SCIO DIAMOND TECHNOLOGY CORP, 10-Q filed on 2/12/2015
Quarterly Report
Document And Entity Information
9 Months Ended
Dec. 31, 2014
Feb. 10, 2015
Document Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Dec. 31, 2014 
 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q3 
 
Entity Registrant Name
Scio Diamond Technology Corp 
 
Entity Central Index Key
0001488934 
 
Current Fiscal Year End Date
--03-31 
 
Entity Filer Category
Smaller Reporting Company 
 
Trading Symbol
SCIO 
 
Entity Common Stock, Shares Outstanding
 
57,198,166 
CONDENSED BALANCE SHEETS (USD $)
Dec. 31, 2014
Mar. 31, 2014
Current Assets:
 
 
Cash and cash equivalents
$ 1,090,858 
$ 47,987 
Accounts receivable, net
92,894 
42,085 
Other receivables
89,192 
Inventory, net
215,202 
152,817 
Deferred contract costs
55,739 
Prepaid expenses
43,569 
79,078 
Prepaid rent
23,050 
23,050 
Total current assets
1,521,312 
434,209 
Property, plant and equipment
 
 
Facility
904,813 
899,499 
Manufacturing equipment
3,192,350 
3,171,656 
Other equipment
71,059 
71,059 
Total property, plant and equipment
4,168,222 
4,142,214 
Less accumulated depreciation
(1,493,818)
(1,029,212)
Net property, plant and equipment
2,674,404 
3,113,002 
Intangible assets, net
8,241,654 
9,240,640 
Prepaid rent, non-current
25,000 
42,288 
Other assets
21,000 
20,000 
TOTAL ASSETS
12,483,370 
12,850,139 
Current Liabilities:
 
 
Notes payable
1,412,060 
Accounts payable
567,341 
671,782 
Customer deposits
52,151 
179,610 
Deferred revenue
61,675 
Accrued expenses
594,335 
573,126 
Total current liabilities
1,275,502 
2,836,578 
Notes payable, non-current
2,000,000 
Other liabilities
109,605 
84,144 
TOTAL LIABILITIES
3,385,107 
2,920,722 
Common stock $0.001 par value, 75,000,000 shares authorized; 57,198,166 and 50,739,312 shares issued and outstanding at December 31, 2014 and March 31, 2014, respectively
57,199 
50,739 
Additional paid-in capital
26,715,337 
24,476,940 
Accumulated deficit
(17,673,273)
(14,597,262)
Treasury stock, 1,000,000 shares at December 31, 2014 and March 31, 2014
(1,000)
(1,000)
Total shareholders’ equity
9,098,263 
9,929,417 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$ 12,483,370 
$ 12,850,139 
CONDENSED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2014
Mar. 31, 2014
Common stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Common stock, shares authorized
75,000,000 
75,000,000 
Common stock, shares issued
57,198,166 
50,739,312 
Common Stock, Shares, Outstanding
57,198,166 
50,739,312 
Treasury stock, shares
1,000,000 
1,000,000 
CONDENSED STATEMENTS OF OPERATIONS (USD $)
3 Months Ended 9 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2014
Dec. 31, 2013
Revenue
 
 
 
 
Product revenue, net
$ 109,358 
$ 93,915 
$ 292,672 
$ 589,129 
Licensing revenue
250,000 
375,000 
250,000 
Revenue, net
109,358 
343,915 
667,672 
839,129 
Cost of goods sold
 
 
 
 
Cost of goods sold
495,410 
513,145 
1,277,178 
1,740,932 
Gross deficit
(386,052)
(169,230)
(609,506)
(901,803)
General and administrative expenses
 
 
 
 
Professional and consulting fees
142,699 
104,131 
309,695 
1,097,030 
Salaries and benefits
127,668 
186,967 
688,368 
612,405 
Rent, equipment lease and facilities expense
36,772 
37,101 
108,803 
112,349 
Marketing costs
13,198 
15,300 
32,065 
41,716 
Depreciation and amortization
199,931 
200,018 
600,179 
599,910 
Corporate general and administrative
100,334 
96,732 
282,593 
282,091 
Forgiveness of legal accounts payable
(165,453)
(165,453)
Loss from impairment of in-process research and development
418,065 
418,065 
Loss from operations
(1,259,266)
(809,479)
(2,883,821)
(3,647,304)
Other expense
 
 
 
 
Interest expense
(60,025)
(55,756)
(192,190)
(102,702)
Net loss
$ (1,319,291)
$ (865,235)
$ (3,076,011)
$ (3,750,006)
Basic:
 
 
 
 
Weighted average number of shares outstanding (in shares)
53,701,988 
50,264,312 
51,705,910 
49,303,267 
Loss per share (in dollars per share)
$ (0.02)
$ (0.02)
$ (0.06)
$ (0.08)
Fully diluted:
 
 
 
 
Weighted average number of shares outstanding (in shares)
53,701,988 
50,264,312 
51,705,910 
49,303,267 
Loss per share (in dollars per share)
$ (0.02)
$ (0.02)
$ (0.06)
$ (0.08)
CONDENSED STATEMENTS OF CASH FLOW (USD $)
9 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Cash flows from operating activities:
 
 
Net loss
$ (3,076,011)
$ (3,750,006)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
1,111,209 
1,118,114 
Loss on impairment of in-process research and development
418,065 
Expense for warrants, stock and inventory issued in exchange for services and rent
34,200 
389,731 
Employee stock based compensation
155,000 
193,150 
Inventory write down
68,722 
Changes in assets and liabilities:
 
 
Decrease/(increase) in accounts receivable
(50,809)
36,459 
Decrease in other receivables
89,192 
Increase in deferred contract costs
(55,739)
Decrease/(increase) in prepaid expenses and rent
(12,886)
63,211 
Decrease/(increase) in inventory and other assets
(131,107)
139,918 
Increase/(decrease) in accounts payable
(104,441)
392,817 
Increase/(decrease) in customer deposits
(127,459)
127,222 
Increase in accrued expenses
76,866 
15,034 
Increase in deferred revenues
61,675 
125,000 
Increase in other liabilities
25,461 
25,461 
Net cash used in operating activities
(1,518,062)
(1,123,889)
Cash flows from investing activities:
 
 
Purchase of property, plant and equipment
(26,007)
(30,486)
Investment in joint venture
(1,000)
Net cash used in investing activities
(27,007)
(30,486)
Cash flows from financing activities:
 
 
Proceeds from note payable
2,153,615 
1,304,746 
Payments of notes payable
(1,565,675)
Finance charges paid on note payable
(214,746)
Proceeds from sale of common stock - net of fees
2,000,000 
129 
Net cash provided by financing activities
2,587,940 
1,090,129 
Change in cash and cash equivalents
1,042,871 
(64,246)
Cash and cash equivalents, beginning of period
47,987 
223,257 
Cash and cash equivalents, end of period
1,090,858 
159,011 
Cash paid for:
 
 
Interest
48,000 
18,874 
Income taxes
Non-cash investing and financing activities:
 
 
Payment of accounts payable and accrued expenses with stock
$ 55,657 
$ 0 
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (USD $)
Total
Common Stock
Additional Paid in Capital
Treasury Stock
Accumulated Deficit
Balance at Mar. 31, 2014
$ 9,929,417 
$ 50,739 
$ 24,476,940 
$ (1,000)
$ (14,597,262)
Balance (in Shares) at Mar. 31, 2014
 
50,739,312 
 
(1,000,000)
 
Common stock issued in exchange for operating expenses
77,857 
226 
77,631 
Common stock issued in exchange for operating expenses (in shares)
 
225,523 
 
 
Common stock issued in exchange for past consulting services
12,000 
50 
11,950 
Common stock issued in exchange for past consulting services (in shares)
 
50,000 
 
 
Common stock issued for cash @ $0.30 per share
2,000,000 
6,667 
1,993,333 
Common stock issued for cash @ $0.30 per share (in shares)
 
6,666,664 
 
 
Common stock returned to Company and cancelled
(1,000)
1,000 
Common stock returned to Company and cancelled (in shares)
 
(1,000,000)
 
 
Employee stock based compensation
155,000 
517 
154,483 
Employee stock based compensation (in shares)
 
516,667 
 
 
Net loss for the nine months ended December 31, 2014
(3,076,011)
(3,076,011)
Ending Balance at Dec. 31, 2014
$ 9,098,263 
$ 57,199 
$ 26,715,337 
$ (1,000)
$ (17,673,273)
Ending Balance (in Shares) at Dec. 31, 2014
 
57,198,166 
 
(1,000,000)
 
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (Parenthetical)
9 Months Ended
Dec. 31, 2014
Issue price per unit (in dollars per share)
$ 0.30 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
 
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:
 
·
Successfully raised $4 million in investment in the Company in the form of private placements of common shares to accredited investors and secured debt. Funds have been used to fund current operations and re-finance higher interest rate secured debt;
 
·
Established a joint venture with Renaissance Diamonds, Inc. focused on the creation of recipes and procedures to develop, market, and sell lab-grown fancy-colored diamonds;
 
·
Continued to focus efforts on new business development opportunities to generate revenues and diversify our customer base; and
 
·
Enhanced efforts on optimizing production for existing manufacturing capabilities.
 
In the opinion of management, 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 all of 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 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, 2014 and March 31, 2014 and the results of operations and cash flows for the three and nine month interim periods ended December 31, 2014 and 2013. 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, 2014 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, 2014.
 
In accordance with Accounting Standards Codification (“ASC”) 323, Investments—Equity Method and Joint Ventures, the Company uses the equity method of accounting for investments in corporate joint ventures for which the Company has the ability to exercise significant influence but does not control and is not the primary beneficiary. Significant influence typically exists if the Company has a 20% to 50% ownership interest in the venture unless predominant evidence to the contrary exists. Under this method of accounting, the Company records its proportionate share of the net earnings or losses of equity method investees and a corresponding increase or decrease to the investment balances. Cash payments to equity method investees such as additional investments, loans and advances and expenses incurred on behalf of investees, as well as payments from equity method investees such as dividends, distributions and repayments of loans and advances are recorded as adjustments to investment balances. When the Company’s carrying value in an equity method investee is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company guaranteed obligations of the equity method investee or has committed additional funding.   When the equity method investee subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.  The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
  
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:
 
 
 
December 31,
 
 
 
2014
 
2013
 
Common stock options and warrants
 
 
5,799,295
 
 
9,338,045
 
 
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, 2014 or March 31, 2014.
 
Other Receivables
 
As of March 31, 2014, the Company considered a pending insurance settlement over the actions of a Company supplier of $89,192 as an other receivable. This settlement was paid during the nine months ended December 31, 2014.
 
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:
 
 
 
December 31,
 
March 31,
 
 
 
2014
 
2014
 
Raw materials and supplies
 
$
104,888
 
$
35,543
 
Work in process
 
 
19,038
 
 
25,611
 
Finished goods
 
 
91,276
 
 
91,663
 
 
 
$
215,202
 
$
152,817
 
 
The Company continues to experience selling prices lower than cost. While we did not record a lower of cost or market adjustment during the three month period ended December 31, 2014, we have recorded a lower of cost or market write down of $68,722 for inventory produced during the nine month period then ended. The Company did not record a lower of cost or market write down for the three or nine month periods ended December 31, 2013. The estimation of the total write-down involves management judgments and assumptions including assumptions regarding future selling price forecasts, the estimated costs to complete, disposal costs and a normal profit margin.
 
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.
 
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. During the three months ended December 31, 2014, management evaluated assets included in IPRD and determined that certain projects will 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.  There were no impairment charges during the three and nine months ended December 31, 2013.
 
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.
 
The carrying value of cash and cash equivalents, accounts receivable, other assets and trade accounts payable approximates fair value due to the short-term nature of these instruments.
 
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 recognizes licensing and development revenues in accordance with the contractual terms of the agreements.
 
For product sales made by the Company to our joint venture partners for further value add and ultimate sale to customers, the Company defers recognition of revenues and associated expenses on these sales until finished goods are sold by the joint venture to its customer.
 
Recent Accounting Pronouncements
 
In July 2013, the FASB issued ASC 2013-11, “Income Taxes – Presentation of an Unrecognized Tax benefit When a Net Operation Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”) which is part of Accounting Standards Codification (“ASC”) 740: Income Taxes. The new guidance requires an entity to present an unrecognized tax benefit and an NOL carryforward, a similar tax loss or a tax credit carryforward on a net basis as part of a deferred tax asset, unless the unrecognized tax benefit is not available to reduce the deferred tax asset component or would not be utilized for that purpose, then a liability would be recognized. ASU 2013-11 is effective for annual and interim periods for fiscal years beginning after December 15, 2013. The Company adopted this new standard for the fiscal year ended March 31, 2015 and the adoption has not had a significant impact on its financial statements.
 
In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers (Topic 606).” This guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company will adopt this standard in fiscal year 2018. The Company has not yet determined the effect, if any, that the adoption of this standard will have on the Company’s financial position or results of operations.
  
There are currently no other accounting standards that have been issued but not yet adopted by the Company that are expected to have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption.
INTANGIBLE ASSETS
INTANGIBLE ASSETS
NOTE 2 — 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.
 
Intangible assets consist of the following:
 
 
 
 
 
December 31,
 
March 31,
 
 
 
Life
 
2014
 
2014
 
Patents, gross
 
6.75 – 19.46
 
$
8,135,063
 
$
8,135,063
 
In-process research and development
 
Indefinite
 
 
1,832,370
 
 
2,250,435
 
 
 
 
 
 
9,967,433
 
 
10,385,498
 
Accumulated amortization
 
 
 
 
(1,725,779)
 
 
(1,144,858)
 
Net intangible assets
 
 
 
$
8,241,654
 
$
9,240,640
 
 
During the three months ended December 31, 2014, management evaluated assets included in IPRD and determined that certain projects will no longer be pursued for further development resulting in an impairment charge of $418,065
 
Total amortization expense for the three and nine months ending December 31, 2014 was $193,710 and $580,921, respectively. The amortization expense for the three and nine months ended December 31, 2013 was $193,753 and $581,258, respectively.
 
Total annual amortization expense of finite lived intangible assets is estimated to be as follows:
 
Fiscal Year Ending
 
 
 
Three months ending March 31, 2015
 
$
193,710
 
March 31, 2016
 
 
774,840
 
March 31, 2017
 
 
774,840
 
March 31, 2018
 
 
774,840
 
March 31, 2019
 
 
774,840
 
Thereafter
 
$
3,116,214
 
NOTES PAYABLE
NOTES PAYABLE
NOTE 3 — NOTES PAYABLE
 
On June 21, 2013, the Company entered into a loan agreement with Platinum Capital Partners, LP (“Platinum”) providing for a $1 million secured revolving line of credit that the Company may draw on to fund working capital and other corporate purposes.  Borrowings under the loan agreement accrued 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 provided for payment of an accommodation fee of up to 10% of the commitment amount, 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 loan agreement contained 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 contained 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.
 
On October 11, 2013, the Company entered into a First Amendment to Loan Agreement (the “First Amendment”), which amended the Original Loan Agreement (as amended by the First Amendment, the “Amended Loan Agreement”) to provide for an additional $500,000 of borrowing capacity (the “Additional Loan” and, together with the original Loan, the “Loan”) under the $1 million secured revolving line of credit established under the Original Loan Agreement. On October 11, 2013, $280,750 was drawn on the Additional Loan, $30,750 of which was retained by Platinum to cover applicable fees. Borrowings accrued interest at the rate of 18% per annum, payable monthly on or before the last calendar day of each month. An interest reserve of $133,500 was set aside from the proceeds of the Additional Loan to make required payments of interest, provided that interest billed to the Company was first be deducted from a $90,000 reserve established under the Original Note for payments of interest on the Original Note, until that reserve was exhausted. The Amended Loan Agreement provided for payment of an accommodation fee of $25,000 and a closing fee of $3,250, the amounts of which were retained by Platinum out of amounts drawn on the Additional Loan on October 11, 2013. Under terms of the First Amendment, the Company may prepay borrowings without premium or penalty upon notice to Platinum. The Loan is secured by a security agreement, under which the Company granted Platinum first priority security interest in the Company’s inventory, equipment, accounts and other rights to payments and intangibles as security for the Loan. The Additional Loan provided for monthly interest payments commencing November 2013.
  
On October 16, 2014, the Company entered into a Second Amendment to Loan Agreement (“Amendment No. 2”) with Platinum to its existing loan agreement dated as of June 21, 2013 with Platinum, as modified by the First Amendment to Loan Agreement dated as of October 11, 2013. Under the terms of Amendment No. 2, Platinum, among other things, consolidated the Company’s credit facilities into one $1,500,000 note and deferred $63,619 of interest that was due and payable on September 30, 2014 under the Loan Agreement until December 19, 2014. The Company also executed two new promissory notes concurrently with Amendment No. 2: (i) a Revolving Promissory Note dated as of October 17, 2014 in the principal amount of $1,500,000 in favor of Platinum (the “New Revolving Promissory Note”), which replaced the Company’s Promissory Note dated as of June 21, 2013, in the principal amount of $1,000,000 in favor of Platinum, and the Company’s Promissory Note dated as of October 11, 2013, in the principal amount of $500,000 in favor of Platinum; and (ii) a Deferred Interest Promissory Note dated as of September 30, 2014, in the principal amount of $63,619 in favor of Platinum (the “Deferred Interest Promissory Note”). The New Revolving Promissory Note had a maturity date of June 30, 2015 and interest on the outstanding principal accrued at a rate of 18% per annum, compounded annually. The Deferred Interest Promissory Note had a maturity date of December 19, 2014 and interest on the outstanding principal accrued at a rate of 18% per annum, compounded annually. The loan agreement contained 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 could have prepaid 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.
 
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 to Platinum 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 $4.0 million 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 Growers (the “Grower Sale-Lease Agreement”) with HGI. 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 direct profit margin generated from the growers 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. The Company will also have the right to repurchase the leased growers upon the occurrence of certain events. There was no activity under this Grower Sale-Leaseback Agreement through December 31, 2014.
CAPITAL STOCK
CAPITAL STOCK
NOTE 4 — CAPITAL STOCK
 
The authorized capital of the Company is 75,000,000 common shares with a par value of $  0.001 per share.
  
At the request of the then Board of Directors, the Company entered into an agreement, effective April 12, 2014, with Mr. Joseph Cunningham to provide consulting services to the Company. Under this agreement, the Company agreed to provide Mr. Cunningham $4,000 and 20,000 shares of common stock per month in exchange for his professional services to the Company. This contract expired in August 2014. During the nine months ended December 31, 2014, the Company issued 80,000 shares to Mr. Cunningham. These shares were valued at an average of $0.43 per share based on the closing prices of the shares on the dates of grant and the Company recognized $34,200 in professional and consulting fee expense for these shares during the nine months ended December 31, 2014.
 
On July 15, 2014, the Board of Directors approved the issuance and sale of up to 2,000,000 shares of common stock to accredited investors at a price of $0.30. On September 25, 2014, the Board agreed to increase the size of the offering up to 6,666,667 shares to raise up to $2,000,000. The Company completed the offering on December 23, 2014 and issued 6,666,664 shares of common stock, at a price of $0.30 per share, for total cash proceeds of $2,000,000.
 
On October 30, 2014, the Board of Directors approved the issuance of 50,000 shares to Bradley Robb to settle $15,000 of liabilities for services rendered to the Company. Also on this date, the Board approved the issuance of 95,522 shares of stock to an affiliate of our landlord to settle $28,657 of outstanding rent liabilities. The shares issued in each of these transactions were valued at $0.30 per share.
 
The Company had 57,198,166 shares of common stock issued and outstanding as of December 31, 2014 of which 1,000,000 were held in treasury.
 
The Company had 5,566,795 warrants outstanding with a weighted average exercise price of $1.53 per share as of December 31, 2014. No warrants were issued in the nine months ended December 31, 2014.
SHARE-BASED COMPENSATION
SHARE-BASED COMPENSATION
NOTE 5 — 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 shares 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 Company did not issue any options during the three months ended December 31, 2014.
 
The following sets forth the options to purchase shares of the Company’s stock issued and outstanding as of December 31, 2014:
 
 
 
 
Weighted-
 
Weighted-Average
 
 
 
 
 
Average Exercise
 
Remaining
 
Options
 
Shares
 
Price
 
Contractual Term
 
Options Outstanding March 31, 2014
 
 
4,342,500
 
$
0.77
 
 
1.75
 
Granted
 
 
 
 
 
 
 
Exercised
 
 
 
 
 
 
 
Expired/cancelled
 
 
(4,110,000)
 
 
0.79
 
 
 
Options Outstanding December 31, 2014
 
 
232,500
 
$
0.35
 
 
1.70
 
Exercisable at December 31, 2014
 
 
23,125
 
$
0.44
 
 
1.45
 
 
A summary of the status of non-vested shares as of December 31, 2014 and changes during the nine months ended December 31, 2014 is presented below:
 
 
 
 
 
Weighted Average
 
 
 
 
 
Grant-Date
 
Non-vested Shares
 
Shares
 
Fair Value
 
Non-vested at March 31, 2014
 
 
2,414,792
 
$
0.49
 
Granted
 
 
 
 
 
Vested
 
 
(122,000)
 
 
0.43
 
Expired/cancelled: non-vested
 
 
(2,083,417)
 
 
0.50
 
Non-vested at December 31, 2014
 
 
209,375
 
$
0.21
 
  
The following table summarizes information about stock options outstanding by price as of December 31, 2014:
 
 
 
 
Options Outstanding
 
Options Exercisable
 
Exercise Price
 
Number
Outstanding
 
Weighted Average
Remaining
Contractual Life
(years)
 
Weighted Average
Exercise Price
 
Number of
Shares
 
Weighted Average
Exercise Price
 
$
0.80
 
 
7,500
 
 
0.52
 
$
0.80
 
 
5,500
 
$
0.80
 
$
0.33
 
 
225,000
 
 
1.73
 
 
0.33
 
 
17,625
 
 
0.33
 
 
 
 
 
232,500
 
 
1.70
 
$
0.35
 
 
23,125
 
$
0.44
 
 
The Company initially issued options with exercise prices of $0.70 or $0.80 per share which were the prices of recent equity capital investment. However, in December 2012, the Company decided to change the exercise price policy by utilizing the stock market closing price on the day that the options were granted by our Board of Directors. All subsequent exercise prices have been determined in this manner.
 
The intrinsic value of options outstanding at December 31, 2014 and March 31, 2014 was $129,000 and $0, respectively.
 
The non-vested options outstanding vest based on the Company meeting various operating metrics and cash flow targets. The Company estimates the fair value of options granted on the grant date utilizing the Black-Scholes Option model. For the nine months ended December 31, 2014 and 2013, the Company recognized $0 and $193,150, respectively, as compensation cost for options issued, and recorded related deferred tax asset of $0 for all periods.
 
At December 31, 2014, unrecognized compensation cost related to non-vested awards was $44,529. This cost is expected to be recognized over a weighted average period of 1.72 years.
RELATED PARTIES
RELATED PARTIES
NOTE 6 — RELATED PARTIES
 
During the three months ended December 31, 2014, four directors of the Company participated in the Company’s private placement stock offering. Karl Leaverton purchased 333,333 shares for $100,000, Bruce Likly purchased 375,000 shares for $112,500, Lewis Smoak purchased 333,333 shares for $100,000, and Ben Wolkowitz purchased 158,333 shares for $47,500.
LITIGATION
LITIGATION
NOTE 7 — LITIGATION
 
On October 15, 2013, plaintiff Mark P. Sennott, as Trustee of the Sennott Family Charitable Trust, (“Sennott”) filed a complaint derivatively, on behalf of ADI, in the United Stated District Court for the District of South Carolina, against Edward S. Adams (our then Chairman), Michael R. Monahan (a former member of the Company’s Board of Directors), the law firm of Adams Monahan, LLP, Loblolly, Inc., which was formerly known as Scio Diamond Technology Corporation, and the Company (collectively, “Sennott Defendants”). This derivative complaint on ADI’s behalf (the “ADI Derivative Complaint”) alleges claims for breach of fiduciary duty, constructive fraud and unjust enrichment.
 
The ADI Derivative Complaint was effectively settled on June 23, 2014 when the Company entered into a settlement agreement (the “Settlement Agreement”) by and among Edward S. Adams, Michael R. Monahan, Gerald McGuire, James Korn, Bruce Likly, Theodorus Strous, and Robert C. Linares, their present and past affiliates, such as Apollo Diamond, Inc., Apollo Diamond Gemstone Corporation, Adams Monahan LLP, Focus Capital Group, Inc. and Oak Ridge Financial Services Group, Inc., family members and spouses (the “Adams Group”), and Thomas P. Hartness, Kristoffer Mack, Paul Rapello, Glen R. Bailey, Marsha C. Bailey, Kenneth L. Smith, Bernard M. McPheely, James Carroll, Robert M. Daisley, Ben Wolkowitz, Craig Brown, Ronnie Kobrovsky, Lewis Smoak, Brian McPheely, Mark P. Sennott, the Sennott Family Charitable Trust, and their affiliates (the “Save Scio Group”), pursuant to which the Company and the Save Scio Group settled the previously pending consent contest for the election of directors. Pursuant to the Settlement Agreement, on June 23, 2014, Messrs. Adams, Strous, Linares and McGuire resigned as directors effective immediately; the Board expanded the size of the Board to 7 directors and appointed Messrs. McPheely, Wolkowitz, Smoak and Leaverton (the “Save Scio Nominees”) to fill all but one of the resulting vacancies. In addition, the Company agreed to nominate each of Messrs. Korn and Likly (the “Adams Group Nominees”) and the Save Scio Nominees for election to the Board at the Company’s 2014 annual meeting of stockholders. Pursuant to the Settlement Agreement, the Adams Group and the Save Scio Group must vote their shares of Common Stock for the other’s nominees for the next three years, and will also have replacement rights in the event these nominees are unable to serve as directors.
 
As of February 10, 2015, the parties to the ADI Derivative Complaint are waiting for the United States District Court to issue an order approving the dismissal of the litigation.
  
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.
 
The Company recognizes legal fees for litigation as they are incurred as professional and consulting fees. The Company then submits the expenses to our insurance carrier for reimbursement under our insurance policy. During the three months ended December 31, 2014, our insurance carrier did not make any payments related to prior period legal expenses. For the nine months ended December 31, 2014, our insurance carrier paid $168,015 for past legal fees from the prior fiscal year. This payment is recorded as a reduction to professional fees during the nine months ending December 31, 2014.
 
The Company reached an agreement with a former legal services provider that allowed the Company to settle outstanding past legal fees from prior fiscal years. This settlement of $165,453 was recorded as forgiveness of legal accounts payable during the three and nine months ending December 31, 2014.
INVESTMENT IN JOINT VENTURE
INVESTMENT IN JOINT VENTURE
NOTE 8 — INVESTMENT IN 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 50% members of RCDC.
 
The LLC Agreement provides that RCDC is a manager-managed limited liability company, and each of the Company and Renaissance will appoint one manager, with both such managers appointing a third manager.  The managers will manage the day-to-day operations of RCDC, subject to certain customary limitations on managerial actions that require the consent of the Company and Renaissance, including but not limited to making or guaranteeing loans, distributing cash or other property to the members of RCDC, entering into affiliate transactions, amending or modifying limited liability company organizational documents, and entering into major corporate events, such as a merger, acquisition or asset sale.
 
The arrangement was entered into in order to facilitate the development of procedures and recipes for, and to market and sell, lab-grown fancy-colored diamonds.  Pursuant to the LLC Agreement, the arrangement will last three years, unless terminated earlier, with the option to automatically renew for additional two-year periods.
 
The Company made an initial $1,000 investment in RCDC and was granted a 50% equity stake. RCDC has the right of first refusal to purchase diamond gemstones from the Company, including rough diamond preforms or processed stones.  Renaissance may sell seed stock to RCDC for production by the Company.  RCDC will purchase rough gemstones produced by the Company, finish the rough gemstones and, in turn, sell the finished stones to various retailers and other participants in the market for gemstones.  Profits generated by RCDC’s operations will be distributed between the Company and Renaissance according to the terms of the LLC Agreement.
 
Through December 31, 2014 the operations of RCDC have been focused on the development and processing of diamond material into finished Gemstone material. RCDC has had limited sales of finished goods to its customers through December 31, 2014. Through December 31, 2014, the Company has sold product to RCDC valued at $69,050. The Company defers recognition of revenues and expenses on these sales to RCDC until finished goods are sold by RCDC. At December 31, 2014, the Company has deferred $61,675 of revenue and $55,739 of expenses related to our sales to RCDC. The Company anticipates recognizing this revenue as RCDC sells through its inventory.
 
The Company anticipates accounting for RCDC utilizing the equity method of accounting. Based on the developmental stage of RCDC and lack of detailed financial information at December 31, 2014, the Company has not recognized any portion of income or losses from RCDC in its financial statements.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
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.
 
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:
 
·
Successfully raised $4 million in investment in the Company in the form of private placements of common shares to accredited investors and secured debt. Funds have been used to fund current operations and re-finance higher interest rate secured debt;
 
·
Established a joint venture with Renaissance Diamonds, Inc. focused on the creation of recipes and procedures to develop, market, and sell lab-grown fancy-colored diamonds;
 
·
Continued to focus efforts on new business development opportunities to generate revenues and diversify our customer base; and
 
·
Enhanced efforts on optimizing production for existing manufacturing capabilities.
 
In the opinion of management, 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 all of 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 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, 2014 and March 31, 2014 and the results of operations and cash flows for the three and nine month interim periods ended December 31, 2014 and 2013. 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, 2014 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, 2014.
 
In accordance with Accounting Standards Codification (“ASC”) 323, Investments—Equity Method and Joint Ventures, the Company uses the equity method of accounting for investments in corporate joint ventures for which the Company has the ability to exercise significant influence but does not control and is not the primary beneficiary. Significant influence typically exists if the Company has a 20% to 50% ownership interest in the venture unless predominant evidence to the contrary exists. Under this method of accounting, the Company records its proportionate share of the net earnings or losses of equity method investees and a corresponding increase or decrease to the investment balances. Cash payments to equity method investees such as additional investments, loans and advances and expenses incurred on behalf of investees, as well as payments from equity method investees such as dividends, distributions and repayments of loans and advances are recorded as adjustments to investment balances. When the Company’s carrying value in an equity method investee is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company guaranteed obligations of the equity method investee or has committed additional funding.   When the equity method investee subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.  The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
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:
 
 
 
December 31,
 
 
 
2014
 
2013
 
Common stock options and warrants
 
 
5,799,295
 
 
9,338,045
 
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, 2014 or March 31, 2014.
Other Receivables
 
As of March 31, 2014, the Company considered a pending insurance settlement over the actions of a Company supplier of $89,192 as an other receivable. This settlement was paid during the nine months ended December 31, 2014.
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:
 
 
 
December 31,
 
March 31,
 
 
 
2014
 
2014
 
Raw materials and supplies
 
$
104,888
 
$
35,543
 
Work in process
 
 
19,038
 
 
25,611
 
Finished goods
 
 
91,276
 
 
91,663
 
 
 
$
215,202
 
$
152,817
 
 
The Company continues to experience selling prices lower than cost. While we did not record a lower of cost or market adjustment during the three month period ended December 31, 2014, we have recorded a lower of cost or market write down of $68,722 for inventory produced during the nine month period then ended. The Company did not record a lower of cost or market write down for the three or nine month periods ended December 31, 2013. The estimation of the total write-down involves management judgments and assumptions including assumptions regarding future selling price forecasts, the estimated costs to complete, disposal costs and a normal profit margin.
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.
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. During the three months ended December 31, 2014, management evaluated assets included in IPRD and determined that certain projects will 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.  There were no impairment charges during the three and nine months ended December 31, 2013.
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.
 
The carrying value of cash and cash equivalents, accounts receivable, other assets and trade accounts payable approximates fair value due to the short-term nature of these instruments.
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 recognizes licensing and development revenues in accordance with the contractual terms of the agreements.
 
For product sales made by the Company to our joint venture partners for further value add and ultimate sale to customers, the Company defers recognition of revenues and associated expenses on these sales until finished goods are sold by the joint venture to its customer.
Recent Accounting Pronouncements
 
In July 2013, the FASB issued ASC 2013-11, “Income Taxes – Presentation of an Unrecognized Tax benefit When a Net Operation Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”) which is part of Accounting Standards Codification (“ASC”) 740: Income Taxes. The new guidance requires an entity to present an unrecognized tax benefit and an NOL carryforward, a similar tax loss or a tax credit carryforward on a net basis as part of a deferred tax asset, unless the unrecognized tax benefit is not available to reduce the deferred tax asset component or would not be utilized for that purpose, then a liability would be recognized. ASU 2013-11 is effective for annual and interim periods for fiscal years beginning after December 15, 2013. The Company adopted this new standard for the fiscal year ended March 31, 2015 and the adoption has not had a significant impact on its financial statements.
 
In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers (Topic 606).” This guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company will adopt this standard in fiscal year 2018. The Company has not yet determined the effect, if any, that the adoption of this standard will have on the Company’s financial position or results of operations.
  
There are currently no other accounting standards that have been issued but not yet adopted by the Company that are expected to have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)
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,
 
 
 
2014
 
2013
 
Common stock options and warrants
 
 
5,799,295
 
 
9,338,045
 
The components of inventories are as follows:
 
 
 
December 31,
 
March 31,
 
 
 
2014
 
2014
 
Raw materials and supplies
 
$
104,888
 
$
35,543
 
Work in process
 
 
19,038
 
 
25,611
 
Finished goods
 
 
91,276
 
 
91,663
 
 
 
$
215,202
 
$
152,817
 
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
 
INTANGIBLE ASSETS (Tables)
Intangible assets consist of the following:
 
 
 
 
 
December 31,
 
March 31,
 
 
 
Life
 
2014
 
2014
 
Patents, gross
 
6.75 – 19.46
 
$
8,135,063
 
$
8,135,063
 
In-process research and development
 
Indefinite
 
 
1,832,370
 
 
2,250,435
 
 
 
 
 
 
9,967,433
 
 
10,385,498
 
Accumulated amortization
 
 
 
 
(1,725,779)
 
 
(1,144,858)
 
Net intangible assets
 
 
 
$
8,241,654
 
$
9,240,640
 
Total annual amortization expense of finite lived intangible assets is estimated to be as follows:
 
Fiscal Year Ending
 
 
 
Three months ending March 31, 2015
 
$
193,710
 
March 31, 2016
 
 
774,840
 
March 31, 2017
 
 
774,840
 
March 31, 2018
 
 
774,840
 
March 31, 2019
 
 
774,840
 
Thereafter
 
$
3,116,214
 
SHARE-BASED COMPENSATION (Tables)
The following sets forth the options to purchase shares of the Company’s stock issued and outstanding as of December 31, 2014:
 
 
 
 
Weighted-
 
Weighted-Average
 
 
 
 
 
Average Exercise
 
Remaining
 
Options
 
Shares
 
Price
 
Contractual Term
 
Options Outstanding March 31, 2014
 
 
4,342,500
 
$
0.77
 
 
1.75
 
Granted
 
 
 
 
 
 
 
Exercised
 
 
 
 
 
 
 
Expired/cancelled
 
 
(4,110,000)
 
 
0.79
 
 
 
Options Outstanding December 31, 2014
 
 
232,500
 
$
0.35
 
 
1.70
 
Exercisable at December 31, 2014
 
 
23,125
 
$
0.44
 
 
1.45
 
A summary of the status of non-vested shares as of December 31, 2014 and changes during the nine months ended December 31, 2014 is presented below:
 
 
 
 
 
Weighted Average
 
 
 
 
 
Grant-Date
 
Non-vested Shares
 
Shares
 
Fair Value
 
Non-vested at March 31, 2014
 
 
2,414,792
 
$
0.49
 
Granted
 
 
 
 
 
Vested
 
 
(122,000)
 
 
0.43
 
Expired/cancelled: non-vested
 
 
(2,083,417)
 
 
0.50
 
Non-vested at December 31, 2014
 
 
209,375
 
$
0.21
 
The following table summarizes information about stock options outstanding by price as of December 31, 2014:
 
 
 
 
Options Outstanding
 
Options Exercisable
 
Exercise Price
 
Number
Outstanding
 
Weighted Average
Remaining
Contractual Life
(years)
 
Weighted Average
Exercise Price
 
Number of
Shares
 
Weighted Average
Exercise Price
 
$
0.80
 
 
7,500
 
 
0.52
 
$
0.80
 
 
5,500
 
$
0.80
 
$
0.33
 
 
225,000
 
 
1.73
 
 
0.33
 
 
17,625
 
 
0.33
 
 
 
 
 
232,500
 
 
1.70
 
$
0.35
 
 
23,125
 
$
0.44
 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details)
9 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Common stock options and warrants (in shares)
5,799,295 
9,338,045 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1) (USD $)
Dec. 31, 2014
Mar. 31, 2014
Inventories
 
 
Raw materials and supplies
$ 104,888 
$ 35,543 
Work in process
19,038 
25,611 
Finished goods
91,276 
91,663 
Inventory Net
$ 215,202 
$ 152,817 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2)
9 Months Ended
Dec. 31, 2014
Machinery and equipment |
Maximum
 
Property, Plant and Equipment
 
Estimated useful lives
15 years 
Machinery and equipment |
Minimum
 
Property, Plant and Equipment
 
Estimated useful lives
3 years 
Furniture and fixtures |
Maximum
 
Property, Plant and Equipment
 
Estimated useful lives
10 years 
Furniture and fixtures |
Minimum
 
Property, Plant and Equipment
 
Estimated useful lives
3 years 
Engineering equipment |
Maximum
 
Property, Plant and Equipment
 
Estimated useful lives
12 years 
Engineering equipment |
Minimum
 
Property, Plant and Equipment
 
Estimated useful lives
5 years 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Textual) (USD $)
3 Months Ended 9 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2014
Dec. 31, 2013
Mar. 31, 2014
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 
 
 
 
Other Receivables
 
 
 
 
$ 89,192 
Inventory reserves
68,722 
 
68,722 
 
 
Proceeds from Issuance of Private Placement
 
 
4,000,000 
 
 
Impairment Charge
418,065 
418,065 
 
In-process research and development
 
 
 
 
 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 
 
 
 
Impairment Charge
$ 418,065 
 
$ 418,065 
 
 
Maximum
 
 
 
 
 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 
 
 
 
Equity Method Investment, Ownership Percentage
50.00% 
 
50.00% 
 
 
Minimum
 
 
 
 
 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 
 
 
 
Equity Method Investment, Ownership Percentage
20.00% 
 
20.00% 
 
 
INTANGIBLE ASSETS (Details) (USD $)
9 Months Ended
Dec. 31, 2014
Mar. 31, 2014
Dec. 31, 2014
Patent
Mar. 31, 2014
Patent
Dec. 31, 2014
Patent
Minimum
Dec. 31, 2014
Patent
Maximum
Dec. 31, 2014
In-process research and development
Mar. 31, 2014
In-process research and development
INTANGIBLE ASSETS
 
 
 
 
 
 
 
 
Finite-Lived Intangible Assets, Gross
$ 9,967,433 
$ 10,385,498 
$ 8,135,063 
$ 8,135,063 
 
 
$ 1,832,370 
$ 2,250,435 
Accumulated amortization
(1,725,779)
(1,144,858)
 
 
 
 
 
 
Net intangible assets
$ 8,241,654 
$ 9,240,640 
 
 
 
 
 
 
Amortization period
 
 
 
 
6 years 9 months 
19 years 5 months 16 days 
 
 
INTANGIBLE ASSETS (Details 1) (USD $)
Dec. 31, 2014
Estimated annual amortization expense of intangible assets
 
Three months ending March 31, 2015
$ 193,710 
March 31, 2016
774,840 
March 31, 2017
774,840 
March 31, 2018
774,840 
March 31, 2019
774,840 
Thereafter
$ 3,116,214 
INTANGIBLE ASSETS (Details Textual) (USD $)
3 Months Ended 9 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2014
Dec. 31, 2013
Finite-Lived Intangible Assets [Line Items]
 
 
 
 
Intangible Assets
$ 193,710 
$ 193,753 
$ 580,921 
$ 581,258 
Impairment charge
418,065 
418,065 
In-process research and development
 
 
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
 
 
Impairment charge
$ 418,065 
 
$ 418,065 
 
NOTES PAYABLE (Details Textual) (USD $)
9 Months Ended 1 Months Ended
Dec. 16, 2014
Oct. 11, 2013
Oct. 16, 2014
Revolving Promissory Note
Oct. 16, 2014
Revolving Promissory Note
Replaced With June 2013 Promissory Note
Oct. 16, 2014
Revolving Promissory Note
Replaced With October 2013 Promissory Note
Oct. 16, 2014
Deferred Interest Promissory Note
Dec. 31, 2014
Line of Credit
Oct. 11, 2013
Line of Credit
Jun. 21, 2013
Line of Credit
Dec. 31, 2014
Line of Credit
Maximum
Oct. 11, 2013
Amended Loan Agreement
Oct. 11, 2013
Additional Loan
Dec. 18, 2014
HGI Loan Agreement
Dec. 16, 2014
HGI Loan Agreement
Notes payable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maximum borrowing capacity
 
 
 
 
 
 
 
 
$ 1,000,000 
 
 
 
 
$ 2,000,000 
Annual interest rate (as a percent)
 
 
 
 
 
 
18.00% 
 
 
 
18.00% 
 
 
7.25% 
Service charge on late payment (as a percent)
 
 
 
 
 
 
3.00% 
 
 
 
 
 
 
 
Accommodation fees (as a percent)
 
 
 
 
 
 
 
 
 
10.00% 
 
 
 
 
Periodic collateral monitoring fee for the first six months
 
 
 
 
 
 
2,000 
 
 
 
 
 
 
 
Periodic collateral monitoring fee for the last six months
 
 
 
 
 
 
1,000 
 
 
 
 
 
 
 
Additional borrowing capacity
 
 
 
 
 
 
 
 
 
 
500,000 
 
 
 
Loan draw
 
 
 
 
 
 
 
 
 
 
 
280,750 
2,000,000 
 
Applicable fees
 
 
 
 
 
 
 
 
 
 
 
30,750 
 
 
Interest reserve established
 
 
 
 
 
 
 
90,000 
 
 
 
133,500 
 
 
Accommodation fees
 
 
 
 
 
 
 
 
 
 
25,000 
 
 
 
Closing fee
 
 
 
 
 
 
 
 
 
 
3,250 
 
 
 
Line of Credit Facility, Amount Outstanding
 
1,000,000 
1,500,000 
1,000,000 
500,000 
63,619 
 
 
 
 
 
 
 
 
Line of Credit Facility, Interest Rate at Period End
 
 
18.00% 
 
 
18.00% 
 
 
 
 
 
 
 
 
Minimum Amount Of Maintain Book Networth
$ 4,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
CAPITAL STOCK (Details Textual) (USD $)
9 Months Ended 1 Months Ended 9 Months Ended 0 Months Ended 9 Months Ended
Dec. 31, 2014
Sep. 25, 2014
Mar. 31, 2014
Jul. 15, 2014
Accredited Investors
Oct. 30, 2014
Bradley Robb
Dec. 31, 2014
Common Stock
Apr. 12, 2014
Mr Joseph Cunningham
Dec. 31, 2014
Mr Joseph Cunningham
Oct. 30, 2014
Affiliated Entity
CAPITAL STOCK
 
 
 
 
 
 
 
 
 
Common stock, shares authorized
75,000,000 
 
75,000,000 
 
 
 
 
 
 
Common stock, par value (in dollars per share)
$ 0.001 
 
$ 0.001 
 
 
 
 
 
 
Consulting Expenses
 
 
 
 
 
 
$ 4,000 
 
 
Common stock issued in exchange for consulting services per month (in shares)
 
 
 
 
 
 
20,000 
 
 
Common stock issued in exchange for consulting services (in shares)
 
 
 
 
 
 
 
80,000 
 
Common stock price in exchange for consulting services (in dollars per shares)
 
 
 
$ 0.30 
 
 
 
$ 0.43 
 
Common stock issued in exchange for consulting services
 
 
 
 
15,000 
 
 
34,200 
 
Common stock, issued (in shares)
57,198,166 
 
50,739,312 
 
 
 
 
 
 
Common stock, outstanding (in shares)
57,198,166 
 
50,739,312 
 
 
 
 
 
 
Shares held in treasury
1,000,000 
 
1,000,000 
 
 
 
 
 
 
Warrants outstanding
5,566,795 
 
 
 
 
 
 
 
 
Class of Warrant or Right, Exercise Price of Warrants or Rights
$ 1.53 
 
 
 
 
 
 
 
 
Common Stock, Capital Shares Reserved for Future Issuance
 
6,666,667 
 
2,000,000 
50,000 
 
 
 
95,522 
Development Stage Entities, Stock Issued, Shares, Issued for Cash
 
 
 
 
 
6,666,664 
 
 
 
Development Stage Entities, Equity Issuance, Per Share Amount
$ 0.30 
 
 
 
$ 0.30 
$ 0.30 
 
 
 
Development Stage Entities, Stock Issued, Value, Issued for Cash
2,000,000 
 
 
 
 
6,667 
 
 
 
Common Stock, Potential Value, Future Issuance
 
2,000,000 
 
 
 
 
 
 
 
Accrued Rent
 
 
 
 
 
 
 
 
$ 28,657 
SHARE-BASED COMPENSATION (Details) (USD $)
9 Months Ended 12 Months Ended
Dec. 31, 2014
Mar. 31, 2014
Options
 
 
Options outstanding at beginning of period (in shares)
4,342,500 
 
Granted (in shares)
 
Exercised (in shares)
 
Expired/Cancelled (in shares)
(4,110,000)
 
Options outstanding at the end of the period (in shares)
232,500 
4,342,500 
Exercisable at the end of the period (in shares)
23,125 
 
Weighted Average Exercise Price
 
 
Options outstanding at the beginning of the period (in dollars per share)
$ 0.77 
 
Granted (in dollars per share)
$ 0 
 
Exercised (in dollars per share)
$ 0 
 
Expired/cancelled (in dollars per share)
$ 0.79 
 
Options outstanding at the end of the period (in dollars per share)
$ 0.35 
$ 0.77 
Exercisable at the end of the period (in dollars per share)
$ 0.44 
 
Weighted-Average Remaining Contractual Term
 
 
Options outstanding
1 year 8 months 12 days 
1 year 9 months 
Exercisable at the end of the period
1 year 5 months 12 days 
 
SHARE-BASED COMPENSATION (Details 1) (USD $)
9 Months Ended
Dec. 31, 2014
Shares
 
Non-vested at the beginning of the period (in shares)
2,414,792 
Granted (in shares)
Vested (in shares)
(122,000)
Expired/cancelled: non-vested (in shares)
(2,083,417)
Non-vested at the end of the period
209,375 
Weighted Average Grant-Date Fair Value
 
Non-vested at the beginning of the period (in dollars per share)
$ 0.49 
Granted (in dollars per share)
$ 0 
Vested (in dollars per share)
$ 0.43 
Expired/cancelled: non-vested (in dollars per share)
$ 0.50 
Non-vested at the end of the period (in dollars per share)
$ 0.21 
SHARE-BASED COMPENSATION (Details 2) (USD $)
9 Months Ended
Dec. 31, 2014
Options Outstanding
 
Number Outstanding
232,500 
Weighted Average Remaining Contractual Life
1 year 8 months 12 days 
Weighted Average Exercise Price (in dollars per share)
$ 0.35 
Options Exercisable
 
Number of Shares
23,125 
Weighted Average Exercise Price (in dollars per share)
$ 0.44 
Exercise Price One
 
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
 
Exercise Price
$ 0.80 
Options Outstanding
 
Number Outstanding
7,500 
Weighted Average Remaining Contractual Life
6 months 7 days 
Weighted Average Exercise Price (in dollars per share)
$ 0.80 
Options Exercisable
 
Number of Shares
5,500 
Weighted Average Exercise Price (in dollars per share)
$ 0.80 
Exercise Price Two
 
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
 
Exercise Price
$ 0.33 
Options Outstanding
 
Number Outstanding
225,000 
Weighted Average Remaining Contractual Life
1 year 8 months 23 days 
Weighted Average Exercise Price (in dollars per share)
$ 0.33 
Options Exercisable
 
Number of Shares
17,625 
Weighted Average Exercise Price (in dollars per share)
$ 0.33 
SHARE-BASED COMPENSATION (Details Textual) (USD $)
9 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Mar. 31, 2014
May 7, 2012
Number of shares of common stock authorized under the 2012 Share Incentive Plan
 
 
 
5,000,000 
Granted (in dollars per share)
$ 0 
 
 
 
Unrecognized compensation cost related to nonvested awards
$ 44,529 
 
 
 
Weighted average period to recognize unrecognized compensation expense related to nonvested awards
1 year 8 months 19 days 
 
 
 
Intrinsic value of options outstanding
129,000 
 
 
Total compensation costs
193,150 
 
 
Deferred tax asset recorded, relating to recognized compensation cost
$ 0 
$ 0 
 
 
Maximum [Member]
 
 
 
 
Granted (in dollars per share)
$ 0.80 
 
 
 
Minimum [Member]
 
 
 
 
Granted (in dollars per share)
$ 0.70 
 
 
 
RELATED PARTIES (Details Textual) (USD $)
3 Months Ended
Dec. 31, 2014
Karl Leaverton
 
Related Party Transaction [Line Items]
 
Stock Issued During Period, Shares, New Issues
333,333 
Stock Issued During Period, Value, New Issues
$ 100,000 
Bruce Likly
 
Related Party Transaction [Line Items]
 
Stock Issued During Period, Shares, New Issues
375,000 
Stock Issued During Period, Value, New Issues
112,500 
Lewis Smoak
 
Related Party Transaction [Line Items]
 
Stock Issued During Period, Shares, New Issues
333,333 
Stock Issued During Period, Value, New Issues
100,000 
Ben Wolkowitz
 
Related Party Transaction [Line Items]
 
Stock Issued During Period, Shares, New Issues
158,333 
Stock Issued During Period, Value, New Issues
$ 47,500 
LITIGATION (Details Textual) (USD $)
3 Months Ended 9 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2014
Dec. 31, 2013
Litigation
 
 
 
 
Malpractice Loss Contingency, Insurance Recoveries
 
 
$ 168,015 
 
Litigation Settlement, Amount
$ 165,453 
$ 0 
$ 165,453 
$ 0 
INVESTMENT IN JOINT VENTURE (Details Textual) (RCDC [Member], USD $)
9 Months Ended
Dec. 31, 2014
RCDC [Member]
 
Schedule of Equity Method Investments [Line Items]
 
Equity Method Investment, Aggregate Cost
$ 1,000 
Equity Method Investment, Ownership Percentage
50.00% 
Equity Method Investment, Amount Sold
69,050 
Equity Method Investment, Summarized Financial Information, Revenue
61,675 
Equity Method Investment Related Expenses
$ 55,739