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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 original business plan of the Company was focused on offsetting carbon dioxide (“C02”) emissions through the creation and protection of forest-based carbon “sinks.” The Company has since abandoned its original business plan and restructured its business to focus on man-made diamond technology development and commercialization.
On July 13, 2011, the Board of Directors of the Company resolved to authorize a 2-for-1 forward split of its issued and outstanding common shares, whereby every one (1) old share of common stock was to be exchanged for two new shares of the Company’s common stock, effective on August 5, 2011. As a result, the issued and outstanding shares of common stock increased from 3,200,000 prior to the forward split to 6,400,000 following the forward split. The forward split shares are payable upon surrender of certificates to the Company’s transfer agent. The accompanying financial statements and notes give retroactive effect to the forward split for all periods presented.
Prior to October 1, 2012, the Company was a development stage company. Developmental activities have ceased and planned principal operations have commenced.
Going Concern
The Company has generated very 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.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management has responded to these circumstances by taking the following actions:
· Focused efforts on the construction and start-up of its state-of-the-art manufacturing facility in South Carolina in order to begin production and generate revenues; and
· Ongoing solicitation of investment in the Company in the form of a private placement of common shares, secured and unsecured debt to accredited investors.
In the opinion of management, these actions will be 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. 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 financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts, sales returns, provision for inventory obsolescence, fair value of acquired intangible assets, useful lives of intangible assets and property and equipment, employee stock options, and contingencies and litigation, among others. The Company generally bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts recorded could differ materially from those estimates
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and notes payable approximate their fair value due to the short-term nature of these instruments.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers highly liquid financial instruments purchased with an original maturity of three months or less when purchased to be cash equivalents. At March 31, 2013 and 2012, the Company held no cash equivalents.
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 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 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:
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|
March 31, |
| ||
|
|
2013 |
|
2012 |
|
Common stock options and warrants |
|
9,609,295 |
|
370,014 |
|
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 also maintains a provision for estimated returns and allowances based upon historical experience. The Company has determined that an allowance was not necessary at March 31, 2012 or 2013.
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 and obsolete items. Inventory costs include material, labor, and manufacturing overhead and are determined by the “first-in, first-out” (FIFO) method. The components of inventories are as follows:
|
|
March 31, |
|
March 31, |
| ||
Raw materials and supplies |
|
$ |
64,255 |
|
$ |
— |
|
Work in process |
|
— |
|
— |
| ||
Finished goods |
|
474,693 |
|
2,502 |
| ||
|
|
538,948 |
|
2,502 |
| ||
Inventory reserves |
|
— |
|
— |
| ||
|
|
$ |
538,948 |
|
$ |
2,502 |
|
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 |
|
3–15 |
|
Furniture and fixtures |
|
3–10 |
|
Engineering equipment |
|
5–12 |
|
Leasehold improvements 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. Manufacturing equipment was placed into service beginning July 1, 2012.
Intangible Assets
Intangible assets, such as 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 years ended March 31, 2013 or 2012. During the year ended March 31, 2013 intangible assets in the amount of $7,534,063 were assigned to specific patents and considered placed in service due to their inherent nature in the Company’s manufacturing process. These patents are being amortized over a period ranging from 6.75 years to 15.67 years.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. Valuation allowances are provided against deferred tax assets when it is more likely than not that an asset will not be realized in accordance with Accounting Standards Codification (“ASC”) 740, Accounting for Income Taxes.
Management has evaluated the potential impact in accounting for uncertainties in income taxes and has determined that it has no significant uncertain income tax positions as of March 31, 2012 or 2013. Income tax returns subject to review by taxing authorities include March 31, 2010, 2011, 2012 and 2013.
Stock-based Compensation
Stock-based compensation 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
During the year ended March 31, 2013 the Company received a significant amount of its total revenues with two customers. One customer accounted for 84% of total revenues for the Company and purchased substantially all of the Company’s production output. The second customer purchased a substantial portion of the Company’s by-product inventory and accounted for 11% of total revenues for the Company and 94% of the Company’s accounts receivable at March 31, 2013. No such concentration existed as of March 31, 2012 as the Company was not in operational status as of that time.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by the accounting literature contains three levels as follows:
Level 1— Quoted prices in active markets for identical assets or liabilities.
Level 2— Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
In addition, GAAP requires the Company to disclose the fair value for financial assets on both a recurring and non-recurring basis. On August 31, 2011, the Company issued to certain current and former stockholders of Apollo Diamond Inc. (“ADI”) that were at that time accredited investors subscription rights valued at $11,040,000 for the purchase of ADI assets disclosed in Note 2 measured at fair value on a nonrecurring basis. The fair value of the ADI subscription rights was determined based on an appraisal which used the Black-Scholes model whose assumptions were considered by management to be a Level 3 input. During June 2012, the Company issued to certain current and former stockholders of Apollo Diamond Gemstone Corporation (“ADGC”) that are accredited investors subscription rights valued at $770,000 for the purchase of ADGC assets disclosed in Note 2 measured at fair value on a nonrecurring basis. The fair value of the ADGC subscription rights was determined using the Black-Scholes model whose assumptions were considered by management to be a Level 3 input.
Revenue Recognition
We recognize 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.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, Guidance on Testing Goodwill for Impairment. ASU 2011-08 gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. ASU 2011-08 is effective for fiscal and interim reporting periods within those years beginning after December 15, 2011. The adoption of this accounting standard did not have a material effect on the Company’s financial statements.
In July 2012 the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard). The revised standard is intended to reduce the cost and complexity of testing indefinite-lived intangible assets other than goodwill for impairment. It allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company adopted this new standard in the fiscal year ended March 31, 2013 and the adoption did not have a significant impact on its financial statements.
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.
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NOTE 2 — ASSET PURCHASES
The Company purchased certain assets from ADI on August 31, 2011, consisting primarily of diamond growing machines and certain intellectual property related thereto. The purchase price consisted of an aggregate of $2,000,000 in a combination of cash and a promissory note bearing interest at 4.00% annually, plus the subscription rights for certain current and former stockholders of ADI qualifying as accredited investors to acquire approximately 16 million shares of common stock of the Company for $0.01 per share (the “ADI Offering”). The Company has estimated the fair value of these ADI subscription rights to acquire shares of common stock of the Company for $0.01 per share to be $0.69 per right. At the date of the transaction, the fair value of the subscription rights was $11,040,000, and this amount was credited to additional paid-in capital. The fair value of the ADI subscription rights was determined using the Black-Scholes model with the following assumptions: estimated volatility of 100%, risk free interest rate of 0.1%, and an expected life of 1 year. The promissory note from this asset purchase was settled in full in December 2012.
The following table reflects our purchase price allocation of the assets at the time of acquisition:
Machinery and equipment |
|
$ |
943,685 |
|
Reactors |
|
2,311,818 |
| |
In-process research and development |
|
9,784,497 |
| |
Total |
|
$ |
13,040,000 |
|
The Company utilized a third-party valuation as part of its determination of the fair value of the assets acquired on the date of acquisition. The final amounts allocated to the ADI assets acquired are based upon the results of that valuation appraisal.
On June 5, 2012, the Company acquired certain of the assets of ADGC (the “ADGC Asset Purchase”), consisting primarily of lab-created diamond gemstone-related know-how, inventory, and various intellectual property, in exchange for $100,000 in cash and the right for certain current and former stockholders of ADGC qualifying as accredited investors to acquire up to approximately 1 million shares of common stock of the Company for $0.01 per share (the “ADGC Offering”) with the intent that the ADI Offering be conducted substantially concurrently with the ADGC Offering (collectively, the “ADI/ADGC Stockholder Offering”). The Company paid the $100,000 cash portion of the ADGC Asset Purchase during the month of December 2012. The ADI/ADGC Stockholder Offering began in June and was completed in March 2013. At the date of the transaction, the Company estimated the fair value of such subscription rights to be $0.79 per right and the aggregate fair value of such subscription rights was $790,000. This amount was credited to additional paid-in capital. The fair value of such rights to acquire shares of common stock of the Company was determined using the Black-Scholes model. Subsequent to the date of the transaction, the Company obtained a third-party valuation to support the fair value of the assets acquired. This valuation determined a slightly lower value of $770,000 for the subscription rights and adjusted the purchase price allocation between inventory and in-process research and development. Adjustments were made in the March 31, 2013 financial statements to reflect this modification of final purchase price and asset allocation. The final amounts allocated to the ADGC assets acquired are based upon the results of that valuation appraisal and the following table reflects our final purchase price allocation of the assets:
Inventory |
|
$ |
269,000 |
|
In-process research and development |
|
601,000 |
| |
Total |
|
$ |
870,000 |
|
The ADI/ADGC Stockholder Offering was completed in March 2013 and resulted in the issuance of an aggregate of 16,766,773 shares of the Company’s common stock.
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NOTE 3 — INTANGIBLE ASSETS
During the year ended March 31, 2013, the Company evaluated its patent portfolio and allocated $7,534,063 of the previously acquired in-process research and development to specific patents that are being used by the Company for its manufacturing operations. These patents were considered in service by the Company during the year and the values assigned are being amortized on a straight-line basis over the remaining effective lives of the patents.
Intangible assets consist of the following:
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|
|
|
March 31, |
|
March 31, |
| ||
|
|
Life |
|
2013 |
|
2012 |
| ||
Patents, gross |
|
6.75 – 15.67 |
|
$ |
7,534,063 |
|
$ |
— |
|
In-process research and development |
|
Indefinite |
|
2,851,435 |
|
9,784,497 |
| ||
|
|
|
|
10,385,498 |
|
9,784,497 |
| ||
Accumulated amortization |
|
|
|
369,847 |
|
— |
| ||
Net intangible assets |
|
|
|
$ |
10,015,651 |
|
$ |
9,784,497 |
|
Total amortization expense during the year ending March 31, 2013 was $369,847. There was no amortization expense for the year ended March 31, 2012.
Total annual amortization expense of finite lived intangible assets is estimated to be as follows:
Fiscal Year Ending |
|
|
| |
March 31, 2014 |
|
$ |
739,694 |
|
March 31, 2015 |
|
739,694 |
| |
March 31, 2016 |
|
739,694 |
| |
March 31, 2017 |
|
739,694 |
| |
March 31, 2018 |
|
739,694 |
| |
Thereafter |
|
$ |
3,465,746 |
|
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NOTE 4 — NOTES PAYABLE
In conjunction with the purchase of certain assets from ADI on August 31, 2011, the Company entered into a promissory note bearing interest at 4.00% annually and which was due and payable in full on September 1, 2012. As of March 31, 2012, $125,000 of the promissory note to ADI remained unpaid. The promissory note was paid in full during the fiscal year ended March 31, 2013.
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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 fiscal year ended March 31, 2012 the Company had the following issuances of capital stock:
· On August 5, 2011, 3,200,000 shares were issued in a 2-for-1 forward split from Krossbow Holding Corp. stockholders.
· As part of a private placement, 2,517,570 shares were issued at a price of $0.70 per share for total cash proceeds, net of fees, of $1,679,064.
· 13,000,000 shares were issued at a market value price of $0.02 per share to purchase the name “Scio Diamond Technology Corporation” (the “Scio Name”) for a total purchase price of $260,000. The Company purchased the Scio name from a privately-held Nevada corporation named Scio Diamond Technology Corporation (“Private Scio”). The Company and Private Scio are entities under common control. ASC 805-50-30-5 states that when accounting for a transfer of assets between entities under common control, the entity that receives the asset shall initially measure the recognized asset at the carrying amount in the accounts of the transferring entity at the date of the transfer. As the Scio Name acquired had no carrying value, the value of the shares given to purchase the Scio name were recorded as a deemed distribution so that the accounting basis of the Scio name remained at zero.
· The Company issued 16 million subscription rights with an exercise price of $0.01 per share to certain current and former stockholders of ADI as part of the ADI asset purchases discussed in Note 2.
· During the three months ended December 31, 2011, the Company issued 3,908,000 shares at a price of $0.70 per share for total cash proceeds, net of fees, of $2,672,059.
· In January 2012, the Company issued 1,875,500 shares of common stock at a price of $0.70 for total net cash proceeds of $94,499.
During the fiscal year ended March 31, 2013 the Company had the following issuances of capital stock:
· The Company issued 1 million subscription rights with an exercise price of $0.01 per share to certain current and former stockholders of ADGC as part of the ADGC asset purchases discussed in Note 2.
· The Company issued 4,891,250 units, each consisting of one share of common stock and one warrant for the purchase of a share of common stock at a strike price of $1.60 at a unit price of $0.80 for total net cash proceeds of $3,913,000.
· The Company issued 16,766,773 shares under the ADI and ADGC subscription rights.
· The Company issued 46,250 shares of common stock in lieu of cash payments to certain vendors.
· The Company issued 19,469 shares upon exercise of certain outstanding warrants;
The Company had 47,736,812 shares of common stock issued and outstanding as of March 31, 2013 of which 1,000,000 were held in treasury. This total does not include the 1,000,000 indemnity shares authorized for issuance by our Board of Directors on March 25, 2013.
As of March 31, 2013, the Company had 5,516,795 warrants outstanding. 425,545 warrants have exercise prices of $.70 per share and expire in 2016 and 2017. The warrants were issued by the Company as compensation for consulting work, placement agent services, and in exchange for cash discounts on facility rent and are valued at $0.52 per warrant using the Black-Scholes option pricing model. The Company had 4,891,250 of warrants outstanding with exercises prices of $1.60 that expire in 2015. These warrants were issued as part of the units issued during the year ended March 31, 2013. In addition, during the fiscal year ended March 31, 2013, the Company issued 200,000 warrants which remain outstanding with an exercise price of $1.60 that expire in 2018 in exchange for consulting services and are valued at $0.57 per warrant using the Black-Scholes option pricing model.
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NOTE 6 — SHARE-BASED COMPENSATION
The Company currently has one equity-based compensation plan under which stock-based compensation awards can be granted to directors, officers, employees and consultants providing bona fide services to or for the Company. The Company’s 2012 Share Incentive Plan was adopted on May 7, 2012 (the “2012 Share Incentive Plan” or “Plan”) and allows the Company to issue up to 5,000,000 share of its common stock pursuant to awards granted under the 2012 Share Incentive Plan. The Plan permits the granting of stock options, stock appreciation rights, restricted or unrestricted stock awards, phantom stock, performance awards, other stock-based awards, or any combination of the foregoing. The only awards that have been issued under the Plan are stock options. Because the Plan has not been approved by our shareholders, all such stock option awards are non-qualified stock options. The following sets forth the options to purchase shares of the Company’s stock issued and outstanding as of March 31, 2013:
Options |
|
Shares |
|
Weighted- |
|
Weighted-Average |
| |
Options Outstanding March 31, 2012 |
|
— |
|
$ |
— |
|
|
|
Granted |
|
11,417,500 |
|
0.85 |
|
|
| |
Exercised |
|
— |
|
— |
|
|
| |
Expired/cancelled |
|
7,325,000 |
|
0.84 |
|
|
| |
Options Outstanding March 31, 2013 |
|
4,092,500 |
|
$ |
0.87 |
|
2.54 |
|
Exercisable at March 31, 2013 |
|
1,626,333 |
|
$ |
0.81 |
|
2.29 |
|
The intrinsic value of options outstanding and of options exercisable at March 31, 2013 was $299,900 and $176,109, respectively.
A summary of the status of non-vested shares as of March 31, 2013 and changes during the year ended March 31, 2013 is presented below.
|
|
|
|
Weighted Average |
| |
|
|
|
|
Grant-Date |
| |
Non-vested Shares |
|
Shares |
|
Fair Value |
| |
Non-vested at March 31, 2012 |
|
— |
|
$ |
— |
|
Granted |
|
11,417,500 |
|
0.59 |
| |
Vested |
|
(3,626,222 |
) |
0.55 |
| |
Expired/cancelled: non-vested |
|
(5,325,000 |
) |
0.59 |
| |
Non-vested at March 31, 2013 |
|
2,466,278 |
|
$ |
0.65 |
|
· On May 7, 2012 the Company granted to five key management personnel options to purchase a total of 4,660,000 share of the Company’s stock at $0.70 per share. 1,310,000 of the options vested immediately on the date of grant and the remaining options were to be earned based upon specific management objectives. The Black-Scholes model assumptions made to calculate the grant date fair value of the options are as follows: expected dividend yield- 0.0%, risk-free interest rate- 0.79%, expected life in years- 3, and expected volatility of 100%.
· On July 10, 2012, the Company granted to a non-executive employee options to purchase a total of 7,500 shares of the Company’s stock at $0.80 per share. 1,500 of these options vested immediately and the remainder is to vest based upon specific management objectives. The Black-Scholes model assumptions made to calculate the grant date fair value of the options are as follows: expected dividend yield- 0.0%, risk-free interest rate- 0.63%, expected life in years- 3, and expected volatility of 100%.
· On August 3, 2012, the Company granted to three executive officers options to purchase a total of 1,100,000 shares of the Company’s stock at $0.80 per share. The options will vest upon the achievement of specific management objectives. The Black-Scholes model assumptions made to calculate the grant date fair value of the options are as follows: expected dividend yield- 0.0%, risk-free interest rate- 0.67%, expected life in years- 3, and expected volatility of 100%.
· On November 30, 2012, the Company’s former Chief Executive Officer and former Chief Financial Officer resigned from the Company. Pursuant to agreements entered into in connection with their respective resignations, an aggregate of 2,725,000 unvested and an aggregate of 1,400,000 vested stock options, for a total of 4,125,000 stock options, previously granted to these officers were forfeited. In addition, the Chief Executive Officer surrendered 1,000,000 shares of common stock with $0.001 par value to the Company, which are held in treasury.
· On December 5, 2012, the Company granted to Stephen D. Kelley, its then newly-appointed Chief Executive Officer, options to purchase a total of 3,200,000 shares of the Company’s stock at $1.01 per share. On January 24, 2013, Mr. Kelley resigned from the Company. No options granted to Mr. Kelley had been exercised as of his date of resignation, and accordingly pursuant to his stock option award agreement, all his stock options were forfeited on that date. The Black-Scholes model assumptions made to calculate the grant date fair value of the options are as follows: expected dividend yield- 0%, risk-free interest rate- 0.61%, expected life in years- 5, and expected volatility of 100%.
· On December 14, 2012, the Company granted its four then existing members of the Board of Directors options to purchase a total of 250,000 shares of the Company’s stock as compensation for serving on the Board during 2012. These options were fully vested on the date granted. The Black-Scholes model assumptions made to calculate the grant date fair value of the options are as follows: expected dividend yield- 0%, risk-free interest rate- 0.34%, expected life in years- 3, and expected volatility of 100%.
· On February 2, 2013, the Company granted to Mr. Michael McMahon, its newly-appointed Chief Executive Officer options to purchase a total of 1,500,000 shares of the Company’s stock at $0.93 per share. Of the 1,500,000 stock options, 234,375 stock options vested immediately upon employment and 1,265,625 stock options to vest upon the achievement of specific management objectives including employment tenure, cumulative cash flow and cumulative revenue. As of the date of grant, management of the Company anticipated that the average term of the options granted to Mr. McMahon would be three years, and the Company reserved a pool of shares to be issued upon exercise of such options. Using the Black-Scholes option pricing model, management determined that the options issued on February 2, 2013 had a value of $0.60 per option on the date of the grant, and total compensation costs of $209,101 were recognized for certain of these options as of March 31, 2013. Compensation expense for the remaining options will be immediately recognized when management determines that the relevant objectives had become reasonably probable to occur.
The assumptions used and the calculated fair value of the February 2, 2013 options are as follows:
· Expected dividend yield |
|
0.00 |
% | |
· Risk-free interest rate |
|
0.40 |
% | |
· Expected life in years |
|
3.00 |
| |
· Expected volatility |
|
106 |
% | |
· Weighted average calculated value of options granted |
|
$ |
0.60 |
|
· On March 25, 2013 the Company granted to Mr. Jonathan Pfohl, its newly-appointed Chief Financial Officer, options to purchase a total of 700,000 shares of the Company’s stock at $0.83 per share. Of the 700,000 stock options, 126,583 stock options vested immediately upon employment and 573,417 stock options to vest upon the achievement of specific management objectives including employment tenure, cumulative cash flow and cumulative revenue. As of the date of grant, management of the Company anticipated that the average term of the options granted to Mr. Pfohl would be three years, and the Company reserved a pool of shares to be issued upon exercise of such options. Using the Black-Scholes option pricing model, management determined that the options issued on March 26, 2013 had a value of $0.53 per option on the date of the grant, and total compensation costs of $77,359 were recognized for certain of these options as of March 31, 2013. Compensation expense for the remaining options will be immediately recognized when management determines that the relevant objectives had become reasonably probable to occur.
The assumptions used and the calculated fair value of the March 25, 2013 options are as follows:
· Expected dividend yield |
|
0.00 |
% | |
· Risk-free interest rate |
|
0.38 |
% | |
· Expected life in years |
|
3.00 |
| |
· Expected volatility |
|
106 |
% | |
· Weighted average calculated value of options granted |
|
$ |
0.53 |
|
On March 25, 2013, the Board of Directors authorized the issuance of 50,000 warrants at an exercise price of $1.60 per share to Theodorus Strous, a member of the Board, as compensation for Mr. Strous’ efforts in connection with the Company’s largest customer and not as compensation in his capacity as a member of the Board. In addition, on March 25, 2013, the Board of Directors authorized the issuance of 150,000 warrants at an exercise price of $1.60 per share to an unaffiliated third party as compensation for his efforts in connection with the Company’s largest customer. All such warrants were fully vested at the time of grant and have five years until expiration. The Company recognized $113,760 in expense as professional and consulting fees related to these warrant grants in the fiscal year ended March 31, 2013.
The assumptions used and the calculated fair value of the March 25, 2013 warrants are as follows:
· Expected dividend yield |
|
0.00 |
% | |
· Risk-free interest rate |
|
0.80 |
% | |
· Expected life in years |
|
5.00 |
| |
· Expected volatility |
|
106 |
% | |
· Weighted average calculated value of warrants granted |
|
$ |
0.57 |
|
Also on March 25, 2013, the Board of Directors authorized the issuance of 500,000 shares of the Company’s common stock to Edward S. Adams, Chairman of the Board, and 500,000 shares of the Company’s common stock to Michael R. Monahan, a member of the Board, to indemnify Messrs. Adams and Monahan under applicable law and the Company’s charter documents for shares of Company common stock transferred by them in May 2012 to certain individuals in settlement of a complaint filed by such individuals against Messrs. Adams and Monahan, their respective spouses, the law firm of Adams Monahan LLP, Mr. Joseph Lancia (our former President and Chief Executive Officer), the Company, and, as a nominal defendant, Private Scio. The Company recognized $830,000 as professional and consulting fees related to this authorization for indemnity. As of March 31, 2013 these shares had not been issued by the Company.
For the years ended March 31, 2013 and 2012, the Company recognized $1,996,426 and $0, respectively, as compensation cost for options issued, and recorded related deferred tax asset of $0 for all periods.
At March 31, 2013, unrecognized compensation cost related to non-vested awards was $1,265,827. This cost is expected to be recognized over a weighted average period of 2.71 years. The total fair value of shares vested during the years ended March 31, 2013 and 2012 was $1,873,609 and $0, respectively.
|
NOTE 7 — OTHER INCOME
During the year ended March 31, 2012, the Company received grants totaling $75,000 as incentive for locating its production facilities in Greenville, South Carolina. At March 31, 2012, the Company had met all conditions with respect to the grants and accordingly has included them in other income for the period ended March 31, 2012. The Company recognized no other income for the period ended March 31, 2013.
|
NOTE 8 — OPERATING LEASES
The Company leases office space at locations in Hudson, Massachusetts and Greenville, South Carolina. Under the terms of the leases, the Company is obligated to pay escalation rentals for certain operating expenses and real estate taxes. The Company’s lease in Hudson, Massachusetts expires in January 2014 and the Greenville, South Carolina lease expires in March 2019. The Company also leases electrical equipment in its production facility in South Carolina. The Company recognized $426,023 and $82,895 in lease expense for the fiscal years ending March 31, 2013 and 2012, respectively. Minimum future rental payments under the leases are summarized as follows:
2014 |
|
$ |
383,134 |
|
2015 |
|
347,851 |
| |
2016 |
|
361,660 |
| |
2017 |
|
224,410 |
| |
2018 |
|
224,410 |
| |
2019 and thereafter |
|
$ |
224,411 |
|
NOTE 9 — RELATED PARTIES
The Company incurred expenses of $106,229 and $239,988 for professional and consulting services provided by AdamsMonahan, LLP, a firm in which our Board members, Edward S. Adams and Michael R. Monahan, are partners, for the years ended March 31, 2013 and 2012, respectively.
On August 5, 2011, the Company executed the Scio Asset Purchase Agreement with Private Scio. Under the terms of the Scio Asset Purchase Agreement, the Company purchased the name “Scio Diamond Technology Corporation” and acquired other rights from Private Scio for 13,000,000 newly issued shares of common stock of the Company. Our directors Edward S. Adams and Michael R. Monahan were directors of Private Scio and Joseph D. Lancia, our former Chief Executive Officer, was an officer of Private Scio, and they owned 31.5%, 31.5% and 15.4%, respectively, of Private Scio. At the time that the Scio Asset Purchase Agreement was executed, Mr. Adams and Mr. Monahan had control of the Company. Mr. Adams and Mr. Monahan each acquired, directly or indirectly, 4,100,000 shares of our common stock pursuant to the Scio Asset Purchase Agreement, and Mr. Lancia acquired 2,000,000 shares pursuant to the Scio Asset Purchase Agreement.
The Company purchased certain assets from ADI on August 31, 2011, consisting primarily of diamond growing machines and intellectual property related thereto. The purchase price consisted of an aggregate of $2,000,000 in a combination of cash and a promissory note bearing interest at 4.00% annually and due and owing in full on September 1, 2012, plus the right for certain current and former stockholders of ADI to acquire approximately 16 million shares of common stock of the Company for $0.01 per share. These rights were valued at $11,040,000 in total using the Black-Scholes model. Both Mr. Adams, in an executive role, and Mr. Monahan previously served in various capacities with ADI through early 2011.
On June 5, 2012, the Company acquired substantially all of the assets of ADGC, consisting primarily of lab-created diamond gemstone-related know-how, inventory, and various intellectual property, in exchange for $100,000 in cash and the opportunity for certain current and former stockholders of ADGC qualifying as accredited investors to acquire up to approximately 1 million shares of common stock of the Company for $0.01 per share. These rights were valued at $770,000 based on an independent third-party appraisal. Mr. Adams and Mr. Monahan served in various capacities with ADGC through early 2011.
Robert C. Linares was elected to the Board of Directors in January 2013. Dr. Linares is the father-in-law of Edward S. Adams, the Chairman of our Board of Directors. The ADI/ADGC Stockholder Offering was completed in March 2013 and resulted in the issuance of an aggregate of 16,766,773 shares of the Company’s common stock.
On January 29, 2013, the Board of Directors approved an arrangement under which the Company and two of our board members, Edward S. Adams and Michael R. Monahan, have jointly engaged outside counsel to pursue a complaint against a former Company service provider. Claims being considered include both claims on behalf of the Company and claims on behalf of Messrs. Adams and Monahan individually. The terms of the engagement include an agreement for the Company, on the one hand, and Messrs. Adams and Monahan, on the other, to split the costs of pursuing this matter, and to split any recoveries obtained from the service provider. In the event the complaint is unsuccessful, the Board has agreed that the Company will indemnify Messrs. Adams and Monahan for all monies paid by them in pursuit of the complaint. The Company recognized $100,000 in expense during the fiscal year ending March 31, 2013 to reflect fees paid to the outside counsel to pursue this complaint, of which $50,000 was paid to the outside counsel by the Company and $50,000 was accrued by the Company as a potential liability for the indemnification. The Company is unable to determine the aggregate costs it will ultimately incur or the aggregate recoveries it will ultimately obtain, if any.
On March 6, 2013, the Board of Directors retained two directors, Mr. Michael Monahan and Mr. Theo Strous, to provide consulting services for the Company at a total cost of $11,000 and $4,000 respectively, per month. The Company recognized $15,000 in consulting expense for these services during the fiscal year ended March 31, 2013.
On May 7, 2012, Kristoffer Mack and Paul Rapello, shareholders of Loblolly, Inc. (f/k/a Scio Diamond Technology Corporation) (referred to in this report as Private Scio), derivatively and on behalf of nominal defendant Private Scio (collectively, the “Plaintiffs”) filed a claim in the U.S. District Court for the District of Minnesota against Edward S. Adams (our Chairman), Denise L. Adams, Michael R. Monahan (our director), Julie C. Monahan, the law firm of Adams Monahan LLP (“AMLLP”), Joseph Lancia (our former Chief Executive Officer) and the Company (collectively, the “Defendants”) and Private Scio, as a Nominal Defendant. The complaint alleged (i) against Messrs. Adams, Monahan and Lancia, AMLLP and the Company, violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder and violation of Minnesota Statutes §§ 80A.68 and 80-A.76, (ii) against Messrs. Adams, Monahan and Lancia and AMLLP, breach of fiduciary duty, (iii) against Messrs. Adams and Monahan and AMLLP, malpractice, (iv) against all Defendants, rescission of the transactions set forth in the Scio Asset Purchase Agreement and (v) against Adams, Monahan and AMLLP, usurpation of a corporate opportunity. Each allegation relates to, among other things, certain actions taken in connection with the asset purchase contemplated in the Scio Asset Purchase Agreement, the ADGC Asset Purchase, and the ADI/ADGC Stockholder Offering.
The Plaintiffs sought direct and consequential damages in an amount to be established through proof at trial, plus pre-judgment and post-judgment interest and reasonable attorneys’ fees and costs, rescission of the alleged improper corporate transactions, a constructive trust in favor of Private Scio based on the alleged usurpation of corporate opportunities, and other appropriate equitable and other relief. On May 11, 2012, four days after the complaint was filed, the Plaintiffs voluntarily dismissed the complaint with prejudice. This voluntarily dismissal was the result of a settlement agreement whereby Messrs. Adams and Monahan transferred to the Plaintiffs 1,000,000 shares of common stock of the Company held by them, and Mr. Adams transferred to the Plaintiffs a cash payment in the amount of $90,000.
On March 25, 2013, the Board of Directors reviewed the facts of the litigation described above and the settlement, and agreed to accept liability for the settlement and authorized the following to indemnify Messrs. Adams and Monahan, members of the Board, under applicable law and the Company’s charter documents for expenses incurred and shares of Company common stock and cash transferred by them in settlement of the litigation: (i) the issuance of 500,000 shares of the Company’s common stock to each of Messrs. Adams and Monahan, (ii) the payment of $90,000 to Mr. Adams for amounts paid by him to settle the complaint, and (iii) any other amounts and expenses paid in connection with stockholder litigation matters involving certain current and former stockholders of the Company. During the fiscal year ended March 31, 2013, the Company recognized $946,555 in expense related to the foregoing indemnification. Of this amount, $830,000 represents non-cash expenses related to the value of the Company common stock to be issued
Also on March 25, 2013, the Board of Directors authorized the issuance of a warrant to purchase 50,000 shares of our common stock at an exercise price of $1.60 per share to Theodorus Strous, a member of the Board, as compensation for Mr. Strous’ efforts in connection with the Company’s largest customer and not as compensation in his capacity as a member of the Board. These warrants were fully vested at the time of grant and the Company recognized $28,440 in expense related to these warrants in the fiscal year ended March 31, 2013.
|
NOTE 10 — INCOME TAXES
There was no current or deferred tax expense (benefit) for the years ended March 31, 2013 and 2012.
The deferred tax asset (liability) at March 31, 2013 and 2012 consists of the following types of temporary differences and their related tax effects:
|
|
At March 31, |
|
At March 31, |
| ||
Accrued expenses |
|
$ |
187,640 |
|
$ |
27,659 |
|
Property and equipment |
|
(112,563 |
) |
(3,321 |
) | ||
Capitalized startup/acquisition costs |
|
633,713 |
|
679,697 |
| ||
Federal and state net operating loss carry-forward |
|
2,122,402 |
|
15,302 |
| ||
Trade name |
|
92,572 |
|
97,888 |
| ||
Intangible assets |
|
(55,685 |
) |
— |
| ||
Nonqualified Options |
|
59,029 |
|
72,440 |
| ||
|
|
|
|
|
| ||
Valuation allowance |
|
(2,927,108 |
) |
(889,665 |
) | ||
Total |
|
$ |
— |
|
$ |
— |
|
The Company recorded a valuation allowance against its net deferred tax asset at March 31, 2013 and March 31, 2012, as the Company believes that it is more likely than not that this asset will not be realized.
|
|
At March 31, 2013 |
|
At March 31, 2012 |
| ||||||
|
|
Amount |
|
% |
|
Amount |
|
% |
| ||
Tax at statutory federal income tax rate |
|
$ |
(2,476,000 |
) |
(34.0 |
)% |
$ |
(702,746 |
) |
(34.0 |
)% |
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
| ||
State income tax expense |
|
— |
|
0.0 |
% |
(69,190 |
) |
(3.3 |
)% | ||
Change in valuation allowance |
|
1,846,204 |
|
25.3 |
% |
779,177 |
|
37.7 |
% | ||
Incentive stock options |
|
625,235 |
|
8.6 |
% |
— |
|
0.0 |
% | ||
Other, net |
|
4,561 |
|
0.1 |
% |
(7,241 |
) |
(0.4 |
)% | ||
|
|
|
|
|
|
|
|
|
| ||
Total |
|
$ |
— |
|
0.0 |
% |
$ |
— |
|
0.0 |
% |
The Company had federal and state net operating loss carry-forwards (“carry-forward”) of $5,646,000 and $41,000 at March 31, 2013 and 2012 respectively. These carry-forwards start to expire in the year 2031.
|
NOTE 11 — LITIGATION
In the course of ordinary business operations, the Company at times may be subject to, or involved in, certain legal disputes or actions arising out of claims from third parties or by claims made on behalf of the Company itself. As of March 31, 2013 there were no outstanding claims by the Company or against the Company.
|
NOTE 12 — SUBSEQUENT EVENTS
On May 13, 2013, Mr. Bernard McPheely a member of our Board of Directors tendered his resignation from the Board. As of June 17, 2013, no one has been appointed to replace Mr. McPheely.
On June 4, 2013 the Company engaged Arque Capital LTD., Maxwell Simon, Inc., and Stonegate Securities, Inc. to assist the Company in future capital raising activities. The Company agreed to issue 165,000, 162,500 and 200,000 shares of its common stock to each of Arque Capital LTD., Maxwell Simon, Inc. and Stonegate Securities Inc. respectively as partial compensation for these engagements.
On June 21, 2013, the Company entered into a loan agreement with Platinum Capital Partners, LP providing for a $1 million secured revolving line of credit that the Company may draw on to fund working capital and other corporate purposes. On June 21, 2013, $910,000 was drawn on the facility. The Company plans to utilize these funds and amounts drawn in the future to fund its ongoing operations. Borrowings under the loan agreement accrue interest at the rate of 18% per annum, payable monthly on or before the last calendar day of each month, and a service charge of 3% applies to late payments. The loan agreement also provides for payment of an accommodation fee of up to 10% of the commitment amount as provided in the loan agreement, and payment of a monthly collateral monitoring fee of $2,000 per month for the first six months and $1,000 per month for the last six months of the term of the loan agreement. The credit facility matures on June 20, 2014. The 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 shareholders and sell, purchase or lease real or personal property or other assets or equipment. The loan agreement also contains affirmative covenants and events of default. The Company may prepay borrowings without premium or penalty upon notice to Platinum as provided in the loan agreement. Under a security agreement entered into in connection with the loan agreement, the Company granted Platinum a first priority security interest in the Company’s inventory, equipment, accounts and other rights to payments and intangibles as security for the loan.
|
Going Concern
The Company has generated very 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.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management has responded to these circumstances by taking the following actions:
· Focused efforts on the construction and start-up of its state-of-the-art manufacturing facility in South Carolina in order to begin production and generate revenues; and
· Ongoing solicitation of investment in the Company in the form of a private placement of common shares, secured and unsecured debt to accredited investors.
In the opinion of management, these actions will be 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. 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 financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts, sales returns, provision for inventory obsolescence, fair value of acquired intangible assets, useful lives of intangible assets and property and equipment, employee stock options, and contingencies and litigation, among others. The Company generally bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts recorded could differ materially from those estimates
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and notes payable approximate their fair value due to the short-term nature of these instruments.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers highly liquid financial instruments purchased with an original maturity of three months or less when purchased to be cash equivalents. At March 31, 2013 and 2012, the Company held no cash equivalents.
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 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 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:
|
|
March 31, |
| ||
|
|
2013 |
|
2012 |
|
Common stock options and warrants |
|
9,609,295 |
|
370,014 |
|
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 also maintains a provision for estimated returns and allowances based upon historical experience. The Company has determined that an allowance was not necessary at March 31, 2012 or 2013.
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 and obsolete items. Inventory costs include material, labor, and manufacturing overhead and are determined by the “first-in, first-out” (FIFO) method. The components of inventories are as follows:
|
|
March 31, |
|
March 31, |
| ||
Raw materials and supplies |
|
$ |
64,255 |
|
$ |
— |
|
Work in process |
|
— |
|
— |
| ||
Finished goods |
|
474,693 |
|
2,502 |
| ||
|
|
538,948 |
|
2,502 |
| ||
Inventory reserves |
|
— |
|
— |
| ||
|
|
$ |
538,948 |
|
$ |
2,502 |
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 |
|
3–15 |
|
Furniture and fixtures |
|
3–10 |
|
Engineering equipment |
|
5–12 |
|
Leasehold improvements 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. Manufacturing equipment was placed into service beginning July 1, 2012.
Intangible Assets
Intangible assets, such as 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 years ended March 31, 2013 or 2012. During the year ended March 31, 2013 intangible assets in the amount of $7,534,063 were assigned to specific patents and considered placed in service due to their inherent nature in the Company’s manufacturing process. These patents are being amortized over a period ranging from 6.75 years to 15.67 years.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. Valuation allowances are provided against deferred tax assets when it is more likely than not that an asset will not be realized in accordance with Accounting Standards Codification (“ASC”) 740, Accounting for Income Taxes.
Management has evaluated the potential impact in accounting for uncertainties in income taxes and has determined that it has no significant uncertain income tax positions as of March 31, 2012 or 2013. Income tax returns subject to review by taxing authorities include March 31, 2010, 2011, 2012 and 2013.
Stock-based Compensation
Stock-based compensation 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
During the year ended March 31, 2013 the Company received a significant amount of its total revenues with two customers. One customer accounted for 84% of total revenues for the Company and purchased substantially all of the Company’s production output. The second customer purchased a substantial portion of the Company’s by-product inventory and accounted for 11% of total revenues for the Company and 94% of the Company’s accounts receivable at March 31, 2013. No such concentration existed as of March 31, 2012 as the Company was not in operational status as of that time.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by the accounting literature contains three levels as follows:
Level 1— Quoted prices in active markets for identical assets or liabilities.
Level 2— Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
In addition, GAAP requires the Company to disclose the fair value for financial assets on both a recurring and non-recurring basis. On August 31, 2011, the Company issued to certain current and former stockholders of Apollo Diamond Inc. (“ADI”) that were at that time accredited investors subscription rights valued at $11,040,000 for the purchase of ADI assets disclosed in Note 2 measured at fair value on a nonrecurring basis. The fair value of the ADI subscription rights was determined based on an appraisal which used the Black-Scholes model whose assumptions were considered by management to be a Level 3 input. During June 2012, the Company issued to certain current and former stockholders of Apollo Diamond Gemstone Corporation (“ADGC”) that are accredited investors subscription rights valued at $770,000 for the purchase of ADGC assets disclosed in Note 2 measured at fair value on a nonrecurring basis. The fair value of the ADGC subscription rights was determined using the Black-Scholes model whose assumptions were considered by management to be a Level 3 input.
Revenue Recognition
We recognize 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.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, Guidance on Testing Goodwill for Impairment. ASU 2011-08 gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. ASU 2011-08 is effective for fiscal and interim reporting periods within those years beginning after December 15, 2011. The adoption of this accounting standard did not have a material effect on the Company’s financial statements.
In July 2012 the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard). The revised standard is intended to reduce the cost and complexity of testing indefinite-lived intangible assets other than goodwill for impairment. It allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company adopted this new standard in the fiscal year ended March 31, 2013 and the adoption did not have a significant impact on its financial statements.
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.
|
|
|
March 31, |
| ||
|
|
2013 |
|
2012 |
|
Common stock options and warrants |
|
9,609,295 |
|
370,014 |
|
|
|
March 31, |
|
March 31, |
| ||
Raw materials and supplies |
|
$ |
64,255 |
|
$ |
— |
|
Work in process |
|
— |
|
— |
| ||
Finished goods |
|
474,693 |
|
2,502 |
| ||
|
|
538,948 |
|
2,502 |
| ||
Inventory reserves |
|
— |
|
— |
| ||
|
|
$ |
538,948 |
|
$ |
2,502 |
|
|
Years |
|
Machinery and equipment |
|
3–15 |
|
Furniture and fixtures |
|
3–10 |
|
Engineering equipment |
|
5–12 |
|
|
Machinery and equipment |
|
$ |
943,685 |
|
Reactors |
|
2,311,818 |
| |
In-process research and development |
|
9,784,497 |
| |
Total |
|
$ |
13,040,000 |
|
Inventory |
|
$ |
269,000 |
|
In-process research and development |
|
601,000 |
| |
Total |
|
$ |
870,000 |
|
|
|
|
|
|
March 31, |
|
March 31, |
| ||
|
|
Life |
|
2013 |
|
2012 |
| ||
Patents, gross |
|
6.75 – 15.67 |
|
$ |
7,534,063 |
|
$ |
— |
|
In-process research and development |
|
Indefinite |
|
2,851,435 |
|
9,784,497 |
| ||
|
|
|
|
10,385,498 |
|
9,784,497 |
| ||
Accumulated amortization |
|
|
|
369,847 |
|
— |
| ||
Net intangible assets |
|
|
|
$ |
10,015,651 |
|
$ |
9,784,497 |
|
Fiscal Year Ending |
|
|
| |
March 31, 2014 |
|
$ |
739,694 |
|
March 31, 2015 |
|
739,694 |
| |
March 31, 2016 |
|
739,694 |
| |
March 31, 2017 |
|
739,694 |
| |
March 31, 2018 |
|
739,694 |
| |
Thereafter |
|
$ |
3,465,746 |
|
|
Options |
|
Shares |
|
Weighted- |
|
Weighted-Average |
| |
Options Outstanding March 31, 2012 |
|
— |
|
$ |
— |
|
|
|
Granted |
|
11,417,500 |
|
0.85 |
|
|
| |
Exercised |
|
— |
|
— |
|
|
| |
Expired/cancelled |
|
7,325,000 |
|
0.84 |
|
|
| |
Options Outstanding March 31, 2013 |
|
4,092,500 |
|
$ |
0.87 |
|
2.54 |
|
Exercisable at March 31, 2013 |
|
1,626,333 |
|
$ |
0.81 |
|
2.29 |
|
|
|
|
Weighted Average |
| |
|
|
|
|
Grant-Date |
| |
Non-vested Shares |
|
Shares |
|
Fair Value |
| |
Non-vested at March 31, 2012 |
|
— |
|
$ |
— |
|
Granted |
|
11,417,500 |
|
0.59 |
| |
Vested |
|
(3,626,222 |
) |
0.55 |
| |
Expired/cancelled: non-vested |
|
(5,325,000 |
) |
0.59 |
| |
Non-vested at March 31, 2013 |
|
2,466,278 |
|
$ |
0.65 |
|
The assumptions used and the calculated fair value of the March 25, 2013 warrants are as follows:
· Expected dividend yield |
|
0.00 |
% | |
· Risk-free interest rate |
|
0.80 |
% | |
· Expected life in years |
|
5.00 |
| |
· Expected volatility |
|
106 |
% | |
· Weighted average calculated value of warrants granted |
|
$ |
0.57 |
|
The assumptions used and the calculated fair value of the February 2, 2013 options are as follows:
· Expected dividend yield |
|
0.00 |
% | |
· Risk-free interest rate |
|
0.40 |
% | |
· Expected life in years |
|
3.00 |
| |
· Expected volatility |
|
106 |
% | |
· Weighted average calculated value of options granted |
|
$ |
0.60 |
|
The assumptions used and the calculated fair value of the March 25, 2013 options are as follows:
· Expected dividend yield |
|
0.00 |
% | |
· Risk-free interest rate |
|
0.38 |
% | |
· Expected life in years |
|
3.00 |
| |
· Expected volatility |
|
106 |
% | |
· Weighted average calculated value of options granted |
|
$ |
0.53 |
|
|
2014 |
|
$ |
383,134 |
|
2015 |
|
347,851 |
| |
2016 |
|
361,660 |
| |
2017 |
|
224,410 |
| |
2018 |
|
224,410 |
| |
2019 and thereafter |
|
$ |
224,411 |
|
|
|
|
At March 31, |
|
At March 31, |
| ||
Accrued expenses |
|
$ |
187,640 |
|
$ |
27,659 |
|
Property and equipment |
|
(112,563 |
) |
(3,321 |
) | ||
Capitalized startup/acquisition costs |
|
633,713 |
|
679,697 |
| ||
Federal and state net operating loss carry-forward |
|
2,122,402 |
|
15,302 |
| ||
Trade name |
|
92,572 |
|
97,888 |
| ||
Intangible assets |
|
(55,685 |
) |
— |
| ||
Nonqualified Options |
|
59,029 |
|
72,440 |
| ||
|
|
|
|
|
| ||
Valuation allowance |
|
(2,927,108 |
) |
(889,665 |
) | ||
Total |
|
$ |
— |
|
$ |
— |
|
|
|
At March 31, 2013 |
|
At March 31, 2012 |
| ||||||
|
|
Amount |
|
% |
|
Amount |
|
% |
| ||
Tax at statutory federal income tax rate |
|
$ |
(2,476,000 |
) |
(34.0 |
)% |
$ |
(702,746 |
) |
(34.0 |
)% |
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
| ||
State income tax expense |
|
— |
|
0.0 |
% |
(69,190 |
) |
(3.3 |
)% | ||
Change in valuation allowance |
|
1,846,204 |
|
25.3 |
% |
779,177 |
|
37.7 |
% | ||
Incentive stock options |
|
625,235 |
|
8.6 |
% |
— |
|
0.0 |
% | ||
Other, net |
|
4,561 |
|
0.1 |
% |
(7,241 |
) |
(0.4 |
)% | ||
|
|
|
|
|
|
|
|
|
| ||
Total |
|
$ |
— |
|
0.0 |
% |
$ |
— |
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|