Item 1. Business
ITEM
1. BUSINESS.
The
Company:
Sigma is a software company that was founded
by scientist-engineers composed of physicists and metallurgists then working at Los Alamos National Labs for the entrepreneurial 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 aggressively market PrintRite3D®.
However, the worldwide COVID-19 pandemic caused a reduction, and in some cases a freeze, in capital spending within the Company’s
targeted industries and had what the Company believes to be a short-term negative impact on the Company’s expected timing of generating
meaningful revenue. Despite the pandemic, 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.
Additive
Metal Manufacturing and the role and need for Sigma’s technology:
The
use of 3D printing technology dates back to the 1980s for polymer applications, but the ability to print functional parts from metal
alloys has spurred significant interest and investment into AM over 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/or
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 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 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.
4
PrintRite3D®
Technology and Product Family
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 printers. The PrintRite3D® system detects potential anomalies and incorporates machine
learning in conjunction with developed metrics to map those metrics to the post-process data. This provides the ability to reduce post-production
testing and costs, 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 opens up 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.
Distribution
Methods
Sigma
Labs employs a multi-channel distribution model for its IPQA products including a direct sales force, value added resellers (“VARs”)
and 3D printer Original Equipment Manufacturers (“OEMs”). In 2021, the majority of the Company’s revenue was
generated by direct sales in North America and Europe. 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 aggressively to establish and extend relationships
with 3D printer OEMs and began to generate revenue from this channel. The revenue generated by the OEMs in 2021 did not meet the Company’s
projections due to several reasons, including but not limited to: (1) the ramp up time for the OEM’s sales force, (2)
the ongoing impact of COVID on our European based OEM partners, and (3) the lack of OEM sales into select vertical markets (e.g.,
aerospace and space exploration) that require that parts conform to specific quality standards. We expect that the percentage of
the Company’s revenue coming from OEMs will increase in 2022 and beyond.
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 to support the ongoing development
and maintenance.
Dependence
on a Few Major Customers and Partners
The
Company has established distribution agreements with two international 3D printer OEMs. We expected each to contribute a significant
percentage of our 2021 revenue, however due to the previously discussed reasons, revenue in the first year of the relationship did not
meet either company’s expectations. The Company supports the OEMs with joint marketing programs, field sales and technical
support personnel to assist in the sale of its technology. It is the Company’s intent to continue to build the OEM channel through
distribution relationships with other 3D printer OEMs 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 has been primarily from the printer OEMs who offer their own
monitoring system, usually as a separately priced option to its printers. Sigma believes 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 from approximately 50 to a much small number over the next decade.
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 only 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 3rd party agnostic
system capable of working across 3D printer machine types. These systems use camera-based technology and machine learning to identify
gross defects during the printing process. These 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.
5
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 chart below summarizes 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 that the patent applications we have submitted will issue or that if issued, they will offer adequate protection under applicable
law.
Sigma Labs, Inc. Patent Portfolio as of
December 31, 2021
Jurisdiction
Granted
In
Process
Total
US
13
16
29
PCT
-
3
3
EP
-
4
4
Germany
1
7
8
China
1
4
5
Japan
-
2
2
Korea
-
1
1
Total
15
37
52
The Company believes that its patented
PrintRite3D® technology is a significant barrier to entry to competitors attempting to replicate the Company’s
strategy.
6
Title
Type
Patent
No. or Application No.
Expiration
Date
Methods
and Systems for Monitoring Additive Manufacturing Processes
US
Utility
9,999,924
5/11/36
Systems
and Methods for Additive Manufacturing Operations
US
Utility
10,207,489
6/20/37
Material
Qualification System and Methodology
US
Utility
10,226,817
4/26/37
Material
Qualification System and Methodology
China
Utility
ZL201680010333.X
1/13/26
Optical
Manufacturing Process Sensing and Status Indication System
US
Utility
10,317,294
5/2/35
Systems
and Methods for Measuring Radiated Thermal Energy During an Additive Manufacturing Operation
US
Utility
10,479,020
8/1/38
Optical
Manufacturing Process Sensing and Status Indication System
US
Utility
10,520,372
3/25/35
Systems
and Methods for Additive Manufacturing Operations
US
Utility
10,717,264
12/28/38
Systems
and Methods for Measuring Radiated Thermal Energy During an Additive Manufacturing Operation
US
Utility
10,639,745
2/21/39
Photodetector
Array for Additive Manufacturing Operations
US
Utility
10,786,850
2/21/39
Multi-Sensor
Quality Inference and Control for Additive Manufacturing Processes
US
Utility
10,786,948
4/24/37
Optical
Manufacturing Process Sensing and Status Indication System
US
Utility
11,073,431
3/25/35
Method
and System for Monitoring Additive Manufacturing Process
US
Utility
11,135,654
8/11/35
Layer-Based
Defect Detection Using Normalized Sensor Data
US
Utility
11,072,043
1/26/40
Systems
and Methods for Measuring Radiated Thermal Energy During an Additive Manufacturing Operation
Germany
Utility
112,018,001,597
8/1/38
Government
Regulation
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,
with respect to our work with government agencies, our sales are driven by pricing based on costs incurred to produce products or perform
services under contracts with the U.S. government. U.S. government contracts generally are subject to Federal Acquisition Regulations
(“FAR”), agency-specific regulations that implement or supplement FAR, such as the DoD’s 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. A contractor’s 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 suspension or debarment from government contracting or subcontracting for a period of time. In addition, government contractors are
also 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 23, 2022, we have several active contracts with government agencies. During fiscal year 2021, we entered into two contracts
with government agencies, and we plan to increase this activity in the future.
Human Capital
As
of December 31, 2021, we had 33 full-time employees. We continue to search for additional, qualified personnel, to support our expanding
operations in the area of IPQA® for AM. We believe that our future success depends, in part, upon our continued ability to
attract and retain highly skilled employees and management and technical personnel. Employee engagement is important to us and
we focus on continuously enhancing our corporate culture.
Compensation
and Benefits
We
strive to provide robust and 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.
7
COVID-19
Pandemic
The health and wellness of our
employees is also critical to our success. In an effort to keep our employees safe during the COVID-19 pandemic, we have implemented
a number of health-related measures including, but not limited to, protocols governing the use of face-masks while on company property,
temperature taking protocols, a flexible work-from-home policy, cleaning procedures at our offices, and social-distancing protocols,
which measures we will continue to monitor.
Corporate
Information
We
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 from Framewaves Inc. to Sigma Labs, 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.sigmalabsinc.com. The Company’s annual reports, quarterly reports, current reports
on Form 8-K and amendments to such reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934,
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 February
17, 2022, we announced that Jacob Brunsberg was appointed as President and Chief Operating Officer of the Company .
In this position, Mr. Brunsberg will have responsibility for product direction, strategic relationships, sales, marketing, and
engineering. As President and Chief Operating Officer, he will report to Mark K. Ruport, Sigma’s Chief Executive Officer.
Mr. Brunsberg will oversee several strategic initiatives designed to accelerate the growth and performance of the company, including
the transition to a software only offering, initiating and implementing a comprehensive OEM integration program, building strategic partnerships,
and implementing a new subscription-based pricing model as an option to our existing perpetual pricing model. Each of these key
initiatives is integral to lowering the additive manufacturing (“AM”) industry’s technology adoption barriers and easing
entry and expansion for manufacturers and OEM partners.
On
January 26, 2022, we announced that together with Materialise, a leading provider of additive manufacturing (AM) software and services,
we had developed a breakthrough technology to enhance the scalability of metal AM applications. The new platform combines the Materialise
Control Platform and Sigma Labs’ PrintRite3D® sensor technology to allow users to identify and correct metal build issues in
real-time. With added control over their unique processes, manufacturers can optimize metal AM processes for consistency and repeatability,
key factors in scaling AM operations for serial production.
On
January 25, 2022, we announced that our PrintRite3D® in-process quality assurance solution had been purchased by Auburn University,
based in Auburn, Alabama. The PrintRite3D solution will be installed on the university’s EOS M290 machine and is the start of an
academic and industrial collaboration between the university and Sigma Labs, and we will deploy the system under a commercial lease/purchase
program that provides more flexible and acceptable terms for academic institutions and early adopters.
PrintRite3D
will be implemented to support several projects at the Auburn University National Center for Additive Manufacturing Excellence (NCAME)
to utilize 3D printed (additively manufactured) components to improve commercial air and space travel. As reported by the Auburn University
Samuel Ginn College of Engineering, NCAME is funded by a $3 million grant from the Federal Aviation Administration (FAA). The objective
is to address issues related to the variability in additive manufacturing machines, as well as generate an understanding of how microscopic
anomalies in the 3D-printed metals affect overall fatigue and fracture properties.
On
January 20, 2022, we announced that our PrintRite3D® in-process quality assurance solution will be certified to work with Aconity3D’s
line of 3D metal printers and available as a standard option via Aconity3D’s online configurator. Aconity3D will designate their
printers as ‘PrintRite3D Ready™’. As an original equipment manufacturer (OEM) Aconity3D will sell, install and support
PrintRite3D as an integrated solution to its customers.
Aconity3D
is a machine manufacturer for laser-based 3D printing of metals, with a focus on the buildup of customer specific systems for Laser Powder
Bed Fusion (LPBF), in which metal particles are fused layer upon layer by a laser. The Aconity System Framework allows full customization
of each machine for customers’ specific applications. Aconity3D’s customers and partners include leading industrial, aviation
and automotive companies, and world-renowned institutes and universities at the forefront of the additive manufacturing (AM) landscape.
8