463,911, respectively, as compared to $142,921 and $470,509, respectively, for the same periods in 2012. Our payroll expenses for the three and nine months ended September 30, 2013 were $29,137 and $184,963, respectively, as compared to $62,712 and $264,212, respectively, for the same periods in 2012. Our expenses relating to non-cash stock compensation for the three and nine months ended September 30, 2013 were $96,500 and $213,200, respectively, as compared to $0 and $125,000, respectively for the same periods in 2012.

General and administrative expenses principally include operating expenses and outside services fees, the largest component of which consists of services in connection with our obligations as an SEC reporting company, in addition to other legal and accounting fees. The net decrease in payroll expenses for the three and nine months ended September 30, 2013 as compared to the same periods in 2012 is principally the result of the reduction in hours worked by employees of Sigma Labs.

We expect our general and administrative expenses to increase for the remainder of 2013 and in 2014 as we continue to actively pursue our business plans and increase our operations and marketing. Similarly, we expect our payroll and non-cash compensation expenses to increase as we grow our business.

Our net loss for the three and nine months ended September 30, 2013 decreased overall and totaled $185,427 and $504,521, respectively, as compared to $15,107 and $649,755, respectively, for the same periods in 2012.

Liquidity and Capital Resources

As of September 30, 2013, we had $1,217,298 in cash and had a working capital surplus of $1,290,720, as compared with $150,071 in cash and a working capital surplus of $315,574 as of December 31, 2012. On July 18, 2013, we closed a private placement of our common stock, pursuant to which we received $1,200,000 from the sale of 120,000,000 shares of restricted stock.

We plan to generate revenues primarily by marketing and selling our advanced manufacturing quality control and materials technologies. However, for the period from our inception through September 30, 2013, we generated revenues and financed our operations primarily from consulting services we provided during this period and through private sales of Sigma Labs common stock.

We expect that our continued development of our "In Process Quality Assurance" or IPQA technology will enable us to commercialize this technology during fiscal 2014. However, until commercialization of our technologies, we plan to continue funding our development activities and operating expenses by providing consulting services concerning our areas of expertise, i.e., manufacturing quality control and materials technologies, and through the use of proceeds from sales of our securities.

As of November 14, 2013, B6 Sigma has 3 active consulting contract with respect to which we expect to perform and generate up to $238,238 in revenues during the remainder of 2013, and Sumner has 2 active consulting contracts, which Sumner expects to perform and generate up to $50,000 in revenues during the remainder of 2013.

Some of these consulting contracts are fixed price contracts, for which we will receive a specified fee regardless of our cost to perform under such contract. In connection with entering into these fixed-contract consulting arrangements, we are required to estimate our costs of performance. To actually earn a profit on these contracts, we must accurately estimate costs involved and assess the probability of meeting the specified objectives, realizing the expected units of work or completing individual transactions, within the contracted time period. Accordingly, if we under-estimate the cost to complete a contract, we remain obligated to complete the work based on our initial cost estimate, which would reduce the amount of profit actually earned under the contract.

We have no credit lines or facilities as of November 14, 2013, nor have we ever had a credit facility since our inception. We will continue to evaluate potential future sources of capital, as we do not currently have commitments from any third parties to provide us with additional capital.

Based on the funds we have as of November 14, 2013 and the revenues we expect to receive under our consulting agreements, we believe that we will have sufficient funds to pay our administrative and other operating expenses through 2014. Until we are able to generate significant revenues and royalties from sales or licensing of our technologies, our ability to continue to fund our liquidity and working capital needs will be dependent upon revenues from existing and future consulting contracts and proceeds received from sales of our securities.

Our general and administrative expenses are expected to increase as we seek to commercialize our IPQA-related technologies, and we may have to incur additional marketing expenses to further bring exposure to our business plan. Despite our sale of $1,200,000 of restricted common stock during July, 2013, we anticipate having to obtain additional capital from the sale of additional securities or by borrowing funds from private lenders to fulfill our business plans. There is no assurance that we will be successful in obtaining additional funding.

If we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail or cease our operations. No assurance can be given that we will be able to obtain sufficient capital to meet our requirements.

Inflation and changing prices have had no effect on our continuing operations over our two most recent fiscal years.

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

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