UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 20172018

OR

[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-38015

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.[  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 14, 2017,13, 2018, the issuer had 4,569,6888,248,729 shares of common stock outstanding.

SIGMA LABS, INC.

For the quarter ended June 30, 2017FORM 10-Q

FORM 10-Q

TABLE OF CONTENTS

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PART II. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Sigma Labs, Inc.

Condensed Balance Sheets

(Unaudited)

The accompanying notes are an integral part of these condensed financial statementsstatements.

3

Sigma Labs, Inc.

Condensed Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these condensed financial statementsstatements.

4Sigma Labs, Inc.

Condensed Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these condensed financial statementsstatements.

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SIGMA LABS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

June 30, 20172018

(Unaudited)

NOTE 1 –- Summary of Significant Accounting Policies

Nature of Business – On September 13, 2010 Sigma -Sigma Labs, Inc., formerly named Framewaves, Inc., a Nevada corporation, acquired 100% of the shares of B6 Sigma, Inc. by exchanging 6.67 shares of Framewaves, Inc. restricted common stock for each issued and outstanding share of B6 Sigma, Inc. The acquisition has been accounted for as a “reverse merger” and, accordingly, the operations of Framewaves, Inc. prior to the date of acquisition have been eliminated. Unless otherwise indicated or the context otherwise requires, the term “B6 Sigma” refers to B6 Sigma, Inc., a Delaware corporation, which, until the short-form merger referenced below, was our wholly-owned, operating company acquired in September 2010; the terms the “Company,” “Sigma,” “we,” “us” and “our” refer to Sigma Labs, Inc., together with B6 Sigma, Inc. Prior to December 29, 2015, we conducted substantially all of our operations through B6 Sigma. On December 29, 2015, we completed a short-form merger of B6 Sigma into Sigma. As a result, B6 Sigma became part of Sigma and no longer exists as a subsidiary.

B6 Sigma, Inc., incorporated February 5, 2010, was founded by a group of scientists, engineers and businessmen to develop and commercialize novel and unique manufacturing and materials technologies. The CompanySigma believes that some of these technologies will fundamentally redefine conventional quality assurance and process control practices by embedding them into the manufacturing processes in real time, enabling process intervention and ultimately leading to closed loop process control. The Company anticipates that its core technologies will allow its clientele 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. The terms the “Company,” “Sigma,” “we,” “us” and “our” refer to Sigma Labs, Inc.

Basis of Presentation –- The accompanying financial statements have been prepared by the Company in accordance with Article 8Generally Accepted Accounting Principles (“GAAP”) in the United States of U.S.America and applicable rules and regulations of the Securities and Exchange Commission Regulation S-X.(“SEC”) regarding interim reporting. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at June 30, 20172018 and 20162017 and for the periods then ended have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. The Company suggests these condensed financial statements be read in conjunction with the December 31, 20162017 audited financial statements and notes thereto included in the Company’s Form 10-K. The results of operations for the periods ended June 30, 20172018 and 20162017 are not necessarily indicative of the operating results for the full year.

Reclassification –- Certain amounts in prior-period financial statements have been reclassified for comparative purposes to conform to presentation in the current-period financial statements. In addition, $153,013 of issuance costs associated with the February 2017 capital raise have been reclassified from operating costs to a reduction in additional paid in capital.

Continuing Operations - The Company has sustained losses and had negative cash flows from operating activities since its inception. In 2017 and the first six months of 2018, management has reported a change of strategy under which the company ceased to make sales and installations for research and development applications in order to focus its efforts entirely on potential customers already manufacturing 3D metal parts and therefore, already in need of quality improvement. The result of this change between September 2017 and the second quarter of 2018 was a significant decrease in revenues which the Company hopes to replace with orders for serial production use. The Company has raised significant equity capital as it continues to develop new products with commercial applications that may increase future revenues. On February 21, 2017, the Company closed an underwritten public offering of equity securities resulting in net proceeds of approximately $5,097,000, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. The Company was able to fund operations for 2017 with these funds and end the year with a cash balance of $1,515,674. On March 28, 2018, Sigma received $535,000 in full payment of the Morf 3D note and related accrued interest balance. In addition, on April 6, 2018, the Company closed a private placement offering of equity securities resulting in net proceeds of approximately $877,500, after deducting commissions and other offering expenses payable by the Company. On June 26, 2018 the Company closed a public offering of equity securities resulting in net proceeds of approximately $2,068,900, after deducting placement agent commissions and other offering expenses payable by the Company. As a result, the Company currently has sufficient cash and working capital to fund operations through the first quarter of 2019 and is anticipating that sales contracts may be closed in the second half of fiscal 2018 generating additional cash flow in the near term.

Loss Per Share – -The computation of loss per share is based on the weighted average number of shares outstanding during the period in accordance with ASC Topic No. 260, “Earnings Per Share.” Shares underlying the Companies outstanding warrants, options or note conversion features were excluded due to the anti-dilutive effect they would have on the computation. At June 30, 2018 the Company had 350 convertible preferred stock shares, 3,477,060 warrants, 664,707 stock options and a $50,000 Convertible Note Payable outstanding. The total number of shares of common stock underlying these instruments is 4,516,767. At June 30, 2017 the Company had 1,701,500 warrants, 229,938 stock options and $1,000,000 in Convertible Notes Payable outstanding. The total number of shares of common stock underlying these instruments was 2,431,438.

The following data shows the amounts used in computing loss per share and the effect on income and the weighted average number of shares of dilutive potential common stock for the periods ended June 30, 2018 and 2017:

Recently Enacted Accounting Standards –- The FASB established the Accounting Standards Codification (“Codification” or “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) issued under authority of federal securities laws are also sources of GAAP for SEC registrants.

Recent Accounting Standards Updates (“ASU”) through ASU No. 2015-012018-11 contain technical corrections to existing guidance or affects guidance to specialized industries or situations. The Company has evaluated recently issued technical pronouncements and has determined that, other than ASU 2014-09 (Topic 606), addressed below, these updates have no current applicability to the Company or their effect on the financial statements would not have been significant.

In May 2014, the FASB issued ASU 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. On January 1, 2018, we adopted Topic 606 and all related amendments (“new revenue standard”) to those contracts which were not completed as of January 1, 2018 using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. There is no adjustment to the opening balance of retained earnings due to the cumulative effect of initially applying the new revenue standard determined to be immaterial. We expect the impact of the adoption of the new revenue standard to be immaterial to our net income on an ongoing basis.

Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated by management. Significant accounting estimates that may materially change in the near future are 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.

NOTE 2 - Notes Receivable

On May 1, 2017, the Company made a loan in the principal amount of $250,000 to Jaguar Precision Machine, LLC, a New Mexico limited liability company, pursuant to a Secured Convertible Promissory Note dated May 1, 2017 delivered by Jaguar to the Company. The loan bore interest at the rate of 7% per annum, was due and payable in full on May 1, 2018, was secured by certain assets of Jaguar, and is convertible at the Company’s option into 10% of the outstanding shares of the common stock of Jaguar unless Jaguar exercises its right under specified circumstances to repay all principal and accrued interest on the loan. The purpose of the loan was to provide working capital to Jaguar to, among other things, stand up a metallurgical laboratory and become ASM9100 certified for contracts related to AM of high-precision aerospace and defense components, in furtherance of our strategic alliance. Sigma received from Jaguar priority for use of certain machines and services of Jaguar. On April 27, 2018, the promissory note was amended whereby the due date of the note was extended to June 1, 2018 in exchange for a cash payment of $5,000 received on May 1, 2018, 50% of which will be retained as payment for the 30-day extension. On June 6, 2018 the promissory note was amended whereby the due date was extended to August 1, 2018 in exchange for cash payments of $10,000 by each of June 7, 2018 and July 1, 2018, $8,000 of which is to be retained as payment for the 60-day extension. The first of the $10,000 payments was received by the Company on June 6, 2018. On June 15, 2018, the Company received a $150,000 payment from Jaguar, $17,803 of which was applied to accumulated interest through that date and $132,197, the balance, of which, was applied to the principal balance of the note. This resulted in a June 30, 2018 principal balance of $117,803 and accumulated interest of $361 due on the note.

On March 27, 2017, the Company made a loan in the principal amount of $500,000 bearing interest at the rate of 7% per annum to Morf3D, Inc., an Illinois corporation, pursuant to a Secured Convertible Promissory Note dated March 27, 2017 delivered by Morf3D to the Company. The $500,000 loan principal and $35,000 of accumulated interest was paid in full on March 27, 2018.

NOTE 3 - Inventory

At June 30, 2018 and December 31, 2017, the Company’s inventory was comprised of:

NOTE 4 - Notes Payable

At June 30, 2018 the Company had a $50,000 convertible note bearing interest at a rate of 10% per annum outstanding which is due on October 18, 2018.

NOTE 2 –5 - Stockholders’ Equity

Common Stock

Effective March 17, 2016, our Amended and Restated Articles of Incorporation were amended pursuant to a Certificate of Change Pursuant to Nevada Revised Statutes 78.209 (the “Certificate of Change”) filed with5, 2018, the Nevada Secretary of State. The Certificate of Change provided for both a reverse stock split of the outstanding shares of our common stock on a 1-for-100 basis (the “Reverse Stock Split”), and a corresponding decrease in the number of shares of our common stock that we are authorized to issue (the “Share Decrease”).

As a result of the Reverse Stock Split, the number of issued and outstanding shares of our common stock on March 17, 2016 decreased from 622,969,835 pre-Reverse Stock Split shares to 6,229,710 post-Reverse Stock Split shares (after adjustment for any fractional shares). Pursuant to the Share Decrease, the number of authorized shares of our common stock decreased from 750,000,000 to 7,500,000 shares of common stock. All amounts shown for common stock included in these financial statements are presented post-Reverse Stock Split.

On April 28, 2016, the Company's Amended and Restated Articles of Incorporation were amended to increase the authorized number of authorized shares of the Company's common stock from 7,500,000 to 15,000,000 shares of common stock.

Effective February 15, 2017, our Amended and Restated Articles of Incorporation were amended pursuant to a Certificate of Change Pursuant to Nevada Revised Statutes 78.209 (the “Certificate of Change”) filed with the Nevada Secretary of State. The Certificate of Change provided for both a reverse stock split of the outstanding shares of our common stock on a 1-for-2 basis (the “Reverse Stock Split”), and a corresponding decrease in the number of shares of our common stock that we are authorized to issue (the “Share Decrease”).

As a result of the Reverse Stock Split, the number of issued and outstanding shares of our common stock on February 15, 2017 decreased from 6,307,577 pre-Reverse Stock Split shares to 3,153,801 post-Reverse Stock Split shares (after adjustment for any fractional shares). Pursuant to the Share Decrease, the number of authorized shares of our common stock decreased from 15,000,000 to 7,500,000 shares of common stock, $0.001 par value per share. As of March 31, 2017, the Company had 7,500,000 shares of authorized common stock, $0.001 par value per share.

In January, 2017, the Company issued 20,000 shares of common stock to two15,000,000.

In 2017, the Company issued 40,934 shares of common stock to directors at an average value of $2.09 per share, or $85,408. Also in equal amounts2017, 7,750 shares previously issued to a director and 750 shares previously issued to an employee, with a combined carrying value of 10,000$9,830, were forfeited.

Ronald Fisher, the Company’s Vice President of Business Development, continues to be entitled to receive performance-based stock and cash bonuses under his Employment Offer Letter Agreement if certain milestones are satisfied by December 31, 2018, so long as Mr. Fisher remains an employee of the Company as of the date the applicable milestone is satisfied.

In January 2018, the Company issued 23,256 shares each,of common stock to directors valued at $1.72 per share, or $34,404.$40,000.

In February, 2017,April 2018, the Company issued 5,232176,744 shares of common stock to a directordirectors valued at $3.25$1.2236 per share, or $17,004.$216,264.

Between May 29, 2018 and June 1, 2018, we issued an aggregate of 1,000,000 shares of common stock upon conversion of the 1,000 shares of Series B Preferred Stock issued on April 6, 2018 (as described below under “Preferred Stock”).

On February 14, 2017, The NASDAQ Stock Market LLC informedJune 26, 2018, as part of its public offering of equity securities described in Note 1, the Company issued 2,040,000 shares of common stock and warrants to purchase a total of 717,000 shares of common stock (including the warrants described under “Preferred Stock” below that it had approvedwere issued on June 26, 2018). Each warrant has an initial price of $1.08 per share. The net proceeds to the listingcompany were approximately $2,068,900 after commissions and other offering expenses. The Company also issued Dawson James Securities, Inc., its placement agent in the public offering, a Unit Purchase Option to acquire up to 191,200 Units, at an exercise price of $1.25 per Unit, consisting of 191,200 shares of common stock and warrants to purchase up to 57,360 shares of common stock as compensation.

Deferred Compensation

In previous years and in the six months ended June 30, 2018, the Company issued to various employees, directors, and contractors shares of the Company’s common stock, subject to restrictions, pursuant to the 2013 Equity Incentive Plan (the “2013 Plan”). Such shares were valued at the fair value at the date of issue. The NASDAQ Capital Market, effectivefair value was expensed as compensation over the vesting period and recorded as a reduction of February 15, 2017. The Company’s common stock ceased trading onstockholders’ equity. During the OTCQB on February 15,six months ended June 30, 2018 and June 30, 2017, $156,875 and on such date$106,806, respectively of the common stock commenced trading on The NASDAQ Capital Market under the ticker symbol “SGLB”.unvested compensation cost related to these issues was recognized.

As of June 30, 2018 and December 31, 2017, the balance of unvested compensation to be recognized was $130,965 and 2016, there were 4,570,199$31,576, respectively and 3,133,789 sharesis recorded as prepaid stock compensation as of common stock issued and outstanding, respectively.those dates.

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock, $0.001 par value. No350 and 0 shares of preferred stock were issued and outstanding at June 30, 2018 and December 31, 2017, and 2016.

Stock Optionsrespectively.

On April 19, 2017,6, 2018, Sigma issued 1,000 shares of the Company granted aCompany’s newly-created non-voting Series B Convertible Preferred Stock, which were convertible into 1,000,000 shares of common stock optionand warrants to purchase an officeraggregate of 750,000 shares of the Company’s common stock, for an aggregate purchase price of $1,000,000. The warrants have an initial exercise price of $1.47 per share, the closing price of the Company’s Common Stock reported on The NASDAQ Capital Market on April 6, 2018, subject to adjustment in certain circumstances. The net proceeds to the company were approximately $877,500 after commissions and other offering expenses. Sigma also issued Dawson James Securities, Inc., its placement agent in the foregoing private placement, warrants to purchase up to of 20,000140,000 shares of common stock, at an exercise price of $1.47 per share, as compensation

On June 26, 2018, as part of the public offering described in Note 1, the Company issued 350 of the Company’s newly-created non-voting Series C Convertible Preferred Stock, which were convertible into 350,000 shares of common stock, and warrants to purchase an aggregate of 105,000 shares of the Company’s common stock. The warrants have an initial exercise price of $1.08 per share, 11% above the closing price of the Company’s Common Stock reported on The NASDAQ Capital Market on June 26, 2018, subject to adjustment in certain circumstances.

Stock Options

As of June 30, 2018, an aggregate of 750 shares and 664,707 shares of common stock were reserved for issuance under the 2011 and the 2013 Plans, respectively.

On February 21, 2018, the Company granted Mark Cola, an officer of the company, ten-year options under the 2013 Plan to purchase an aggregate of 123,500 shares of common stock, with the options having an exercise price of $1.49 per share, to vest and become exercisable ratably over 17 monthly installments on the 15th day of each month commencing on March 15, 2018, subject in each case to Mr. Cola’s continuing employment.

On February 26, 2018, the Company granted nine employees ten-year options under the 2013 Equity Incentive Plan to purchase an aggregate of 70,188 shares of common stock, with each option having an exercise price of $1.56 per share, and with vesting periods ranging from 3 to 4 years beginning February 26, 2019.

On April 19, 2018, Sigma granted John Rice, our Chief Executive Officer, three options to purchase up to 20,000 shares of our common stock under our 2013 Plan. In addition, on each of April 30, May 31, and June 30, 2018, Sigma granted Mr. Rice an option to purchase up to 20,000 shares of our common stock under our 2013 Plan. The foregoing options have an exercise price per share equal to $3.27 per share,$1.88, $1.54, $1.48, $1.26, $1.47, and $1.19 respectively, which wasis at least the closing market price of our common stock on April 19, 2017 (i.e.,the respective date of grant, and each is fully vested as of the respective grant date.

The Company also agreed to grant Mr. Rice an option to purchase up to 20,000 shares on July 31, 2018, so long as Mr. Rice remains an employee of the Company as of that date (except that if Mr. Rice ceases to be employed by the Company as a result of a disability, the Option will still be granted on the applicable grant date) with an exercise price equal to the greater of (x) the average closing price of our common stock during the applicable month, and (y) the closing price of our common stock on the date of grant), which option is subject to vesting.

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The weighted average period over which total the compensation cost of the options of $62,857 ($10,476 in 2017)grant, and will be recognized is 4 years. The weighted averagevested in full on the date of grant.

On April 19, 2018, Sigma granted Ron Fisher, our Vice President of Business Development, a five-year option to purchase an aggregate of 28,750 shares of common stock, with such option having an exercise price of all$1.22 per share, and vesting in four annual installments over four years following the date of grant (1,366 shares, 4,097 shares, 6,828 shares and 15,021 shares, respectively)

During the six months ended June 30, 2018, options to purchase 178,813 shares of common stock vested, and $438,040 of compensation cost was recognized. As of June 30, 2018, there were options to purchase 664,707 shares issued and outstanding under the 2013 Plan. Of this amount, there are vested options exercisable for 295,318 shares of common stock. No options were exercised during the six months or the quarter ended June 30, 2018.

The Company generally grants stock options to employees and directors at exercise prices equal to the fair market value of the Company’s stock on the dates of grant. Stock options are typically granted throughout the year and generally vest over four years of service and expire ten years from the date of the award, unless otherwise specified. The Company recognizes compensation expense for the fair value of the stock options over the requisite service period for each stock option award.

Total share-based compensation expense included in the condensed statements of operations for the six months ended June 30, 2018 and 2017 is $584,589 and $306,405, of which $438,040 and $199,545 is related to stock options, respectively. There was no capitalized share-based compensation cost as of June 30, 2107 is $3.942018 and the weighted average2017.

The fair value of the options on the grant datesshare-based awards was $2.86. The estimated fair value of the options was determined using the Black-Scholes pricing model usingwith the following assumptions:weighted-average assumptions for the six months ended June 30, 2018 and 2017:

Warrants

As ofWarrants

At June 30, 2017,2018, the Company had outstanding warrants to purchase a total of 80,0003,477,060 shares of common stock at an exercise price of $4.13 per share. If not exercised, thestock; 1,621,500 warrants to purchase the 80,000 shares will expire on October 17, 2019. In addition, as of June 30, 2017, the Company had outstanding warrants to purchase a total of 1,621,500 shares of common stock at an exercise price of $4.00 per share. Ifshare, which if not exercised, the warrants to purchase the 1,621,500 shares will expire on February 21, 2022. The 1,621,5002022, 890,000 warrants trade on The NASDAQ Capital Market under the ticker symbol “SGLBW”.

Unit Purchase Option

On February 15, 2017, Sigma Labs, Inc. (the “Company”) entered into an underwriting agreement (the “Underwriting Agreement”) with Dawson James Securities, Inc., as underwriter (the “Underwriter”) in connection with a public offering (the “Offering”) of the Company’s securities.   Pursuant to the Underwriting Agreement, the Company has granted the Underwriter the right to purchase from the Company 70,500 Units at an exercise price equal to 125%of $1.47 per share, which if not exercised, will expire on June 26, 2023, 717,000 warrants at an exercise price of $1.08 per share, which if not exercised, will expire on June 26, 2023, and 248,560 warrants at an exercise price of $1.25, which if not exercised, will expire on June 26, 2023.

On May 31, 2018, 24,000 warrants with an exercise price of $2.00 were exercised in a cashless exchange transaction resulting in the issuance of 4,800 shares of the public offering priceCompany’s common stock.

NOTE 6 - Subsequent Events

On August 1, 2018, the Company increased the annual base salary of John Rice, the Units inCompany’s Chief Executive Officer, from $108,000 to $155,000. The Company also agreed to grant Mr. Rice an option under the Offering, or $5.1625 per Unit.  The Unit Purchase Option has a termCompany’s 2013 Equity Incentive Plan (the “Plan”) on each of five yearsNovember 1, 2018, February 1, 2019, May 1, 2019 and is not redeemable by us. A “Unit” is defined as of one shareAugust 1, 2019 to purchase 68,750 shares of the Company’s common stock, par value $0.001 per share and one warrant to purchase one share of the Company’s common stock, par value $0.001 per share, atso long as Mr. Rice is an exercise price of $4.00 per share.

NOTE 3 – Note Receivable

On May 1, 2017, the Company completed funding a loan in the principal amount of $250,000 to Jaguar Precision Machine, LLC, a New Mexico limited liability company, pursuant to a Secured Convertible Promissory Note dated May 1, 2017 delivered by Jaguar to the Company. The loan bears interest at the rate of 7% per annum, is due and payable in full on May 1, 2018, is secured by certain assets of Jaguar, and is convertible at the Company’s option into 10% of the outstanding shares of the common stock of Jaguar unless Jaguar exercises its right under specified circumstances to repay all principal and accrued interest on the loan. The purpose of the loan is to provide working capital to Jaguar to, among other things, stand up a metallugical laboratory and become ASM9100 certified for contracts related to AM of high-precision aerospace and defense components, in furtherance of our strategic alliance. Sigma will receive from Jaguar priority for use of certain machines and services of Jaguar.

On March 27, 2017, the Company completed funding a loan in the principal amount of $500,000 to Morf3D, Inc., an Illinois corporation, pursuant to a Secured Convertible Promissory Note dated March 27, 2017 delivered by Morf3D to the Company. The loan bears interest at the rate of 7% per annum, is due and payable in full on March 27, 2018, is secured by certain assets of Morf3D, and is convertible at the Company’s option into 10% of the outstanding shares of the common stock of Morf3D unless Morf3D exercises its right under specified circumstances to repay all principal and accrued interest on the loan. The purpose of the loan is to provide working capital to Morf3D to, among other things, lease an EOS M 400 system for Morf3D for Morf3D to expand production for contracts related to AM of high-precision aerospace and defense components, in furtherance of our strategic alliance and in contemplation of a possible acquisition of or merger with Morf3D (although discussions regarding a possible acquisition of or merger with Morf3D are not currently ongoing).

NOTE 4– Notes Payable

Effective October 17, 2016, the Company entered into a Securities Purchase Agreement with two accredited investors (the “Investors”) for the private placement by the Company of Secured Convertible Notes in the aggregate principal amount of $1,000,000 (the "Notes") and warrants (the "Warrants") to purchase up to 80,000 shares (the "Warrant Shares") of the Company's common stock ("Common Stock") (subject to adjustment in certain circumstances), for aggregate gross proceeds, before expenses, to the Company of $900,000 (the “Financing Transaction”).

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The Notes carry a one-time upfront interest charge of a total of $100,000, which is being expensed to interest expense monthly over the 1-year term of the Notes and correspondingly increases in the Notes Payable balance each period. As of June 30, 2017, the Notes Payable balance is $969,703. However, the effective Notes Payable balance is $1 million since that is the amount we would have to pay in order to payoff the note anytime between now and the maturity date of October 17, 2017, in addition to accrued interest and a 15% pre-payment penalty.

The Notes carry an interest rate of 10% per annum, calculated on the basis of a 360-day year, based on the $1 million Notes Payable effective balance. Such interest is payable every three months in cash, or, at the holder’s option, in unrestricted shares of Common Stock, if a registration statement is then in effect for such shares of common stock.

In connection with the Financing Transaction, the Company entered into a Registration Rights Agreement, dated October 17, 2016, with the Investors, pursuant to which the Company filed a registration statement related to the Financing Transaction with the Securities and Exchange Commission (“SEC”) covering the resale of (i) the shares of Common Stock that will be issued to the Investors upon conversion of the Notes, and (ii) the Warrant Shares that will be issued to the Investors upon exercise of the Warrants.

The Notes are secured by the assetsemployee of the Company pursuant to a Security Agreement, dated October 17, 2016, between the Company and the "collateral agent" (as defined in the Notes) for the benefit of itself andon each of the Investors.

The Notes are convertible into shares of Common Stock at a conversion price equal to the lesser of (i) the final unit price of the Company’s proposed public offering initially filed with the SEC on July 28, 2016, and (ii) 150% of the closing price of the Common Stock as reported by the OTC Markets Group, Inc. on the date of issuance of the Notes (subject to adjustment as provided therein). As such, as of June 30, 2017, the conversion price of the Notes was $4.13, which is the final unit price of the Company’s public offering.

applicable grant date. Each Warrant hasoption will have an exercise price equal to the lesser of (i) the final unitclosing price of the Company’s proposed public offering initially filed with the SEC on February 17, 2017, and (ii) 150% of the closing price of the Common Stock as reported by the OTC Markets Group, Inc.common stock on the grant date, will have a term of issuance offive years, will be fully vested on the Warrants (subject to adjustment as provided therein), which Warrants may be exercised on a cashless basis as providedgrant date and will have the other terms set forth in the Warrants. As such, as of June 30, 2017,Company’s standard-form non-qualified option agreement. Each option is subject to the exercise price of the Warrants was $4.13, which is the final unit priceapproval of the Company’s public offering.

NOTE 5 - Continuing Operations

The Company has sustained losses and has negative cash flows from operating activities since its inception. However,stockholders at the Company has raised significant equity capital and is currently developing new product lines tonext annual meeting of stockholders of a proposed increase future revenues.On February 21, 2017,in the Company closed an underwritten public offering of equity securities resulting in net proceeds of approximately $5.25 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company.As such, the Companybelieves it has adequate working capital and cash to fund operations through 2017. 

NOTE 6 – Loss Per Share

The following data show the amounts used in computing loss per share and the weighted averageaggregate number of shares of dilutive potential common stock forthat are issuable under the periods ended June 30, 2017 and 2016:Plan.

Dilutive loss per share was not presented as the Company had no common equivalent shares for all periods presented that would affect the computation of diluted loss per share or its effect is anti-dilutive.

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NOTE 7– Subsequent Events

On August 8, 2017, we entered into an “at will” unwritten employment arrangement with John Rice, effective as of August 1, 2017, pursuant to which Mr. Rice serves as our interim Chief Executive Officer. Under his employment arrangement, Mr. Rice is entitled to receive a monthly salary of $9,000, and is eligible to receive medical and dental benefits, life insurance, and long-term and short-term disability coverage. Further, Mr. Rice is eligible under his employment arrangement to participate in the Company’s 2013 Equity Incentive Plan, with equity compensation to Mr. Rice to be determined by the Company’s Compensation Committee at a later date. Effective as of Mr. Rice's July 24, 2017 appointment as interim Chief Executive Officer, Mr. Rice is no longer entitled to receive compensation for his service as a director of the Company.

On August 8, 2017, Dennis Duitch was appointed to the Company’s Board of Directors. Mr. Duitch was also appointed to serve as Chairman of the Audit Committee and interim Chairman of the Compensation Committee and the Nominating and Corporate Governance Committee. In conjunction with Mr. Duitch's appointment as a director, the Company issued Mr. Duitch 7,489 shares of common stock of the Company, which shares will vest in four equal (as closely as possible), successive quarterly installments beginning on the first quarterly anniversary of the grant date, provided that Mr. Duitch remains in the Company’s continuous service as a director through the applicable quarterly anniversary date.

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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.” All statements other than statements of historical fact are “Forward-Looking Statements” for purposes of these provisions, including any projections of revenue 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"(“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, 20162017 and elsewhere in this report.

Overview

Sigma Labs, Inc. (the "Company," "we," "us," or "Sigma") is a software company that has developed quality assurance software known as PrintRite3D® (aka, real-time computer-aided inspection (“CAI”)), which Sigma believes solves the major problems that have prevented large-scale metal part production using 3D printers. GE Aviation has stated that it plans to commit $3.5 billion by 2020 to, among other things, build a metal 3D production facility for its Leap engine and other engines to produce the applicable 3D printed parts. However, unless companies that utilize a 3D production facility like GE Aviation are able to effectively check each part for shape, density, strength and consistency real-time during the manufacturing process, we believe that such companies will not be able to simplify the qualification of printed parts with an in-process monitoring method and therefore will be unable to improve the workflow of 3D printing functional metal parts. We believe that our software, which is positioned “inside” the 3D metal printer, solves these problems by assuring each part is being made to the specifications of the computer fileas such part is being made. We enable 3D prototyping to become 3D manufacturing. Instead of performing quality assurance (“QA”) post production, our PrintRite3D® software has been designed to fundamentally redefine conventional QA by embedding quality assurance and process control into the manufacturing process in real time. We have filed patent applications directed to our In-Process Quality Assurance™ (“IPQA®”) procedure for advanced manufacturing. In addition, we anticipate that our core PrintRite3D® software will enable our customers to combine their digital manufacturing technologies with our 3D manufacturing QA to achieve both cost savings and stronger parts. Vertical markets that we believe would benefit from our technology and software include aerospace, defense, bio-medical, power generation, and oil & gas industries. We provide our software products to customers in the form of Software as a Service (“SaaS”). Corporation Information

About 3D Printing

3D printing (“3DP”) or additive manufacturing (“AM”) is changing the world by going directly from computer graphics to actual parts. 3D printing has been applied to the manufacture of plastic parts for decades. 3D manufacturing of metal parts involves directing a laser or other energy source at a layer of powdered metal and melting it. These layers become melted together from the bottom up. Worldwide revenues attributable to 3D manufacturing for metal products were $88.1 million in 2015 (Wohlers Report 2016, 3D Printing and Additive Manufacturing State of the Industry – Annual Worldwide Progress Report).

The application of 3D printing to high-tolerance, precision manufactured metal parts has only recently emerged. 3D printing of metal parts today represents only a minor percentage of all 3D manufacturing. However, we believe the greatest future growth for 3D printing appears to be in metal parts, given the interest and investment being made by Fortune 100 companies, Federal government laboratories and agencies as well as university-based institutions. Emphasis from these high-end manufacturers and technology leaders is strongly focused on helping the transformation of analog manufacturing of precision, high-tolerance parts in the U.S. today to a digital enterprise of tomorrow complete with automation, robotics and closed-loop process control. We believe that the on-going success of 3D printing for metal parts will be highly dependent upon the evolution of digital quality assurance procedures used, such as our PrintRite3D® process control.

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About Quality Assurance in 3D Printing

Current methods for providing quality in 3DP are generally cost prohibitive because an estimated approximately 25% of parts produced by 3D printing are destroyed in the post-production quality control process. Additional costs may be incurred by using non-traditional x-ray scanning technology on these parts. We offer our clients the ability to use real-time sensors to track each layer, and our software continuously analyzes the part so that when it is finished we know if it is of production quality. We believe our PrintRite3D® software could reduce inspection costs by a factor of 10 and development time for new parts by 50% or more. Most importantly is the ability of our software to reduce risk associated with the qualification of printed parts.

By using PrintRite3D® software, a high-precision manufacturer would have the ability to offer its customers product guarantees and assurances that its printed parts were produced in compliance with stringent quality requirements. Orders for our software have been received from GE Aviation, Honeywell Aerospace, Aeroject Rocketdyne, Woodward, Siemens, Pratt and Whitney, and Solar Turbines.

We believe there is potential for our PrintRite3D® software to be incorporated into a majority of 3D metal printing devices made by companies like Electro-Optical Systems (“EOS”), Additive Industries, Concept Lasers, Trumpf Lasers, Renishaw, Sentrol, Farsoon, Desktop Metal and others.

Sigma’s Cloud-Based IIoT Solutions

The process of making a 3D printed part could start with our customers loading a computer aided design (“CAD”) model of the part into the Cloud as shown in “A” in Figure 1. Next, computer aided engineering (“CAE”) and/or computer aided manufacturing (“CAM”) instructions are sent to the 3D printer (see “B”, as shown in Figure 1). Metal powder in the machine is then deposited onto the build platform where a laser beam, or other energy source, focused onto the build platform melts each successive layer of powder in 20-50 micron increments. Our CAI sensors (see “C” in Figure 1) detect, record, analyze and compare the part as it is being made layer-by-layer against the CAD/CAM specifications and physical reference points for quality assurance during manufacturing. Our software certifies the shape, strength, and internal density of each part, which eliminates the need to: (1) destroy a large percentage of the parts during process qualification and in post-production quality assurance; and (2) retain all of the metal as opposed to cutting pieces and wasting metal.

Our PrintRite3D® CAI web-based software (see “D” in Figure 1) is being designed to reside in the Cloud (see “A” in Figure 1) of the Industrial Internet of Things (“IIoT”). We enable manufacturing engineers to assure the part quality layer-by-layer, provide for manufacturing statistical process control and harvest, aggregate, and analyze Big Data from the manufacturing real-time data collected from our PrintRite3D® SENSORPAK™ (see “C” in Figure 1), as well as post-process manufacturing data collected by our customers (see “E” in Figure 1).

Our specialized sensor suite (see “C” in Figure 1), known as PrintRite3D® SENSORPAK™, is an IIoT-compliant computing device. It contains the modular hardware and software necessary to connect to “cyber-physical” objects (see “B” in Figure 1) living on the manufacturing floor. It allows for bi-directional information flow between the manufacturing floor and the Cloud (see “A” in Figure 1). It starts a million-fold data reduction that finishes with our PrintRite3D® Digital Quality Record (“DQR”) and report, which provides customers with product guarantees and assurances that parts were produced in compliance with stringent quality standards. It can collect, analyze, aggregate, filter, and then further communicate data from the manufacturing floor to the Cloud (see “A” in Figure 1) and enable links to other areas (see “F” in Figure 1) of the IIoT.

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Figure 1. Sigma’s Industrial IoT /PrintRite3D® Cloud Architecture

Business Activities and Industry Applications

Our principal business activities include the continued development and commercialization of our PrintRite3D® suite of software applications, with our main focus currently on the 3DP and the AM industry as well as making operational the contract additive manufacturing business for metal 3DP. Our strategy is to continue to leverage our advanced manufacturing knowledge, experience and capabilities through the following means:

Identify, develop and commercialize our quality assurance software Apps for advanced manufacturing technologies designed to assure part quality in real time as the part is being made and improve process control practices for a variety of industries; 

Provide materials and process engineering consulting services in respect of our PrintRite3D® CAI quality assurance software Apps for advanced manufacturing to customers that have needs in developing next-generation technologies for digital manufacturing technologies; and 

Build and run a contract manufacturing division for metal 3DP beginning with our EOS M290 state-of-the-art metal printer. 

We are presently engaged in the following industry sectors:

Aerospace and defense manufacturing; and 

Energy and power generation. 

We also seek to be engaged in the following industry sectors and have begun to develop relationships with leading manufacturers in each such sector:

Bio-medical manufacturing; 

Automotive manufacturing; and 

Other markets such as firearms and recreational equipment. 

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We generate revenues through PrintRite3D® hardware and CAI 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 AM. By running a contract AM services operation, we are able to understand the current needs of our customers and where they are going with their next-generation product development efforts. Contract AM further allows us a means for continuing/self-funding our IPQA®-enabled R&D and product development activities for CAI software. We provide our AM contract manufacturing services to customers in the form of Quality as a Service (“QaaS”). Starting with our PrintRite3D® cloud-based SaaS model, customers will contract with us for CAE, CAM and CAI services to generate and establish a DQR for AM built parts. Each DQR is cloud-based and allows for archiving and storage of quality data, access to our big data ANALYTICS™ software App for continuous quality monitoring and improvement, and automatic industry benchmarking while maintaining firewalls between company-specific data.

In late 2015, we launched two programs − an Early Adopter Program (“EAP”) and an Original Equipment Manufacturer (“OEM”) Partner Program − designed to broaden our market presence and speed adoption of our PrintRite3D® technology. The EAP was designed to attract end user customers who have an existing, installed base of 3D metal printers and to offer them incentivized pricing in return for feedback on engineering and beta releases of our PrintRite3D® software Apps. Our OEM Partner Program was specifically designed for AM machine manufacturers seeking to embed our PrintRite3D® quality assurance software Apps directly into their machines for customers purchasing a turnkey solution for their new AM machine purchases.

We possess the resident expertise to provide manufacturing materials and process (“M&P”) engineering services and support to companies using our PrintRite3D® software Apps for metal AM. Accordingly, in addition to our primary business focus, we intend to generate revenues by providing such engineering services and support to businesses licensing our PrintRite3D® software Apps.

Our President and Chief Technology Officer has worked at or with the Edison Welding Institute, the United States Department of Energy (“DOE”) national laboratories (including the Knolls Atomic Power Laboratory, Bettis Atomic Power Laboratory, Los Alamos National Laboratory and Sandia National Laboratory) over the past 34 years. Due to his work with the DOE, our President and Chief Technology Officer has 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.

Corporate Information

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.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 on Form 10-Q.

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.2018 Developments

Recent DevelopmentsIn the second quarter of 2018, we reported several events, including the following (in reverse chronological order):

On June 26, 2018 the Company closed a public offering of shares of its common and preferred stock and warrants to purchase common stock resulting in net proceeds of approximately $2,068,900.

On August 3, 2017, we announced signing Jeta Enterprises asJune 19, 2018, Sigma received notice that its U.S. Patent No. 9999924 entitled “Method and System for Monitoring Additive Manufacturing Processes” had been issued. The patent provides protection for methods of assuring part quality using real time data from multiple sensor types. The patent enables serial production applications through real time tracking and reporting of process consistency and part repeatability. The patent being issued is for the first application filed in a new manufacturer’s representative for salesseries of 18 patent applications submitted by Sigma contract printing and AM servicesover these past 5 years in the Northwest regiongeneral domain of the U.S., including Oregon and Washington states. Jeta’s strong customer base in Aerospace and Medical Devices coupled with its expertise in custom-engineered components positions it to serve a growing base of demand for advanced component manufacturing with Sigma's suite of products and services.process quality assurance.

On July 27, 2017, we announced changes in senior management. Mr. Cola, who serves as President, was appointed as Sigma's Chief Technology Officer, responsible for building and implementing the Sigma technological strategy and guiding key technical advancements towards digitalization in the context of the Industrial Internet of Things (IIoT). Together with our executive team members, Mr. Cola will seek to expand and grow the Company through next-generation products and key customer development in a broad range of industries. John Rice, who has served as Chairman of the Board of the Company since his appointment in April 2017, replaced Mr. Cola as Chief Executive Officer effective as of July 24, 2017. As Chairman of the Board and interim Chief Executive Officer, Mr. Rice will oversee our implementation of internal and external growth, with an emphasis on internal focus technology, sales, and efficiency, and externally, reaching into the marketplace to expand the Company’s digital technical bandwidth with respect to our IPQA® technology and additive manufacturing. Mr. Rice brings substantial operating and investment experience to these tasks, including with respect to operations of startup and emerging companies, corporate finance, and mergers and acquisitions.

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On July 20, 2017, we announced the JuneMay 30, 2016 publication of our U.S. Patent Application No. US 2016/0185048; Multi-Sensor Quality Inference and Control For Additive Manufacturing Processes. This patent application is related to real-time quality analysis during AM processes and the characterization of material properties using acoustic signals emitted during AM which can be used in addition to optical signals to simplify the qualification of printed parts.

On July 6, 2017,2018, we announced that the Company has signeddeveloped and demonstrated closed-loop feedback control of the metal laser powder bed fusion 3D printing process. Using Sigma’s PrintRite3D® technology, the system operates by monitoring the process output and extracting process metrics. The process metrics are then compared to baseline metrics. The system then determines what process input parameter values need to be changed and implements those remedial changes in real time by signaling a Technology Development Agreement ("TDA") with OXYS Corporation, a technology company in Cambridge, MA workingchange in the Industrie 4.0 space. The first projectlaser power in order to be executedmaintain the process under the TDA will be a new architecture platform for the Company's PrintRite3D® INSPECT. The Company expects that the completed project will allow for miniaturization of the sensor/hardware PrintRite3D® product, enhancements to the level of hardware/software integration moving it towards board-level integration, as well as broaden the market reach of the Company's PrintRite3D® technology to the Smart Factory and the larger Digital Enterprise, including polymer-based 3D printing.

On June 28, 2017, we announced that our PrintRite3D® INSPECT® software Version 2.0 was recently installed at Honeywell Aerospace in Honeywell's Advanced Manufacturing Engineering Center in Phoenix, AZ, in connection with Sigma Labs' ongoing participation in the Honeywell lead, DARPA Phase III.

On June 6, 2017, we announced that the Company has entered into agreements with two additional, non-exclusive sales agents in the Asia Pacific region, driven by strong customer interest in the region for PrintRite3D®. One such agent, Enervision Inc., will target the high growth expectations in the South Korean AM market, driven by the Korean government's announcement in April 2017 of a $37 million investment to accelerate the development of 3D printing across the country. Our other new sales agent is Beijing Yida Sifang Technology Co., Ltd, a leading metal AM reseller with multiple offices in China, will assist Sigma Labs with its expansion into the China AM market.control.

On May 9, 2017,21, 2018, we received a letter from Nasdaq notifying the Company that we were no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires companies listed on the Nasdaq Capital Market to maintain stockholders’ equity of at least $2,500,000. In this Quarterly Report, the Company reported stockholders’ equity of $4,127,814 as of June 30, 2018, which is above the minimum stockholders’ equity required for continued listing. Accordingly, as of the date of this Quarterly Report, the Company believes that it has regained compliance with Nasdaq Listing Rule 5550(b)(1).

On May 14, 2018, we announced the unveilinginaugural hire of our PrintRite3D® INSPECT™ V.2.0 quality assurance software at RAPID + TCT 2017 (www.rapid3devent.com), North America's preeminent event for discovery, innovation,European customer sales and networking in 3D manufacturing.support team.

OnDuring April 18, 2017, we announced23-26, 2018 the receipt of a contract from Solar Turbines, Incorporated, a subsidiary of Catepillar Inc. (NYSE: CAT). Solar Turbines will implement ourCompany participated in The Rapid 2018 Conference in Fort Worth, Texas, at which the Company exhibited its PrintRite3D® In-Process Quality Assurance™Assurance (IPQA®) technology for the production of gas turbine components using metal AM. The division makes mid-size industrial turbines for use in electric power generation, gas compression, and pumping systems. We planto initially install our PrintRite3D® software on a 3D Systems’ ProX300 machine, with the potential for multiple system orders as the company ramps up to full serial production.applications.

OnDuring April 5, 2017, we announcedthe release8-12, 2018, the Company participated in The Additive Manufacturing Users Group (AMUG) Conference and Exhibition in St. Louis, Missouri. Mark Cola, our President and Chief Technology Officer, participated as a panel member in the In-Situ Monitoring Panel discussion, which focused on the time and cost associated with validation of our OEM Developers Kitthe manufacturing process for PrintRite3D® INSPECT™aerospace quality assurance software version 2.0. The Company has placed its alpha version with a European OEM partner for test, evaluation and incorporation into its additive manufacturing 3D printers. The Developers Kit allows an OEM to seamlessly and quickly embed PrintRite3D® technology directly into their OEM solutions allowing for rapid entry of their products into the market place.components.

On April 6, 2018, the Company closed a private placement of preferred stock and warrants resulting in net proceeds of approximately $877,500, after deducting commissions and other offering expenses payable by the Company. All shares of preferred stock that were issued in the offering were converted into an aggregate of 1,000,000 shares of common stock during the second quarter of 2018.

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 amounts in the accompanying consolidated financial statements and related notes. These estimates and assumptions have a significant impact on our consolidated financial statements. Actual results could differ materially from those estimates. 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. Our significant accounting policies are disclosed in Note 1 to the Consolidated Financial Statements included in our Annualthis Quarterly Report Dated December 31, 2016.on Form 10-Q. 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.

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Results of Operations

We expect to generate revenue primarily by selling and licensing our IPQA technologies, selling technical support services and contract manufacturing and materials technologiesselling specialty parts and studies 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. We also expect to generate revenues though contract AM manufacturing using our in-house metal 3D printing capability. However, we presently make limited sales of these technologies and services, which include limited sales of non-exclusive licenses to use our PrintRite3D® technologies, including under our recently established Early Adopter Program and OEM Partner Program, as described above.production-run quality yields. Our ability to generate revenues in the future will depend on our ability to further commercialize and increase market presence of our PrintRite3D® technologies.technologies, and it will depend on if key prospective customers continue to move from AM metal prototyping to production.

Three Months Ended June 30, 2018 and 2017

In the second quarter of 2018, we recognized revenue of $98,663 compared to $290,553 during the same period of 2017. The primary contributors to the $191,890 reduction were revenue decreases of $118,737 from the DARPA and Aerojet government programs and $128,174 from new system sales. These decreases were partially offset by an increase in net other revenue in the second quarter of 2018, principally attributable to $49,031 in revenue from contract AM service sales in the second quarter of 2018 compared to no such sales in the second quarter of 2017. Our cost of revenue for the second quarter of 2018 was $68,568 as compared to $111,412 during the same period of 2017. The decrease of $42,844 is primarily due to $43,915 of system costs associated with the second quarter 2017 system sales.

Sigma’s total operating expenses for the second quarter of 2018 were $1,422,511 compared to $1,108,234 for the same period of 2017, a $314,277 increase. Our operating expenses are comprised of internal operating and sales expenses, outside service fees, research & development costs, and depreciation & amortization.

The most significant of our operating expenses is personnel costs, comprised of payroll and stock-based compensation expense. Payroll costs in the second quarter of 2018 were $426,049 compared to $346,994 for the same period in 2017. The $79,055 increase result primarily from the strategic addition of six employees since the end of the second quarter of 2017, three in the third quarter of 2017 realignment and three in the second quarter of 2018 as we continue the concentrated acceleration of technology development and expand into the European 3D manufacturing market. Stock-based compensation for the second quarter of 2018 was $423,067 compared to $166,773 for the same period in 2017. The $256,294 increase resulted primarily from the issuance of stock options to our Chief Executive Officer in the second quarter of 2018, $61,651 of additional stock options vesting expense related to the options issued to our President and Chief Technology Officer under his amended and restated employment agreement, and the amortization of an additional $72,494 in Board of Director stock compensation cost in that same 2018 period.

During the three months ended June 30, 2018, Sigma incurred research and development expenditures of $95,045 compared to $131,908 in the same period of 2017. The $36,863 decrease in these expenditures resulted primarily from a reduction in the amount of third party consulting utilized in Sigma’s Inspect 2.0 software and contour hardware development between the two periods.

Sigma’s public company costs and investor relation fees incurred in the second quarter of 2018 were $103,197 compared to $131,780 incurred during the same period in 2017. The $28,583 decrease in the three-month comparative expenditures resulted primarily from the timing of the payment of the $38,500 annual Nasdaq registration fee between the two years.

During the second quarter of 2018, Sigma’s office expenses were $110,936 compared to $64,739 in the same period of 2017. The $46,197 increase in these expenditures resulted primarily from the purchase of computer hardware and software and the rental of additional office space for new employee hires in the last half of 2017 and the second quarter of 2018, and from additional travel expense related to both a more aggressive outreach to prospective EOM and service bureau clients and our expansion into the European market in the second quarter of 2018.

In the second quarter of 2018, our net other income & expense was net income of $3,612 compared to net other expense of $59,646 in the second quarter of 2017. The second quarter 2018 net income was comprised of $3,719 of interest income on the remaining note receivable balance and an exchange rate gain of $1,304 offset by $1,411 of interest expense on the remaining balance of the note payable. This compares to $12,598 of interest income on the original note receivable balance offset by $49,862 of interest expense and a $22,382 loss on disposal of computer software in the second quarter of 2017.

Sigma’s total net loss for the second quarter of 2018 was $1,388,804 as compared to $988,741 for the second quarter of 2017, a $400,063 increase with operating income contributing $463,323 to the increased loss and increased other income and expense offsetting it by $63,260.

Six Months Ended June 30, 2018 and 2017

During the six months ended June 30, 2017,2018, we recognized revenue of $440,756, as$202,078 compared to $452,279 in$405,076 of revenue recognized during the same period of 2017. The primary contributors to the $202,998 reduction were revenue decreases of $134,473 from the DARPA and Aerojet government programs and $130,561 in 2016.new system sales, partially offset by increased in net other revenue in the 2018, primarily, $58,631 of contract AM service sales. Our cost of revenue for the six months ended June 30, 2018 was $142,363 compared to $185,946 during the same period in 2017. The decrease in revenue wasof $43,583 is primarily due to $43,915 of system costs associated with the completionsecond quarter 2017 system sales.

Sigma’s total operating expenses for the six months ended June 30, 2018 were $2,599,641 compared to $2,114,717 for the same period in 2017, a $484,924 increase.

Payroll costs for the six months ended June 30, 2018 were $824,706 compared to $785,204 for the same period in 2017. The $39,502 increases result primarily from the earlier mentioned addition of six employees since the end of the GEA America Makes Programsecond quarter of 2017, partially offset by a $50,000 bonus payment in 20162017 to our Vice President of Business Development in connection with the satisfaction of performance milestones. Stock-based compensation for the six months ended June 30, 2018 was $584,589 compared to $306,405 for the same period in 2017. This $278,184 increase resulted primarily from the previously detailed options vesting and shares amortization increases that generated threeoccurred in the second quarter of 2018.

During the six months ended June 30, 2018, Sigma incurred research and development expenditures of $217,022 compared to $186,413 in the same period of 2017. The $30,609 increase in these expenditures during the first six months of revenue2018 resulted primarily from the purchase of multiple upgraded servers and various pieces of specialized equipment as part of our continued concentrated acceleration of technology development.

Sigma’s public company and investor relation fees incurred in 2016 but no revenuethe six months ended June 30, 2018 were $283,596, compared to $243,913 during the same period in 2017. The $39,683 increase in the six-month comparative expenditures results primarily from the $122,263 increase in stock and cash compensation paid to non-employee board members in 2018 offset by a reduction of $82,573 in amortization expense related to stock compensation paid to officers of the company in 2017.

During the six months ended June 30, 2018, Sigma’s Office Expenses were $206,042 compared to $148,944 in the same period of 2017. The $57,098 increases in these expenditures resulted primarily from $27,787 in additional 2018 hardware, software, supplies and office space costs for new employees, and from $28,296 additional 2018 travel expense related to both a more aggressive outreach to prospective OEM, service bureau and end user customers and our expansion into the European market.

In the six months ended June 30, 2018, our net other income & expense was a net expense of $19,754, as compared to net other income of $80,214 in the same periods of 2017. The six-month 2018 net expense was primarily comprised of a $36,733 write-off of patent and patent application costs offset by interest income of $17,086 on the outstanding notes receivable. The 2017 net positive contribution for the six-month period is comprised of $152,068 in New Mexico state job incentive credits received and a $93,206 positive revaluation of derivatives offset by $56,441 of debt amortization expense, $99,178 of interest expense on the $1,000,000 notes originated in October of 2016 and a $22,2382 write-off of computer software.

Sigma’s net loss for the six months ended June 30, 2018 totaled $2,559,680 as compared to $1,815,373 for the same period of 2017, a $744,307 increase with operating income contributing $644,338 and other income and expense contributing $99,969.

We financed our operations during the three and six months ended June 30, 2018 and 2017 and 2016 primarily from revenue generated from PrintRite3D® system sales Darpa and Aerojet programs, engineering consulting services we provided to third parties during these periods, and through sales of our common and preferred stock and, in 2017, through the issuance of debt securities. We anticipateexpect that our revenue will increase in future periods as we seek to further commercialize and expand our market presence for our PrintRite3D®-related technologies and obtain new contract manufacturing orders in connection with our EOS M290 metal printer, as well as further perform on our engineering consulting contracts for the Aerojet Rocketdyne Booster Propulsion program and Honeywell Aerospace for the DARPA Phase III and Plus up efforts. Our cost of service revenue for the three months ended June 30, 2017 was $185,946 as compared to $138,485 for the same period in 2016. The $47,461 increase is attributable to generating more commercial revenue in 2017 that resulted in lower margins versus generating more programmatic and engineering consulting revenue in 2016 that resulted in higher margins.M290.

Our general and administrative expenses for the six months ended June 30, 2017, were $1,237,988, as compared to $876,185 for the same period in 2016. Our payroll expenses for the six months ended June 30, 2017 were $677,282, as compared to $468,484 for the same period in 2016. Our expenses relating to stock-based compensation for the six months ended June 30, 2017 were $306,405 as compared to $130,913 for the same period in 2016. Our research and development expenses for the six months ended June 30, 2017 were $167,615 as compared to $50,978 for the same period in 2016.

General and administrative expenses principally include operating expenses and outside service fees, the largest component of which consists of services in connection with our obligations as an SEC reporting company, in addition to other legal, accounting, marketing and investor relations fees. The increase in general and administrative expenses for the six months ended June 30, 2017 as compared to the same period in 2016 is principally the result of fees relating to our February 2017 public offering that resulted in net proceeds of approximately $5,250,000, fees incurred in connection with investing in strategic partners, along with the continued development of our IPQA®-enabled PrintRite3D® technologies and our related efforts to expand our services. The increase in payroll expenses for the six months ended June 30, 2017 as compared to the same period in 2016 is principally the result of our hiring of additional software development staff to assist in acceleration of our IPQA®-enabled PrintRite3D® technologies since March 2016. The increase in research and development expenses for the six months ended June 30, 2017 as compared to the same period in 2016 is principally the result of the continued development and improvements of our software and technology. The increase in stock-based compensation costs is due to the fact that the majority of stock options were granted after June 30, 2016, thus more stock option vesting occurred in the first quarter of 2017 than the same period in 2016.

As a result of our increased operating activities, including as we seek further commercialization of our IPQA®-enabled PrintRite3D® technologies, and our increased marketing and sales efforts associated with such technologies, including with respect to our EAP and OEM Partner Program, and our contract manufacturing activities, our general and administrative expenses in the future are expected to continue to increase. Similarly, we anticipate that our payroll and non-cash compensation expenses will continue to increase as we engage more employees and other service providers to support our efforts to grow our business.

Our net loss for the six months ended June 30, 2017 increased over the prior year period and totaled $1,932,706 as compared to $1,212,513 for the same period in 2016. This increase in net loss was attributable to a decrease in revenue and an increase in expenses as noted above.

Liquidity and Capital Resources

As of June 30, 2017,2018, we had $3,384,499$3,519,637 in cash and had a working capital surplus of $3,374,359,$3,320,502, as compared with $398,391$1,515,674 in cash and a working capital surplus of $110,799$2,273,801 as of December 31, 2016.2017.

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 February 21, 2017,April 6, 2018, the Company closed an underwrittena private placement of equity securities resulting in net proceeds of approximately $920,000, after deducting commissions and other offering expenses payable by the Company. On June 26, 2018, the Company closed a public offering of equity securities resulting in net proceeds of approximately $5,250,000,$2,139,000, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. The principal balance in the amount of $50,000 and any accrued and unpaid interest on the convertible promissory note that is payable by us is due in October 18, 2018.

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We expect to generate revenue primarily by licensing our manufacturing and materials technologies 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. We also expect to generate revenues by providing contract AM services using our EOS M290 metal AM system. However, for the period from our inception through June 30, 2017, we generated revenue and financed our operations primarily from PrintRite3D®-enabled engineering consulting services as well as thru the programmatic work performed on both the Darpa Phase II and Aerojet programs we provided during this period and through sales of Sigma common stock and debt securities. During the remainder of 2017,2018, we expect to further ramp up our operations and our commercialization and marketing efforts, which we anticipate will increase the amount of cash we will use in our operations.

We expect that our continued development of our IPQA®-enabled PrintRite3D® technology will enable us to further commercialize this technology for the AM metal market in the remainder of 2017.2018. However, until commercialization of our full suite of PrintRite3D® technologies, 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) and contract manufacturing for metal AM, and through the use of proceeds from sales of our securities.

Net Cash Used in Operating Activities

Net cash used in operating activities during the three months ended June 30, 2017 increased to $1,440,304 from $914,556 during the same period in 2016, primarily due to increases in general and administrative expenses as noted above, which were offset by the net effect of changes in accounts payable, accrued expenses and accounts receivable during the quarters. Also, there was a larger net loss during the six months ended June 30, 2017 offset by more non-cash expenses during the quarter, as compared2018 increased to the same period in 2016. Cash used in investing activities increased during the three months ended June 30, 2017 to $795,468, as compared to $72,265$1,472,519 from $1,291,060 during the same period in 2016, due2017, an increase of $181,459. Sigma’s higher net loss in the six months ended June 30, 2018 contributed $429,006 to this increase while more conservative management of inventory and payables offset $87,686 and $162,065 of that increased use, respectively.

Net Cash Used/Provided by Investing Activities

Net cash provided by investing activities during the six months ended June 30, 2018 was $530,082, which compares to cash used in investing activities during the same period of 2017 totaling $795,468. The $1,325,550 positive swing is attributable primarily to the increaseMarch 2018 receipt of payment in notes receivables related to our loansfull of the $500,000 loan made to Morf3D in March of 2017, and receipt of $150,000 in partial payment of the $250,000 loan made to Jaguar Precision MachineMachines in conjunction with our strategic alliances.May of 2017.

Net Cash flowsUsed/Provided by Financing Activities

Cash provided by financing activities during the six months ended June 30, 2017 increased2018 decreased to $5,225,649$2,946,400 from $0$5,072,636 during the same period in 20162017, due to the receipt of a total of $3,390,100 of proceeds less $443,700 of offering costs from our April 2018 private placement and June 2018 public offering compared to the receipt of $5,823,300 of proceeds less $750,664 of offering costs, from our February 2017 public offering. There were no cash flows used or provided by financing activities in 2016.

SomeThe Company anticipates less loss in 2018, due to expected increased revenues, offset by increased salaries and related expenses in connection with additional employees and potential acquisitions (although there are no agreements with respect to the acquisition by the Company of our engineering consulting contracts, including the contracts from Honeywell Aerospace, Bendix King, Siemens, EOS, Solar Turbines, Pratt & Whitneyany third party, and Aerojet Rocketdyne, are fixed-price contracts, for which wethere can be no assurance that any agreements will be entitled to receive a specified fee regardless of our cost to perform under such contract. In connection with enteringentered 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.entered into, that any acquisition or other transaction will be consummated).

We do not have any material commitments for capital expenditures during the next twelve months. no credit lines as of August 13, 2018, nor have we ever had a credit line since our inception.

Based on the funds we have as of August 14, 2017,13, 2018, and the proceeds we expect to receive under our PrintRite3D®-enabled engineering consulting agreements, from selling or licensing our PrintRite3D® systems and software, and sales of contract AM manufacturing for metal AM parts, we believe that we will have sufficient funds to pay our administrative and other operating expenses through 2017. Until we are able to generate significant revenues and royalties from selling or licensing our PrintRite3D®-enabled technologies and our contact AM manufacturing services, ourat least the first quarter of 2019. Our ability to continue to fund our liquidity and working capital needs will be dependent upon revenues from existing and future PrintRite3D®-enabled engineering consulting contracts, possible strategic partnerships, contract manufacturing orders in connection with our EOS M290, metal printer, and proceeds received from sales of our securities. Revenue we generate from licensing our technologies is not expected to increase significantly during 2017 andwe also anticipate that there will be an increase in the amount of cash we will use during the remainder of 2017 in connection with our efforts to identify compatible businesses to possibly acquire that will be synergistic with our business (although there is no assurance than any acquisition will be consummated). Accordingly, we will have to obtainperhaps by obtaining additional capital from the sale of additional 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 financing. Such financing, if in the form of equity, may be highly dilutive to our existing stockholders and may otherwise include onerous terms. Such financing, if in the form of debt, may include debt covenants and repayment obligations that are onerous and that adversely affect our business operations. If adequate funds are not available to us, we may be required to delay, limit or terminate our business operationsfunding. 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.

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(a) of Regulation S-K.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

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

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 Principal Financial and Accounting Officer, 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.

Changes in internal controls over financial reporting. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarterthree months ended June 30, 20172018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Not applicable.

ITEM 1A. RISK FACTORS.

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

NoneOn April 6, 2018, we issued to two accredited investors Series B Preferred Stock that was convertible into up to an aggregate of 1,000,000 shares of our common stock, and we issued warrants to purchase up to 890,000 shares of our common stock. We also Sigma issued to Dawson James Securities, Inc., our placement agent in the foregoing private placement, warrants to purchase up to 140,000 shares of common stock, as compensation. Between May 29, 2018 and June 1, 2018, we issued a total of 1,000,000 shares of common stock upon conversion of the foregoing Series B Preferred Stock. The foregoing securities were issued in reliance upon an exemption from the registration requirements pursuant to Section 4(2) of the Securities Act.

On June 26, 2018, we issued to Dawson James Securities, Inc., our placement agent in the June 2018 public offering, a Unit Purchase Option to acquire up to 191,200 Units, at an exercise price of $1.25 per Unit, consisting of 191,200 shares of common stock and warrants to purchase up to 57,360 shares of common stock as compensation. The Unit Purchase Option was issued in reliance upon an exemption from the registration requirements pursuant to Section 4(2) of the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

The Company will hold our annual meeting of stockholders on October 2, 2017.Not applicable.

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ITEM 6. EXHIBITS.

* Indicates a management contract or compensatory plan or arrangement.

** Filed herewith.

++ Pursuant to applicable securities laws and regulations, the Registrant is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Registrant has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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