NextTrip, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-looking statements This Quarterly Report contains “Forward-Looking Statements.” All statements other than statements of historical fact are “Forward-Looking Statements” for purposes of these provisions, including but not limited to, statements regarding our expectations about development and commercialization of our technology, any projections of revenues or statements regarding our anticipated 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 (“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, 2021 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. 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.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 (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 Quarterly Report. 15 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 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 and from providing engineering services under contracts. Generally, revenue is recognized 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. Significant estimates and judgements for determining revenue recognition include: (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. 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. 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. 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 share-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. Share based compensation arrangements may include stock options, grants of shares of common stock with and without restrictions, performance-based awards, stock appreciation rights and employee stock purchase plans. 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 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 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 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 our contract manufacturing activities in metal additive manufacturing, or AM. 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. 16 In January 2022, we announced the foundational elements of a three-year plan that we believe will increase the Company’s ability to achieve its mission of setting the quality standard for additive manufacturing. The combined strategies are geared at making our technology more consumable in terms of ease of use and cost by end users, both for initial purchases and expansion opportunities, making it easier for original equipment manufacturers (“OEMs”) to embed our technology and generate attractive revenue streams for the OEM, and finally increasing the Company’s gross margins by moving towards a software-only solution. To lower the barrier for initial users and for expansion opportunities within end users with a large number of printers, we began offering our current PrintRite3D integrated hardware and software solution on a subscription basis. The impact of the change will currently reduce the initial upfront cost to a new user from over $100,000 to approximately $3,000-$4,000 per month. In addition, we believe the subscription model will smooth out the Company’s revenue and cash receipts while making them more predictable. 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 3rd party quality and analytics solution with consistent quality metrics across printers, processes and materials; and (3) OEMs building open 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. The combination of subscription pricing and the software-only embedded OEM offerings are intended to make our technology more affordable to acquire and easier for OEM’s to bundle, distribute and support in an effort to become the industry standard. The shift in our business model has had an impact on our near-term revenue growth as we increase our focus on building strategic partnerships, expanding our partner ecosystem, and ensuring the success of our existing customers as they move into production. However, we believe these changes will contribute to faster adoption of our product by end users and will result in more predictable and profitable revenues over the longer term. During the three months ended March 31, 2022, we recognized revenue of $51,844, as compared to $458,140 in revenue recognized during the same period in 2021, a decrease of $406,296, or 89%. The decrease is primarily due to decreased PrintRite3D® unit sales of $416,500 in the first quarter of 2022, partially offset by an increase in revenues of $13,425 from our subscription based pricing program. Our cost of revenue for the three months ended March 31, 2022 was $40,091, as compared to $128,331 for the same period in 2021, a decrease of $88,240, or 69%. The decrease was primarily attributable to fewer unit sales in 2022. Sigma’s total operating expenses for the three months ended March 31, 2022 were $2,295,698, as compared to $1,781,404 for the same period in 2021, an increase of $514,294, or 29%. The increase was primarily attributable to an increase in salary and benefit costs, as described below, related to the hiring of additional employees in an effort to expand the commercialization of our products. Salary and benefits costs were $1,292,010 for the three months ended March 31, 2022, as compared to $847,171 for the same period in 2021, an increase of $444,839, or 53%. The increase was comprised of: (a) $266,711 related to the hire of additional employees; (b) $84,677 related to salary increases for existing employees; (c) increased stock appreciation rights of $37,498; and (d) increased taxes and benefits of $98,607. Partially offsetting these increases was a decrease in commissions of $42,654 due to fewer unit sales. Stock-based compensation was $170,976 for the three months ended March 31, 2022, as compared to $117,477 for the same period in 2021, an increase of $53,499, or 46%. . This increase is primarily a result of stock options granted to new employees of $3,267 and increased stock option grants to existing employees and executive management of $12,748 and $37,484, respectively, in the three months ended March 31, 2022. Operations and research & development expenses of $143,418 were incurred during the three months ended March 31, 2022, as compared to $196,340 in the same period of 2021, a decrease of $52,922, or 30%. The decrease was primarily due to a decrease in operations costs of $59,192 as we incurred charges in the first quarter of 2021 of $52,987 for inventory obsolescence, including $14,471 for metal powder write-offs, field service expenses of $5,220, as well as equipment upgrades in both our manufacturing facility and our 3D metal printers totaling $12,277. Partially offsetting these decreases was an increase in purchases of lab supplies of $11,565, and increased research & development costs of $6,268 due to an increase in consulting costs of $21,043 in connection with ongoing PrintRite3D software development, partially offset by a decrease in expenses associated with a first quarter 2021 simulation project of $14,775. Investor, public relations, and marketing expenses of $94,326 were incurred during the three months ended March 31, 2022, as compared to $108,341 during the same period in 2021. The decrease of $14,015, or 13%, was primarily due to a decrease in investor relations consulting costs of $23,473 due to issuance of fewer stock appreciation rights and options issued in 2022 and lower advertising expenses of $3,984, partially offset by an increase in tradeshow expenses of $13,442 as a result of increased attendance due to reduced COVID travel restrictions in 2022. 17 Organization costs incurred in the three months ended March 31, 2022 were $58,749, as compared to $77,616 during the same period in 2021. The decrease of $18,867, or 24% was primarily due to a decrease in non-employee director stock-based compensation of $39,750, partially offset by an increase in such directors’ cash compensation of $20,695. Legal & professional fees incurred in the three months ended March 31, 2022 were $211,416, as compared to $176,847 incurred during the same period in 2021, an increase of $34,569, or 20%. This increase was primarily a result of an increase in consulting expenses of $82,175 due to the engagement of technical consulting support of $28,590 in connection with our new subscription-based pricing model, $3,500 in external human resources consulting, $17,800 for manufacturing support, and $32,285 related to consulting services for corporate matters, and an increase in audit fees of $9,936. These increases were partially offset by a decrease in legal expenses of $28,590 and a decrease in recruiting expenses of $26,667 related to new hires in 2021. Office expenses for the three months ended March 31, 2022 were $205,432, as compared to $148,225 for the same period in 2021, an increase of $57,207, or 39%. The increases resulted primarily from: (a) travel and entertainment of $53,542 as compared to virtually no travel during the same period in 2021 as a result of COVID 19 travel restrictions; (b) an increase in payroll service fees of $2,247 related to new hires; and (c) dues & subscriptions of $12,910 for new customer relationship management, product lifecycle management, and project management software. Partially offsetting these increases was a decrease in postage and shipping of $6,388, and a decrease in office supply expense of $7,377. Depreciation and amortization expense for the three months ended March 31, 2022 totaled 31,584 as compared to $23,031 for the same period in 2021, an increase of $8,553, or 37%. The increase is primarily the result of two PrintRite3D units on out new leasing program. Other operating expenses were $87,787 for the three months ended March 31, 2022, as compared to $86,356 for the same period in 2021. The increase was primarily due to an increase in our insurance policy premiums for 2022 of $1,701, partially offset by lower bank service fees during the period. In the three months ended March 31, 2022, we realized net other income of $76,550, as compared to net other income of $800,936 in 2021. The decrease of $724,386, or 90% was primarily due to an unrealized gain of $802,285 from the March 31, 2021 revaluation of the derivative liability resulting from our private placement of warrants to purchase 2,190,000 shares of common stock in the first quarter of 2021, partially offset by $76,628 received in New Mexico state incentives in the first quarter of 2022. Sigma’s net loss applicable to common stockholders for the three months ended March 31, 2022 was $2,221,615, as compared to $711,567 for the same period of 2021, a $1,510,048 increase. The increase was primarily due to the increased loss from operations of $832,350 and the decrease in other income of $724,386. These increases were partially offset by a decrease in preferred dividends of $46,688. Liquidity and Capital Resources As of March 31, 2022, we had $9,277,929 in cash and working capital of $9,588,858, as compared with $11,447,047 in cash and working capital of $11,702,358 as of December 31, 2021. 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. On March 26, 2021, the Company closed a public offering of its securities in which it issued 2,190,000 shares of common stock at a price of $4.445 per share, resulting in net proceeds to the Company of approximately $8,736,487 after deducting placement agent commissions and other offering costs payable by the Company. Pursuant to the Purchase Agreement, the purchasers severally agreed to vote the shares of common stock purchased under the Purchase Agreement in favor of any resolution presented to the stockholders of the Company for the purpose of obtaining approval of an increase in the authorized shares of the Company’s Common Stock from 12,000,000 to 24,000,000 shares (“Stockholder Approval”). In a concurrent private placement under the Purchase Agreement, the Company issued to the purchasers warrants to purchase an aggregate of 2,190,000 shares of common stock at an exercise price of $4.32 per share. Each warrant became exercisable on May 24, 2021, which was the date the Company obtained Stockholder Approval, and will expire two years after the initial exercise date. On January 12, 2021, the Company closed a public offering of common stock in which it issued 1,711,783 shares of common stock at a price of $3.00 per share, resulting in net proceeds of approximately $4,532,445 after deducting commissions and other offering expenses payable by the Company. During the first quarter of 2021, the Company received net cash proceeds of $1,136,010 from the exercise of outstanding warrants. We believe that our existing cash on hand will be sufficient to fund our anticipated operating costs and capital expenditure requirements through at least the first quarter of 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. 18 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: ● Revenue from the sales of our existing and future products; ● Costs associated with the expansion of our business and operations; ● 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; and ● The effect of competing technological and market developments. During 2022, we expect to sustain our operations and our commercialization and marketing efforts with our cash reserves and revenues generated from sales of our PrintRite3D® technology. We expect that continued enhancements of our IPQA®-enabled PrintRite3D® technology will enable us to further commercialize this technology into the AM metal market in 2022. To support the commercialization of our PrintRite3D® technology, we plan 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). The worldwide COVID-19 pandemic caused a reduction, and in some cases a freeze, in capital spending within the Company’s targeted industries. The future impact of the ongoing epidemic, including the emergence of variations of the virus, is highly uncertain so that no assurance can be given that our business and results of operations will not be materially and adversely affected. It is also uncertain as to any further disruption of the financial markets, which may reduce our ability to access capital on favorable terms or at all. However, due to the need to have more flexibility in supply chains with the ability to respond quickly to shortages in parts or products, we believe that the crisis will eventually accelerate the adoption of 3D printing, which may benefit the Company. 19 Net Cash Used in Operating Activities Net cash used in operating activities during the three months ended March 31, 2022 increased to $2,027,019 from $1,240,586 during the same period in 2021, a $786,433, or 63% increase. Contributing to this increase was an increase in net loss of $1,566,736 and decreases in accounts payable and accrued expenses of $265,467, prepaid assets of $6,278, and total stock-based compensation of $5,519. Partially offsetting these increases in cash usage were a decrease in the gain on derivative liability of $802,285, a decrease in accounts receivable of $207,658, a decrease in inventory purchases of $16,110, and increases in deferred revenue and depreciation and amortization expense of $12,961 and $8,553, respectively. Net Cash Used in Investing Activities Net cash used by investing activities during the three months ended March 31, 2022 was $142,099, which compares to $21,969 of cash used by investing activities during the same period of 2021, an increase of $120,130. The increase resulted from leased PrintRite3D units reclassified as property, plant and equipment, and increased patent costs during the first quarter of 2022. Net Cash Provided by Financing Activities The Company did not raise any capital nor were there any warrant exercises during the three months ended March 31, 2022. Cash provided by financing activities during the three months ended March 31, 2021 totaled $14,404,942 due to the receipt of $14,869,899 of proceeds less $1,600,967 of offering costs in connection with our January and March 2021 public and private offerings. The exercise of outstanding warrants during the three months ended March 31, 2021 provided an additional $1,136,010 in cash proceeds. Our ability to continue to fund our liquidity and working capital needs will be dependent upon the success of our efforts to generate revenues from existing and future PrintRite3D contracts, follow-on contracts resulting from successful engagements, possible strategic partnerships, and by obtaining additional capital from the sale of securities or by borrowing funds from lenders to fulfill our business plans. 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. There is no assurance that we will be successful in obtaining additional funding. The Company is unable to predict the effect that the COVID-19 outbreak or geopolitical events, including the conflict in Ukraine, may have on its access to the financing markets. If we fail to obtain sufficient funding when needed, we may be forced to delay, scale back or eliminate all or a portion of our commercialization efforts and operations. We have no lines of credit or other financing arrangements. Inflation and changing prices 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.