NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Business

 

Scio Diamond Technology Corporation (referred to herein as the “Company”, “we”, “us” or “our”) was incorporated under the laws of the State of Nevada as Krossbow Holding Corp. on September 17, 2009. The Company’s focus is on man-made diamond technology development and commercialization.

 

Going Concern

 

The Company has generated little revenue to date and consequently its operations are subject to all risks inherent in the establishment and commercial launch of a new business enterprise. .  The Company continues to develop its diamond technology while operating its factory to maximize revenue.  The Company experienced a process water leak in our facility in mid-December 2015 causing damage to our diamond growers and a temporary interruption in production.   The factory was operating again within a number of days, and is currently operating in excess of 80% of capacity.  The delay in resuming full production capacity is due to the lead time on the ordering of certain parts, and full operations may not resume until the end of February 2016.  The shutdown had a significant negative impact on revenue for December 2015 and January 2016 and delays the Company’s attainment of its near-term business objectives.  The Company is working with its insurance carrier to cover the expense related to the production shutdown and the cost of the business interruption.  

 

These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management has responded to these circumstances by implementing to following strategies and actions:

 

Historically, these actions have been sufficient to provide the Company with the liquidity it needs to meet its obligations and continue as a going concern. There can be no assurance, however, that the Company will successfully implement these plans on a going forward basis. If necessary, the Company will pursue further issuances of equity securities, and future credit facilities or corporate borrowings. Additional issuances of equity or convertible debt securities will result in dilution to our current stockholders. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Accounting Basis

 

The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

 

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of December 31, 2015 and March 31, 2015 and the results of operations and cash flows for the three and nine month interim periods ended December 31, 2015 and 2014. The interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for future periods or the year. The balance sheet at March 31, 2015 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Form 10-K Annual Report of the Company for the year ended March 31, 2015.

 

 

Basic and Diluted Net Loss per Share

 

Net loss per share is presented under two formats: basic net loss per common share, which is computed using the weighted average number of common shares outstanding excluding non-vested restricted stock, during the period, and diluted net loss per common share, which is computed using the weighted average number of common shares outstanding, and the weighted average dilutive potential common shares outstanding, computed using the treasury stock method. Currently, for all periods presented, diluted net loss per share is the same as basic net loss per share as the inclusion of weighted average shares of non-vested restricted stock and common stock issuable upon the exercise of options and warrants would be anti-dilutive.

 

The following table summarizes the number of securities outstanding at each of the periods presented, which were not included in the calculation of diluted net loss per share as their inclusion would be anti-dilutive:

 

		December 31,
		2015			2014
Common stock options			1,027,708			232,500
Warrants to purchase common stock			675,545			5,566,795
Non-vested restricted stock			1,885,000			—

 

Allowance for Doubtful Accounts

 

An allowance for uncollectible accounts receivable is maintained for estimated losses from customers’ failure to make payment on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience, (2) aging of accounts receivable and (3) specific information obtained by the Company on the financial condition and the current credit worthiness of its customers. The Company has determined that an allowance was not necessary at December 31, 2015 or March 31, 2015.

 

Inventories

 

Inventories are stated at the lower of average cost or market. The carrying value of inventory is reviewed and adjusted based upon slow moving, obsolete items and management’s assessment of current market conditions. Inventory costs include material, labor, and manufacturing overhead including depreciation and are determined by the “first-in, first-out” (FIFO) method. The components of inventories are as follows:

 

		December 31, 2015			March 31, 2015
Raw materials and supplies		$	16,615		$	58,390
Work in process			18,084			31,371
Finished goods			138,232			205,999
Inventory reserve			(8,384)			—
		$	164,547		$	295,760

 

 

Property, Plant and Equipment

 

Depreciation of property, plant and equipment is on a straight line basis beginning at the time it is placed in service, based on the following estimated useful lives:

 

		Years
Machinery and equipment		3 to15
Furniture and fixtures		3 to10
Engineering equipment		5 to 12

 

Leasehold improvements which are included in facility fixed assets on the balance sheet are depreciated over the lesser of the remaining term of the lease or the life of the asset (generally three to seven years).

 

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

 

Intangible Assets

 

Acquired in-process research and development costs are considered to have an indefinite useful life until such time as they are put into service at which time they will be amortized on a straight-line basis over the shorter of their economic or legal useful life. Management evaluates indefinite life intangible assets for impairment on an annual basis and on an interim basis if events or changes in circumstances between annual impairment tests indicate that the asset might be impaired. The ongoing evaluation for impairment of its indefinite life intangible assets requires significant management estimates and judgment. Management reviews definite life intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment charges during the three and nine months ended December 31, 2015. During the three months ended December 31, 2014, management evaluated assets included in IPRD and determined that certain projects would no longer be pursued for further development resulting in an impairment charge of $418,065 being recognized during the three and nine months ended December 31, 2014. 

 

Stock-based Compensation

 

Stock-based compensation expense for the value of stock options is estimated on the date of the grant using the Black-Scholes option-pricing model. The Black-Scholes model takes into account implied volatility in the price of the Company’s stock, the risk-free interest rate, the estimated life of the equity-based award, the closing market price of the Company’s stock on the grant date and the exercise price. The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment.

 

Concentration of Credit Risk/Revenue Concentrations

 

 

Revenue Recognition

 

We recognize product revenue when persuasive evidence of an arrangement exists, delivery of products has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. For our Company, this generally means that we recognize revenue when we or our fabrication vendor has shipped finished product to the customer. Our sales terms do not allow for a right of return except for matters related to any manufacturing defects on our part. The Company has an allowance for returns of $22,050 at December 31, 2015. This allowance has reduced reported revenues and is considered an accrued expense in the balance sheet.

 

For product sales to our joint venture partners for further processing and finishing, we currently defer all revenues when products are shipped. We currently recognize revenue at the earlier of when the joint venture partner sells the finished goods manufactured from our materials or we are paid for our goods. Licensing and development revenues are recognized in the month as detailed in appropriate licensing and development contracts. In the event that licensing funds are received prior to the contractual commitment, the Company will recognize deferred revenue (liability) for the amount received.

 

Recent Accounting Pronouncements

 

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance supersedes the revenue recognition guidance in Topic 605, "Revenue Recognition", and most industry-specific guidance throughout the Industry Topics of the Codification. The guidance also supersedes some cost guidance included in Subtopic 605-35, "Revenue Recognition- Contract-Type and Production-Type Contracts". On July 9, 2015, the FASB voted to defer the effective date of the pronouncement by one year. ASU 2014-9, as amended, is effective for annual periods, and interim periods within those years, beginning after December 31, 2017. An entity is required to apply the amendments using one of the following two methods: i) retrospectively to each prior period presented with three possible expedients: a) for completed contracts that begin and end in the same reporting period no restatement is required, b) for completed contract with variable consideration an entity may use the transaction price at completion rather than restating estimated variable consideration amounts in comparable reporting periods and c) for comparable reporting periods before date of initial application reduced disclosure requirements related to transaction price; ii) retrospectively with the cumulative effect of initially applying the amendment recognized at the date of initial application with additional disclosures for the differences of the prior guidance to the reporting periods compared to the new guidance and an explanation of the reasons for significant changes. We are required to adopt ASU 2014-09, as amended, in the first quarter of fiscal 2019, and we are currently assessing the impact of this pronouncement on our financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management to assess, at each annual and interim reporting period, the entity's ability to continue as a going concern within one year after the date that the financial statements are issued and provide related disclosures. The ASU is effective for our fiscal year ending March 31, 2017, with early adoption permitted. The Company is in the process of assessing the impact of this standard on our financial statements or disclosures.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, ("ASU 2015-11"). This new guidance requires an entity to measure inventory at the lower of cost and net realizable value. Currently, entities measure inventory at the lower of cost and market. ASU 2015-11 replaces market with net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured under last-in, first-out or the retail inventory method. ASU 2015-11 requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early application is permitted. ASU 2015-11 is therefore effective in our fiscal year beginning April 1, 2017. We are evaluating the effect that ASU 2015-11 will have on our financial statements and related disclosures.

 

There are currently no other accounting standards that have been issued but not yet adopted by the Company that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption.

NOTE 2 — INTANGIBLE ASSETS

 

Acquired in-process research and development costs are considered to have an indefinite useful life until such time as they are put into service at which time they will be amortized on a straight-line basis over the shorter of their economic or legal useful life.

 

Intangible assets consist of the following:

 

				December 31,			March 31,
		Life		2015			2015
Patents, gross		6.75 – 19.46		$	8,135,063		$	8,135,063
In-process research and development		Indefinite			1,832,370			1,832,370
					9,967,433			9,967,433
Accumulated amortization					(2,500,615)			(1,919,485)
Net intangible assets				$	7,466,818		$	8,047,948

 

 

Total annual amortization expense of finite lived intangible assets is estimated to be as follows:

 

Fiscal Year Ending
Three months ending March 31, 2016		$	193,710
March 31, 2017			774,840
March 31, 2018			774,840
March 31, 2019			774,840
March 31, 2020			595,159
Thereafter		$	2,521,059

NOTE 3 — NOTES PAYABLE

 

On December 16, 2014 the Company entered into a Loan Agreement (the “HGI Loan Agreement”) and a Security Agreement (the “HGI Security Agreement”) with Heritage Gemstone Investors, LLC (“HGI”) providing for a $2,000,000 secured non-revolving line of credit (the “HGI Loan”). The HGI Loan, which is represented by a Promissory Note dated as of December 15, 2014 (the “HGI Note”), matures on December 15, 2017. Borrowings accrue interest at the rate of 7.25% per annum and the Company intends to make monthly interest payments. On December 18, 2014, $2,000,000 was drawn on the HGI Loan. The Company utilized funds drawn on the HGI Loan to repay its existing indebtedness and to continue to fund its ongoing operations. The HGI Loan Agreement contains a number of restrictions on the Company’s business, including restrictions on its ability to merge, sell assets, create or incur liens on assets, make distributions to its stockholders and sell, purchase or lease real or personal property or other assets or equipment. The HGI Loan Agreement contains standard provisions relating to a default and acceleration of the Company’s payment obligations thereunder upon the occurrence of an event of default, which includes, among other things, the failure to pay principal, interest, fees or other amounts payable under the agreement when due; failure to comply with specified agreements, covenants or obligations; cross-default with other indebtedness; the making of any material false representation or warranty; commencement of bankruptcy or other insolvency proceedings by or against the Company; and failure by the Company to maintain a book net worth of at least $4,000,000 at all times. The Company’s obligations under the HGI Loan Agreement are not guaranteed by any other party. The Company may prepay borrowings without premium or penalty upon notice to HGI as provided in the HGI Loan Agreement. The HGI Loan Agreement requires the Company to enter into the HGI Security Agreement. Under the HGI Security Agreement, the Company grants HGI a first priority security interest in the Company’s inventory, equipment, accounts and other rights to payments and intangibles as security for the HGI Loan.

 

Also on December 16, 2014, the Company entered into an agreement for the sale and lease of diamond growing equipment (the “Grower Sale-Lease Agreement”) with HGI to allow for the expansion of current growers and the purchase of new growers. Pursuant to the Grower Sale-Lease Agreement, the Company agreed to a sale-leaseback arrangement for certain diamond growers produced by the Company during the term of the Grower Sale-Leaseback Agreement by which the Company will sell diamond growers to HGI and then lease the growers back from HGI. The term of the Grower Sale-Leaseback Agreement is ten years. For the new and upgraded growers, the direct profit margin generated from the growers as defined in the Grower Sale-Lease Agreement will be split between the Company and HGI in accordance with the Grower Sale-Lease Agreement. The Grower Sale-Lease Agreement requires the Company to operate and service the growers, and requires HGI to up-fit certain existing growers and to make capital improvements to the new growers under certain circumstances. At the end of the Grower Sale-Leaseback Agreement, the Company takes ownership of the leased equipment. The Company will also have the right to repurchase the leased growers upon the occurrence of certain events prior to the expiration of the Grower Sale-Leaseback Agreement.

 

As of December 31, 2015, HGI has advanced the Company $300,000 that funded improvements to our current growers that expanded manufacturing capacity in our production facility and the Company considers this advance as notes payable. The Company has completed the grower expansion and the assets have been placed in service.

 

Payments to HGI for the portion of notes payable that funded capital improvements are contingent on the direct profit margin generated by the upgraded equipment and are expected to continue for three years. The Company has estimated our expected payments to HGI for the direct profit sharing related to these borrowings and determined that the current portion of this note payable is $64,182 at December 31, 2015, which is considered a current liability. During the three and nine months ended December 31, 2015, the Company paid $8,267 in principal on the HGI notes payable and $3,734 in interest.

NOTE 4 – CAPITAL LEASES

 

As discussed in Note 3, the Company entered in the Grower Sale-Lease Agreement with HGI on December 16, 2014. HGI has advanced the Company $200,000 for the purchase of new grower equipment under the Sale-Leaseback Agreement. The Company considered this advance as a notes payable at March 31, 2015. The sale and leaseback transaction occurred during the nine months ended December 31, 2015, and the Company has put the assets into service. Since the sale and leaseback has occurred, the Company has reclassified the $200,000 from notes payable to capital lease obligations. The value of the assets sold and leased back was $200,000 and the Company did not recognize any gain or loss on the sale and lease back transaction.

 

Payments to HGI under the capital lease are contingent on the direct profit margin generated by the equipment as defined in the Grower Sale-Lease Agreement and will continue until the lease obligation is satisfied. The Company has estimated our expected payments to HGI for the direct profit margin sharing related to the equipment under capital lease and determined that the current portion of this capital lease obligation is $167,614 at December 31, 2015, which is considered a current liability. During the three and nine months ended December 31, 2015, the Company paid $5,511 in capital lease obligation and $2,490 in interest.

NOTE 5 — CAPITAL STOCK

 

The authorized capital of the Company is 75,000,000 common shares with a par value of $  0.001 per share.

 

During the nine months ended December 31, 2015, the Company sold and issued 5,216,667 shares of common stock at a price of $0.30 to accredited investors. The Company raised $1,565,000 in this offering and did not incur any material expenses related to the offering.

 

The Company had 63,644,291 shares of common stock issued and outstanding as of December 31, 2015, which includes 1,885,000 shares of non-vested restricted stock.

 

The Company had 675,545 warrants outstanding with a weighted average exercise price of $0.94 per share as of December 31, 2015. During the nine months ended December 31, 2015, 4,891,250 warrants expired and none were issued. The balance of the warrants will expire in 2017 and 2018, unless they are exercised by the warrant holders.

NOTE 8 – LITIGATION

 

We are subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. As of December 31, 2015 there were no material outstanding claims by the Company or against the Company.

 

On May 16, 2014, the Company received a subpoena issued by the SEC ordering the provision of documents and related information concerning various corporate transactions between the Company and its predecessors and other persons and entities.  The Company continues to cooperate with this inquiry.

NOTE 9 — INVESTMENT IN RCDC JOINT VENTURE

 

On December 18, 2014 the Company entered into an arrangement with Renaissance Diamonds, Inc. (“Renaissance”) through the execution of a limited liability company agreement (the “LLC Agreement”) of Renaissance Created Diamond Company, LLC, a Florida limited liability company (“RCDC”), pursuant to which the Company and Renaissance are each 50% members of RCDC.

 

 

 

The Company utilizes the equity method of accounting for its investment in RCDC. As such, the Company recognized $24,667 and $59,368 as its proportional shares of RCDC’s net income during the three and nine months ended December 31, 2015, respectively, as other income.

 

Rollforward of the Company’s ownership interest in the joint venture for the nine months ended December 31, 2015:

Balance of ownership interest in joint venture at March 31, 2015		$	30,041
Aggregate fiscal 2016 equity gain – share of joint venture income			59,368
Balance of ownership interest in joint venture at December 31, 2015		$	89,409
Cumulative recognized income on ownership interest in joint venture at December 31, 2015		$	89,409

 

Selected financial results for RCDC for the nine months ended December 31, 2015 are as follows:

Revenues		$	499,222
Expenses			380,486
Net Income		$	118,736
Total Assets		$	615,821
Total Liabilities		$	437,002
Total Partners Capital			178,819
Total Liabilities and Partner Capital		$	615,821

Going Concern

 

The Company has generated little revenue to date and consequently its operations are subject to all risks inherent in the establishment and commercial launch of a new business enterprise. .  The Company continues to develop its diamond technology while operating its factory to maximize revenue.  The Company experienced a process water leak in our facility in mid-December 2015 causing damage to our diamond growers and a temporary interruption in production.   The factory was operating again within a number of days, and is currently operating in excess of 80% of capacity.  The delay in resuming full production capacity is due to the lead time on the ordering of certain parts, and full operations may not resume until the end of February 2016.  The shutdown had a significant negative impact on revenue for December 2015 and January 2016 and delays the Company’s attainment of its near-term business objectives.  The Company is working with its insurance carrier to cover the expense related to the production shutdown and the cost of the business interruption.  

 

These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management has responded to these circumstances by implementing to following strategies and actions:

 

Historically, these actions have been sufficient to provide the Company with the liquidity it needs to meet its obligations and continue as a going concern. There can be no assurance, however, that the Company will successfully implement these plans on a going forward basis. If necessary, the Company will pursue further issuances of equity securities, and future credit facilities or corporate borrowings. Additional issuances of equity or convertible debt securities will result in dilution to our current stockholders. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Accounting Basis

 

The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

 

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of December 31, 2015 and March 31, 2015 and the results of operations and cash flows for the three and nine month interim periods ended December 31, 2015 and 2014. The interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for future periods or the year. The balance sheet at March 31, 2015 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Form 10-K Annual Report of the Company for the year ended March 31, 2015.

 

Basic and Diluted Net Loss per Share

 

Net loss per share is presented under two formats: basic net loss per common share, which is computed using the weighted average number of common shares outstanding excluding non-vested restricted stock, during the period, and diluted net loss per common share, which is computed using the weighted average number of common shares outstanding, and the weighted average dilutive potential common shares outstanding, computed using the treasury stock method. Currently, for all periods presented, diluted net loss per share is the same as basic net loss per share as the inclusion of weighted average shares of non-vested restricted stock and common stock issuable upon the exercise of options and warrants would be anti-dilutive.

 

The following table summarizes the number of securities outstanding at each of the periods presented, which were not included in the calculation of diluted net loss per share as their inclusion would be anti-dilutive:

 

		December 31,
		2015			2014
Common stock options			1,027,708			232,500
Warrants to purchase common stock			675,545			5,566,795
Non-vested restricted stock			1,885,000			—

Allowance for Doubtful Accounts

 

An allowance for uncollectible accounts receivable is maintained for estimated losses from customers’ failure to make payment on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience, (2) aging of accounts receivable and (3) specific information obtained by the Company on the financial condition and the current credit worthiness of its customers. The Company has determined that an allowance was not necessary at December 31, 2015 or March 31, 2015.

Inventories

 

Inventories are stated at the lower of average cost or market. The carrying value of inventory is reviewed and adjusted based upon slow moving, obsolete items and management’s assessment of current market conditions. Inventory costs include material, labor, and manufacturing overhead including depreciation and are determined by the “first-in, first-out” (FIFO) method. The components of inventories are as follows:

 

		December 31, 2015			March 31, 2015
Raw materials and supplies		$	16,615		$	58,390
Work in process			18,084			31,371
Finished goods			138,232			205,999
Inventory reserve			(8,384)			—
		$	164,547		$	295,760

 

Property, Plant and Equipment

 

Depreciation of property, plant and equipment is on a straight line basis beginning at the time it is placed in service, based on the following estimated useful lives:

 

		Years
Machinery and equipment		3 to15
Furniture and fixtures		3 to10
Engineering equipment		5 to 12

 

Leasehold improvements which are included in facility fixed assets on the balance sheet are depreciated over the lesser of the remaining term of the lease or the life of the asset (generally three to seven years).

 

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

Intangible Assets

 

Acquired in-process research and development costs are considered to have an indefinite useful life until such time as they are put into service at which time they will be amortized on a straight-line basis over the shorter of their economic or legal useful life. Management evaluates indefinite life intangible assets for impairment on an annual basis and on an interim basis if events or changes in circumstances between annual impairment tests indicate that the asset might be impaired. The ongoing evaluation for impairment of its indefinite life intangible assets requires significant management estimates and judgment. Management reviews definite life intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment charges during the three and nine months ended December 31, 2015. During the three months ended December 31, 2014, management evaluated assets included in IPRD and determined that certain projects would no longer be pursued for further development resulting in an impairment charge of $418,065 being recognized during the three and nine months ended December 31, 2014.

Stock-based Compensation

 

Stock-based compensation expense for the value of stock options is estimated on the date of the grant using the Black-Scholes option-pricing model. The Black-Scholes model takes into account implied volatility in the price of the Company’s stock, the risk-free interest rate, the estimated life of the equity-based award, the closing market price of the Company’s stock on the grant date and the exercise price. The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment.

Concentration of Credit Risk/Revenue Concentrations

 

Revenue Recognition

 

We recognize product revenue when persuasive evidence of an arrangement exists, delivery of products has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. For our Company, this generally means that we recognize revenue when we or our fabrication vendor has shipped finished product to the customer. Our sales terms do not allow for a right of return except for matters related to any manufacturing defects on our part. The Company has an allowance for returns of $22,050 at December 31, 2015. This allowance has reduced reported revenues and is considered an accrued expense in the balance sheet.

 

For product sales to our joint venture partners for further processing and finishing, we currently defer all revenues when products are shipped. We currently recognize revenue at the earlier of when the joint venture partner sells the finished goods manufactured from our materials or we are paid for our goods. Licensing and development revenues are recognized in the month as detailed in appropriate licensing and development contracts. In the event that licensing funds are received prior to the contractual commitment, the Company will recognize deferred revenue (liability) for the amount received.

Recent Accounting Pronouncements

 

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance supersedes the revenue recognition guidance in Topic 605, "Revenue Recognition", and most industry-specific guidance throughout the Industry Topics of the Codification. The guidance also supersedes some cost guidance included in Subtopic 605-35, "Revenue Recognition- Contract-Type and Production-Type Contracts". On July 9, 2015, the FASB voted to defer the effective date of the pronouncement by one year. ASU 2014-9, as amended, is effective for annual periods, and interim periods within those years, beginning after December 31, 2017. An entity is required to apply the amendments using one of the following two methods: i) retrospectively to each prior period presented with three possible expedients: a) for completed contracts that begin and end in the same reporting period no restatement is required, b) for completed contract with variable consideration an entity may use the transaction price at completion rather than restating estimated variable consideration amounts in comparable reporting periods and c) for comparable reporting periods before date of initial application reduced disclosure requirements related to transaction price; ii) retrospectively with the cumulative effect of initially applying the amendment recognized at the date of initial application with additional disclosures for the differences of the prior guidance to the reporting periods compared to the new guidance and an explanation of the reasons for significant changes. We are required to adopt ASU 2014-09, as amended, in the first quarter of fiscal 2019, and we are currently assessing the impact of this pronouncement on our financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management to assess, at each annual and interim reporting period, the entity's ability to continue as a going concern within one year after the date that the financial statements are issued and provide related disclosures. The ASU is effective for our fiscal year ending March 31, 2017, with early adoption permitted. The Company is in the process of assessing the impact of this standard on our financial statements or disclosures.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, ("ASU 2015-11"). This new guidance requires an entity to measure inventory at the lower of cost and net realizable value. Currently, entities measure inventory at the lower of cost and market. ASU 2015-11 replaces market with net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured under last-in, first-out or the retail inventory method. ASU 2015-11 requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early application is permitted. ASU 2015-11 is therefore effective in our fiscal year beginning April 1, 2017. We are evaluating the effect that ASU 2015-11 will have on our financial statements and related disclosures.

 

There are currently no other accounting standards that have been issued but not yet adopted by the Company that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption.

The following table summarizes the number of securities outstanding at each of the periods presented, which were not included in the calculation of diluted net loss per share as their inclusion would be anti-dilutive:

 

		December 31,
		2015			2014
Common stock options			1,027,708			232,500
Warrants to purchase common stock			675,545			5,566,795
Non-vested restricted stock			1,885,000			—

The components of inventories are as follows:

 

		December 31, 2015			March 31, 2015
Raw materials and supplies		$	16,615		$	58,390
Work in process			18,084			31,371
Finished goods			138,232			205,999
Inventory reserve			(8,384)			—
		$	164,547		$	295,760

Depreciation of property, plant and equipment is on a straight line basis beginning at the time it is placed in service, based on the following estimated useful lives:

 

		Years
Machinery and equipment		3 to15
Furniture and fixtures		3 to10
Engineering equipment		5 to 12

Intangible assets consist of the following:

 

				December 31,			March 31,
		Life		2015			2015
Patents, gross		6.75 – 19.46		$	8,135,063		$	8,135,063
In-process research and development		Indefinite			1,832,370			1,832,370
					9,967,433			9,967,433
Accumulated amortization					(2,500,615)			(1,919,485)
Net intangible assets				$	7,466,818		$	8,047,948

Total annual amortization expense of finite lived intangible assets is estimated to be as follows:

 

Fiscal Year Ending
Three months ending March 31, 2016		$	193,710
March 31, 2017			774,840
March 31, 2018			774,840
March 31, 2019			774,840
March 31, 2020			595,159
Thereafter		$	2,521,059

The following sets forth the restricted stock outstanding as of December 31, 2015:

 

Restricted Stock		Shares
Restricted stock outstanding March 31, 2015			—
Granted			2,085,000
Vested			—
Expired/cancelled			(200,000)
Restricted stock outstanding December 31, 2015			1,885,000

The following sets forth the employee options to purchase shares of the Company’s stock issued and outstanding as of December 31, 2015 and does not include options granted to Renaissance Diamond Inc.:

 

					Weighted-			Weighted-Average
					Average Exercise			Remaining
Options		Shares			Price			Contractual Term
Employee options outstanding March 31, 2015			232,500		$	0.35			1.45
Granted			685,000			1.03			9.36
Exercised			(11,125)			0.51			—
Expired/cancelled			(212,000)			0.83			—
Employee options outstanding December 31, 2015			694,375		$	0.87			7.38
Exercisable at December 31, 2015			12,000		$	0.33			0.73

A summary of the status of non-vested employee options as of December 31, 2015 and changes during the nine months ended December 31, 2015 is presented below.

 

					Weighted
					Average
					Grant-Date
Non-vested Shares		Shares			Fair Value
Non-vested at March 31, 2015			209,375			0.21
Granted			685,000			0.98
Vested			—			—
Expired/cancelled: non-vested			(212,000)			0.76
Non-vested at December 31, 2015			682,375		$	0.81

The following table summarizes information about employee stock options outstanding by price range as of December 31, 2015:

 

		Options Outstanding									Options Exercisable
					Weighted Average
					Remaining			Weighted			Number
Exercise		Number			Contractual Life			Average Exercise			of			Weighted Average
Price		Outstanding			(years)			Price			Shares			Exercise Price
$1.03			535,000			9.36		$	1.03			—		$	—
$0.33			159,375			0.73			0.33			12,000			0.33
			694,375			7.38		$	0.87			12,000		$	0.33

Rollforward of the Company’s ownership interest in the joint venture for the nine months ended December 31, 2015:

Balance of ownership interest in joint venture at March 31, 2015		$	30,041
Aggregate fiscal 2016 equity gain – share of joint venture income			59,368
Balance of ownership interest in joint venture at December 31, 2015		$	89,409
Cumulative recognized income on ownership interest in joint venture at December 31, 2015		$	89,409

Selected financial results for RCDC for the nine months ended December 31, 2015 are as follows:

Revenues		$	499,222
Expenses			380,486
Net Income		$	118,736
Total Assets		$	615,821
Total Liabilities		$	437,002
Total Partners Capital			178,819
Total Liabilities and Partner Capital		$	615,821