SCIO DIAMOND TECHNOLOGY CORP, 10-Q filed on 11/14/2013
Quarterly Report
Document and Entity Information
6 Months Ended
Sep. 30, 2013
Nov. 11, 2013
Document and Entity Information
 
 
Entity Registrant Name
Scio Diamond Technology Corp 
 
Entity Central Index Key
0001488934 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2013 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--03-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Smaller Reporting Company 
 
Entity Common Stock, Shares Outstanding
 
50,264,312 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q2 
 
CONDENSED BALANCE SHEETS (USD $)
Sep. 30, 2013
Mar. 31, 2013
Current Assets:
 
 
Cash and cash equivalents
$ 6,822 
$ 223,257 
Accounts receivable, net
1,091 
69,042 
Inventory, net
431,351 
538,948 
Prepaid expenses
95,397 
34,455 
Prepaid rent
23,050 
23,050 
Total current assets
557,711 
888,752 
Property, plant and equipment
 
 
Facility
897,596 
883,246 
Manufacturing equipment
3,820,323 
3,813,865 
Other equipment
71,059 
69,331 
Total property, plant and equipment
4,788,978 
4,766,442 
Less accumulated depreciation
(847,298)
(493,533)
Net property, plant and equipment
3,941,680 
4,272,909 
Intangible assets, net
9,628,145 
10,015,651 
Prepaid rent, noncurrent
53,813 
65,338 
Other assets
 
13,800 
TOTAL ASSETS
14,181,349 
15,256,450 
Current Liabilities:
 
 
Accounts payable
656,294 
285,651 
Customer deposits
44,807 
 
Accrued expenses
646,579 
730,698 
Notes payable
974,105 
 
Total current liabilities
2,321,785 
1,016,349 
Other liabilities
67,169 
50,195 
TOTAL LIABILITIES
2,388,954 
1,066,544 
Common stock $0.001 par value, 75,000,000 shares authorized; 50,264,312 and 47,736,812 shares issued and outstanding at September 30, 2013 and March 31, 2013, respectively
50,264 
47,737 
Additional paid-in capital
24,274,211 
23,789,478 
Accumulated deficit
(12,531,080)
(9,646,309)
Treasury stock, 1,000,000 shares at September 30, 2013 and March 31, 2013
(1,000)
(1,000)
Total stockholders' equity
11,792,395 
14,189,906 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$ 14,181,349 
$ 15,256,450 
CONDENSED BALANCE SHEETS (Parenthetical) (USD $)
Sep. 30, 2013
Mar. 31, 2013
CONDENSED BALANCE SHEETS
 
 
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
50,264,312 
47,736,812 
Common stock, shares outstanding
50,264,312 
47,736,812 
Treasury stock, shares
1,000,000 
1,000,000 
CONDENSED STATEMENTS OF OPERATIONS (USD $)
3 Months Ended 6 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Revenue
 
 
 
 
Gross revenue
$ 236,235 
$ 61,149 
$ 495,215 
$ 73,101 
Cost of goods sold
 
 
 
 
Cost of goods sold
533,677 
194,421 
1,227,787 
212,892 
Gross margin
(297,442)
(133,272)
(732,572)
(139,791)
General, administrative, and pre-operating expenses
 
 
 
 
Professional and consulting fees
478,537 
524,291 
992,899 
749,213 
Salaries and benefits
188,601 
448,557 
425,438 
1,792,654 
Rent, equipment lease and facilities expense
37,892 
78,484 
75,248 
230,172 
Marketing costs
13,167 
8,763 
26,416 
23,943 
Depreciation
200,018 
4,524 
399,892 
6,474 
Corporate general and administrative
83,554 
63,029 
185,360 
139,336 
Loss from operations
(1,299,211)
(1,260,920)
(2,837,825)
(3,081,583)
Other income (expense)
 
 
 
 
Interest expense
(42,364)
(756)
(46,946)
(1,592)
Net loss
$ (1,341,575)
$ (1,261,676)
$ (2,884,771)
$ (3,083,175)
Basic:
 
 
 
 
Weighted average number of shares outstanding (in shares)
49,319,257 
33,495,227 
48,820,118 
30,042,828 
Loss per share (in dollars per share)
$ (0.03)
$ (0.04)
$ (0.06)
$ (0.10)
Fully diluted:
 
 
 
 
Weighted average number of shares outstanding (in shares)
49,319,257 
33,495,227 
48,820,118 
30,042,828 
Loss per share (in dollars per share)
$ (0.03)
$ (0.04)
$ (0.06)
$ (0.10)
CONDENSED STATEMENTS OF CASH FLOW (USD $)
6 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Cash flows from operating activities:
 
 
Net loss
$ (2,884,771)
$ (3,083,175)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
745,170 
161,241 
Expense for stock and inventory issued in exchange for services
365,018 
 
Employee stock based compensation
133,409 
1,267,749 
Changes in assets and liabilities:
 
 
Decrease/(increase) in accounts receivable
67,951 
(3,064)
Decrease/(increase) in prepaid expenses and rent
30,482 
(8,303)
Decrease/(increase) in inventory and other assets
96,304 
(153,638)
Increase in accounts payable
370,643 
72,879 
Increase in customer deposits
44,807 
40,979 
Decrease in accrued expenses
(70,015)
(144,928)
Increase in other liabilities
16,974 
18,135 
Net cash used in operating activities
(1,084,028)
(1,832,125)
Cash flows from investing activities:
 
 
Deposits for property, plant and equipment
 
(250,010)
Purchase of property, plant and equipment
(22,536)
(659,071)
Net cash used in investing activities
(22,536)
(909,081)
Cash flows from financing activities:
 
 
Proceeds from note payable
974,105 
 
Finance charges paid on note payable
(84,105)
 
Proceeds from sale of common stock - net of fees
129 
3,781,160 
Payments on notes payable
 
(50,000)
Net cash provided by financing activities
890,129 
3,731,160 
Change in cash and cash equivalents
(216,435)
989,954 
Cash and cash equivalents, beginning of period
223,257 
808,516 
Cash and cash equivalents, end of period
6,822 
1,798,470 
Cash paid for:
 
 
Interest
18,874 
 
Non-cash investing and financing activities:
 
 
Purchase of assets funded by note payable
 
100,000 
Warrants issued for real property lease
 
39,000 
Purchase of assets funded through ADGC subscription rights
 
$ 790,000 
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (USD $)
Total
Common Stock
Additional Paid in Capital
Treasury Stock
Accumulated Deficit
Balance at Mar. 31, 2013
$ 14,189,906 
$ 47,737 
$ 23,789,478 
$ (1,000)
$ (9,646,309)
Balance (in shares) at Mar. 31, 2013
47,736,812 
47,736,812 
 
(1,000,000)
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
Common stock issued in exchange for consulting services
200,450 
527 
199,923 
 
 
Common stock issued in exchange for consulting services (in shares)
 
527,500 
 
 
 
Common stock issued in exchange for past legal services
153,272 
1,000 
152,272 
 
 
Common stock issued in exchange for past legal services (in shares)
 
1,000,000 
 
 
 
Administrative fee received for previous stock issuance
129 
 
129 
 
 
Common stock issued for indemnification of legal settlement
 
1,000 
(1,000)
 
 
Common stock issued for indemnification of legal settlement (in shares)
 
1,000,000 
 
 
 
Employee stock based compensation
133,409 
 
133,409 
 
 
Net loss for the period
(2,884,771)
 
 
 
(2,884,771)
Balance at Sep. 30, 2013
$ 11,792,395 
$ 50,264 
$ 24,274,211 
$ (1,000)
$ (12,531,080)
Balance (in shares) at Sep. 30, 2013
50,264,312 
50,264,312 
 
(1,000,000)
 
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 original business plan of the Company was focused on offsetting carbon dioxide 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.

 

Prior to October 1, 2012, the Company was a development stage company. Developmental activities have ceased and planned principal operations have commenced.

 

On September 16, 2013, the Company entered into a series of agreements with SAAMABA, LLC and S21 Research Holdings (the “Grace Rich Agreements”) to form a joint venture with operations in the People’s Republic of China to deploy 100 Scio designed diamond growing machines.  The agreements allow for the expansion of the joint venture to 400 or more machines.  Under the Grace Rich Agreements, the Company has agreed to license its proprietary technology for the manufacture of diamond gemstones of agreed upon specifications.  In exchange for the license, the Company will receive licensing and development revenue and a 30% ownership position in the joint venture.  In addition to the licensed technology, the Grace Rich Agreements include obligations for the Company to provide and be compensated for technology consulting services to the joint venture to support the start-up of operations.

 

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:

 

·                                          On-going solicitation of investment in the Company in the form of private placements of common shares, secured and unsecured debt to accredited investors;

·                                          Focused efforts on new business development opportunities to generate incremental revenues and diversify our customer base; and

·                                          Began exploring strategic joint ventures, technology licensing agreements and dedicated contract manufacturing to expand company revenue and cash flow including our recently agreed to joint venture in China.

 

In the opinion of management, these actions should 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 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 September 30, 2013 and March 31, 2013 and the results of operations and cash flows for the three and six month interim periods ended September 30, 2013 and 2012.  All 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, 2013 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, 2013.

 

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:

 

 

 

September 30,

 

 

 

2013

 

2012

 

Common stock options and warrants

 

9,778,045

 

10,791,264

 

 

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 September 30, 2013 or March 31, 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:

 

 

 

September 30,
2013

 

March 31,
2013

 

Raw materials and supplies

 

$

132,462

 

$

64,255

 

Work in process

 

22,486

 

 

Finished goods

 

331,911

 

474,693

 

 

 

486,859

 

538,948

 

Inventory reserves

 

(55,508

)

 

 

 

$

431,351

 

$

538,948

 

 

During the six months ended September 30, 2013, we established a lower cost of market reserve of $55,508 due to expected selling prices being lower than cost.  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 an expected 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. 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 six months ended September 30, 2013 or 2012.

 

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 September 2012, the Company issued to certain current and former stockholders of Apollo Diamond Gemstone Corporation (“ADGC”) that were at the time 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.

 

As of September 30, 2013, the Company had 425,545 warrants outstanding with exercise prices of $0.70 per share. The warrants 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 model.  In addition, the Company has 200,000 warrants outstanding with exercise prices of $1.60 per share.  These warrants expire in 2018 and were issued by the Company as compensation to a Board member and an unaffiliated third party for efforts related to the Company’s largest customer and were valued at $0.57 per warrant using the Black-Scholes model.

 

The carrying value of cash and cash equivalents including restricted cash, accounts receivable, other assets and trade accounts payable approximates fair value due to the short-term nature of these instruments.

 

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. The Company also maintains a provision for estimating returns and allowances based upon historical experience.

 

Recent Accounting Pronouncements

 

There are currently no 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.

ASSET PURCHASES
ASSET PURCHASES

NOTE 2 — ASSET PURCHASES

 

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”). The Company paid the $100,000 cash portion of the ADGC Asset Purchase during the month of December 2012. The ADGC Offering began in June 2012 and was completed in March 2013.  The Company obtained a third-party valuation to support the fair value of the assets acquired. This valuation determined a value of $770,000 for the subscription rights.  The 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 ADGC Offering was completed in March 2013 and resulted in the issuance of an aggregate of 988,380 shares of the Company’s common stock.

INTANGIBLE ASSETS
INTANGIBLE ASSETS

NOTE 3 — INTANGIBLE ASSETS

 

During the six months ended September 30, 2013, the Company evaluated its patent portfolio and allocated $601,000 of the previously acquired in-process research and development from the ADGC Asset Purchase to specific patents related to the gemstone market that are being used by the Company for its commercial operations. These patents were considered placed in service by the Company during the quarter ended June 30, 2013 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:

 

 

 

 

 

September 30,

 

March 31,

 

 

 

Life

 

2013

 

2013

 

Patents, gross

 

6.75 – 19.46

 

$

8,135,063

 

$

7,534,063

 

In-process research and development

 

Indefinite

 

2,250,435

 

2,851,435

 

 

 

 

 

10,385,498

 

10,385,498

 

Accumulated amortization

 

 

 

757,353

 

369,847

 

Net intangible assets

 

 

 

$

9,628,145

 

$

10,015,651

 

 

Total amortization expense for the three and six months ending September 30, 2013 was $193,753 and $387,506, respectively. There was no amortization expense for the three and six months ended September 30, 2012.

 

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

 

Fiscal Year Ending

 

 

 

Six months ending March 31, 2014

 

$

387,506

 

March 31, 2015

 

775,011

 

March 31, 2016

 

775,011

 

March 31, 2017

 

775,011

 

March 31, 2018

 

775,011

 

Thereafter

 

$

3,890,160

 

NOTES PAYABLE
NOTES PAYABLE

NOTE 4 — NOTES PAYABLE

 

On June 21, 2013, the Company entered into a loan agreement (the “Original 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.  At September 30, 2013, the Company had utilized a portion of these funds 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 Original 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 Original 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 Original 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 Original 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.

 

The Company had an outstanding balance on this note of $974,105 at September 30, 2013 and was compliant with all financial debt convents.  The remaining $25,895 of availability on this note is reserved to make certain interest payments on the note.  On October 11, 2013, the Company and Platinum amended the Original Loan Agreement to provide for an additional $500,000 of borrowing capacity as described in Note 9: Subsequent Events.

CAPITAL STOCK
CAPITAL STOCK

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 six months ending September 30, 2012, Company issued 2,538,750 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 $1,998,920.

 

On June 4, 2013 the Company engaged Arque Capital LTD., Maxwell Simon, Inc., and Stonegate Securities, Inc. to provide consulting services in connection with future capital raising activities.  The Company issued 165,000, 162,500 and 200,000 shares of its common stock, respectively to each of Arque Capital LTD., Maxwell Simon, Inc. and Stonegate Securities Inc., respectively as partial compensation for these engagements.  The Company recognized $200,450 in expense related to these share issuances.

 

On September 25, 2013 the Company issued 1,000,000 shares of its common stock to our attorneys Schwegman, Lundberg & Woessner in exchange for $153,272 of past legal services.

 

The Company had 50,264,312 shares of common stock issued and outstanding as of September 30, 2013 of which 1,000,000 were held in treasury.

 

The Company had 5,516,795 warrants outstanding with a weighted average exercise price of $1.53 per share as of September 30, 2013.  No warrants were issued in the six months ended September 30, 2013.

SHARE-BASED COMPENSATION
SHARE-BASED COMPENSATION

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.  As of September 30, 2013, 813,750 shares remained available for issuance under the Plan.

 

On September 25, 2013, the Company granted nine non-executive employees options to purchase a total of 500,000 shares of the Company’s stock.  These options vest based on the Company meeting various operating metric and cash flow targets.  The exercise price of $0.33 per share is equal to the closing price of a share of the Company’s common stock on the date of grant.  Using the Black-Scholes option pricing model, management has estimated the options issued on September 25, 2013 had a value of $0.21 per option on the date of the grant.  None of these options were vested upon issuance and the Company recognized no compensation costs for these options as of September 30, 2013.

 

The assumptions used and the calculated fair value of the September 30, 2013 options are as follows:

 

Expected dividend yield

 

0.00

%

Risk-free interest rate

 

.66

%

Expected life in years

 

3.00

 

Expected volatility

 

102.3

%

Weighted average calculated value of options granted

 

$

0.21

 

 

The following sets forth the options to purchase shares of the Company’s stock issued and outstanding as of September 30, 2013:

 

Options

 

Shares

 

Weighted-
Average Exercise
Price

 

Weighted-Average
Remaining
Contractual Term

 

Options Outstanding March 31, 2013

 

4,092,500

 

$

0.87

 

2.54

 

Granted

 

500,000

 

0.33

 

2.99

 

Exercised

 

 

 

 

Expired/cancelled

 

(406,250

)

0.88

 

 

Options Outstanding September 30, 2013

 

4,186,250

 

$

0.79

 

1.87

 

Exercisable at September 30, 2013

 

1,703,833

 

$

0.82

 

2.01

 

 

Prior to December 2012, the Company’s practice was to issue 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 September 30, 2013 and March 31, 2013 was $0 and $299,900, respectively.  The intrinsic value of options exercisable at September 30, 2013 and March 31, 2013 was $0 and $176,109, respectively.

 

A summary of the status of non-vested shares as of March 31, 2013 and changes during the six months ended September 30, 2013 is presented below.

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant-Date

 

Non-vested Shares

 

Shares

 

Fair Value

 

Non-vested at March 31, 2013

 

2,466,278

 

$

0.65

 

Granted

 

500,000

 

0.21

 

Vested

 

(343,750

)

0.73

 

Expired/cancelled: non-vested

 

(200,000

)

0.43

 

Non-vested at September 30, 2013

 

2,482,417

 

$

0.57

 

 

The Company estimates the fair value of options granted on the grant date utilizing the Black-Scholes Option model.  For the six months ended September 30, 2013 and 2012, the Company recognized $133,409 and $1,267,749, respectively, as compensation cost for options issued, and recorded related deferred tax asset of $0 for all periods.

 

At September 30, 2013, unrecognized compensation cost related to non-vested awards was $1,134,425.  This cost is expected to be recognized over a weighted average period of 2.75 years.  The total fair value of shares vested during the six months ended September 30, 2013 and 2012 was $133,409 and $997,165, respectively.

RELATED PARTIES
RELATED PARTIES

NOTE 7 — RELATED PARTIES

 

The Company incurred expenses of $19,658 and $64,266 for professional and consulting services provided by AdamsMonahan, LLP, a firm in which our board member, Edward S. Adams and former board member Michael R. Monahan, are partners, for the six months ended September 30, 2013 and 2012, respectively.  The Company and AdamsMonahan, LLP amicably terminated their professional relationship on June 30, 2013.

 

On June 5, 2012, the Company acquired substantially all of the assets of ADGC, consisting primarily of cultured 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 that are 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 external appraisal.  Mr. Adams and Mr. Monahan served in various capacities with ADGC through early 2011.

 

On March 6, 2013, the Board of Directors retained Mr. Michael Monahan, who at the time was a member of the Company’s Board, and Mr. Theo Strous, a current director, to provide consulting services for the Company at a total cost of $11,000 and $4,000 respectively, per month.  These consulting service agreements with both Messrs. Monahan and Strous were terminated effective June 30, 2013.  The Company recognized $45,000 in consulting expense for these services during the six months ended September 30, 2013.

 

On May 14, 2013 the Board of Directors created a special committee consisting of Mr. Theo Strous to evaluate a report to the Board of Directors by former counsel to the Company and certain actions of a former member of the Board of Directors and former Company officers. The report was completed at the end of June 2013. The Board of Directors approved the payment of $25,000 to Mr. Strous as compensation for his service on the special committee.

 

On March 25, 2013, the Board of Directors agreed to indemnify Messrs. Adams and Monahan for expenses incurred and common stock they provided to settle litigation in May 2012.  On May 21, 2013, the Company deemed issued the 1,000,000 shares previously allocated for indemnification of Messrs. Adams and Monahan and on July 2, 2013, the Company entered into an agreement with Mr. Adams to pay out remaining indemnification related liabilities of $117,305.93 at $7,500 per month through October 2014.

LITIGATION
LITIGATION

NOTE 8 — LITIGATION

 

On July 26, 2013, Bernard M. McPheely, Trustee for the Bernard M. McPheely Revocable Trust Dated May 25, 2012, Thomas P. Hartness, Trustee for the Thomas P. Hartness Revocable Trust Dated July 31, 2010, Brian McPheely and Robert Daisley (collectively, “plaintiffs”), derivatively and on behalf of the Company, filed a complaint in the Court of Common Pleas of the State of South Carolina, County of Greenville against Edward S. Adams (our Chairman), Michael R. Monahan (a former member of the Company’s Board of Directors), Robert Linares (a current member of the Board), Theodorus Strous (a current member of the Board) and the law firm of Adams Monahan, LLP (collectively, “defendants”), and the Company, as a nominal defendant (the “Scio Derivative Complaint”).  Bernard M. McPheely is a former member of the Company’s Board of Directors.

 

The Scio Derivative Complaint alleges (i) against defendants, breach of fiduciary duty, corporate waste and unjust enrichment; (ii) against Messrs. Strous and Linares and Adams Monahan LLP, aiding and abetting a breach of fiduciary duty; (iii) against Messrs. Adams and Monahan, civil conspiracy; (iv) against Messrs. Adams, Monahan and Linares, breach of fiduciary duty — controlling shareholder; and (v) against Mr. Strous and Adams Monahan LLP, aiding and abetting a breach of controlling shareholder duty.  The allegations relate to, among other things, certain actions allegedly taken by defendants in connection with: the acquisition by the Company of certain assets of Apollo Diamond, Inc. (“ADI”) (the “ADI Asset Purchase”); the ADGC Asset Purchase discussed in Note 2 above; the Company’s agreement to provide certain current and former stockholders of ADI and ADGC the opportunity to acquire up to approximately 16 million and 1 million shares, respectively, of common stock of the Company for $0.01 per share (collectively, the “ADI/ADGC Offering”); the provision of legal services by Adams Monahan LLP to the Company; certain equity issuances by the Company following the ADI/ADGC Offering; certain bonuses and other payments paid to members of the Board of Directors; and certain indemnification obligations undertaken by the Company in favor of Messrs. Adams and Monahan.

 

Plaintiffs are seeking direct and consequential damages sustained by the Company in an amount to be established through proof at trial, plus pre-judgment and post-judgment interest; appropriate equitable relief to remedy the alleged breaches of fiduciary duties; reasonable attorney’s fees and costs for the Company incurred in prosecuting the action; and other relief as deemed by the court to be just and proper. The defendants believe the Scio Derivative Complaint to be without merit and are vigorously defending it.

SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

NOTE 9: SUBSEQUENT EVENTS

 

On October 1, 2013, the Company’s Board of Directors approved the issuance of 68,750 stock options to each of Messrs. Adams, Linares, and Strous for their services throughout calendar 2013.  The grant is in accordance with the Company’s director compensation program that provides 6,250 options to each director for each Board meeting held.  All 206,250 options issued have an exercise price of $0.42 that reflects the Company’s closing stock price on the date of grant.

 

On October 11, 2013, the Company entered into a First Amendment to Loan Agreement (the “First Amendment”), dated October 11, 2013, with Platinum, which amends 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 existing $1 million secured revolving line of credit established under the Original Loan Agreement.  The Company may draw on the line to fund working capital.  The Additional Loan, which is represented by a Promissory Note dated October 11, 2013 (the “New Note”), matures on June 20, 2014.  On October 11, 2013, $280,750 was drawn on the Additional Loan, $30,750 of which was retained by Platinum to cover applicable fees.

 

The Company plans to utilize funds drawn on the Additional Loan to fund its ongoing operations.  Borrowings 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. An interest reserve of $133,500 has been set aside from the proceeds of the New Note to make required payments of interest, provided that interest billed to the Company will first be deducted from a $90,000 reserve established under the Original Note for payments of interest on the Original Note, until that reserve has been exhausted. The Amended Loan Agreement also provides 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.  The Company’s obligations under the Amended Loan Agreement are not guaranteed by any other party.  The Company may prepay borrowings without premium or penalty upon notice to Platinum as provided in the Amended Loan Agreement.  The Loan is secured by a security agreement, under which the Company grants 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 New Note provides for monthly interest payments commencing November 2013 and for repayment of all amounts drawn, together with accrued interest, on June 20, 2014.

 

On October 15, 2013, plaintiff Mark P. Sennott, as Trustee of the Sennott Family Charitable Trust, (“Plaintiff”) filed a complaint derivatively, on behalf of Apollo Diamond, Inc. (“Apollo”), in the U.S. District Court for the District of South Carolina, Greenville Division, against Edward S. Adams (our 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, “Defendants”).  This derivative complaint on Apollo’s behalf (the “Apollo Derivative Complaint”) alleges claims for breach of fiduciary duty, constructive fraud and unjust enrichment.  The allegations in the Apollo Derivative complaint are duplicative of the Scio Derivative Complaint allegations concerning Apollo, and repeat almost verbatim the allegations from earlier lawsuits filed and dismissed in 2012 against the Defendants, which were previously disclosed in the Company’s Form 10-Q for the six months ended September 30, 2012 and Form 10-K for fiscal year ended March 31, 2013.  Plaintiff is seeking direct and consequential damages sustained by Plaintiff in an amount to be established through proof at trial, plus pre-judgment and post-judgment interest; appropriate equitable relief to remedy the allegedly wrongful acts; reasonable attorney’s fees and costs incurred in prosecuting the action; and other relief as deemed by the court to be just and proper.  The Defendants believe the Apollo Derivative Complaint has no merit and are vigorously defending it.

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

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:

 

·                                          On-going solicitation of investment in the Company in the form of private placements of common shares, secured and unsecured debt to accredited investors;

·                                          Focused efforts on new business development opportunities to generate incremental revenues and diversify our customer base; and

·                                          Began exploring strategic joint ventures, technology licensing agreements and dedicated contract manufacturing to expand company revenue and cash flow including our recently agreed to joint venture in China.

 

In the opinion of management, these actions should 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 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 September 30, 2013 and March 31, 2013 and the results of operations and cash flows for the three and six month interim periods ended September 30, 2013 and 2012.  All 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, 2013 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, 2013.

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:

 

 

 

September 30,

 

 

 

2013

 

2012

 

Common stock options and warrants

 

9,778,045

 

10,791,264

 

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 September 30, 2013 or March 31, 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:

 

 

 

September 30,
2013

 

March 31,
2013

 

Raw materials and supplies

 

$

132,462

 

$

64,255

 

Work in process

 

22,486

 

 

Finished goods

 

331,911

 

474,693

 

 

 

486,859

 

538,948

 

Inventory reserves

 

(55,508

)

 

 

 

$

431,351

 

$

538,948

 

 

During the six months ended September 30, 2013, we established a lower cost of market reserve of $55,508 due to expected selling prices being lower than cost.  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 an expected 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. 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 six months ended September 30, 2013 or 2012.

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 September 2012, the Company issued to certain current and former stockholders of Apollo Diamond Gemstone Corporation (“ADGC”) that were at the time 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.

 

As of September 30, 2013, the Company had 425,545 warrants outstanding with exercise prices of $0.70 per share. The warrants 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 model.  In addition, the Company has 200,000 warrants outstanding with exercise prices of $1.60 per share.  These warrants expire in 2018 and were issued by the Company as compensation to a Board member and an unaffiliated third party for efforts related to the Company’s largest customer and were valued at $0.57 per warrant using the Black-Scholes model.

 

The carrying value of cash and cash equivalents including restricted cash, accounts receivable, other assets and trade accounts payable approximates fair value due to the short-term nature of these instruments.

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. The Company also maintains a provision for estimating returns and allowances based upon historical experience.

Recent Accounting Pronouncements

 

There are currently no 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.

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

 

 

 

 

September 30,

 

 

 

2013

 

2012

 

Common stock options and warrants

 

9,778,045

 

10,791,264

 

 

 

 

 

September 30,
2013

 

March 31,
2013

 

Raw materials and supplies

 

$

132,462

 

$

64,255

 

Work in process

 

22,486

 

 

Finished goods

 

331,911

 

474,693

 

 

 

486,859

 

538,948

 

Inventory reserves

 

(55,508

)

 

 

 

$

431,351

 

$

538,948

 

 

 

 

 

Years

 

Machinery and equipment

 

3–15

 

Furniture and fixtures

 

3–10

 

Engineering equipment

 

5–12

 

ASSET PURCHASES (Tables) (ADGC Asset Purchase)
Schedule of purchase price allocation of the assets

 

 

Inventory

 

$

269,000

 

In-process research and development

 

601,000

 

Total

 

$

870,000

 

INTANGIBLE ASSETS (Tables)

 

 

 

 

 

 

September 30,

 

March 31,

 

 

 

Life

 

2013

 

2013

 

Patents, gross

 

6.75 – 19.46

 

$

8,135,063

 

$

7,534,063

 

In-process research and development

 

Indefinite

 

2,250,435

 

2,851,435

 

 

 

 

 

10,385,498

 

10,385,498

 

Accumulated amortization

 

 

 

757,353

 

369,847

 

Net intangible assets

 

 

 

$

9,628,145

 

$

10,015,651

 

 

 

Fiscal Year Ending

 

 

 

Six months ending March 31, 2014

 

$

387,506

 

March 31, 2015

 

775,011

 

March 31, 2016

 

775,011

 

March 31, 2017

 

775,011

 

March 31, 2018

 

775,011

 

Thereafter

 

$

3,890,160

 

SHARE-BASED COMPENSATION (Tables)

 

 

Expected dividend yield

 

0.00

%

Risk-free interest rate

 

.66

%

Expected life in years

 

3.00

 

Expected volatility

 

102.3

%

Weighted average calculated value of options granted

 

$

0.21

 

 

 

Options

 

Shares

 

Weighted-
Average Exercise
Price

 

Weighted-Average
Remaining
Contractual Term

 

Options Outstanding March 31, 2013

 

4,092,500

 

$

0.87

 

2.54

 

Granted

 

500,000

 

0.33

 

2.99

 

Exercised

 

 

 

 

Expired/cancelled

 

(406,250

)

0.88

 

 

Options Outstanding September 30, 2013

 

4,186,250

 

$

0.79

 

1.87

 

Exercisable at September 30, 2013

 

1,703,833

 

$

0.82

 

2.01

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant-Date

 

Non-vested Shares

 

Shares

 

Fair Value

 

Non-vested at March 31, 2013

 

2,466,278

 

$

0.65

 

Granted

 

500,000

 

0.21

 

Vested

 

(343,750

)

0.73

 

Expired/cancelled: non-vested

 

(200,000

)

0.43

 

Non-vested at September 30, 2013

 

2,482,417

 

$

0.57

 

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)
0 Months Ended 6 Months Ended
Sep. 16, 2013
item
Sep. 30, 2013
Sep. 30, 2012
Mar. 31, 2013
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 
 
 
Number of Scio designed diamond growing machines to be deployed
100 
 
 
 
Expansion of minimum number of machines than can be allowed under the Grace Rich Agreements
400 
 
 
 
Percentage of ownership position in the joint venture
30.00% 
 
 
 
Antidilutive securities excluded from the calculation of diluted net loss per share
 
 
 
 
Common stock options and warrants excluded from the calculation of diluted net loss per share (in shares)
 
9,778,045 
10,791,264 
 
Inventories
 
 
 
 
Raw materials and supplies
 
$ 132,462 
 
$ 64,255 
Work in process
 
22,486 
 
 
Finished goods
 
331,911 
 
474,693 
Inventory, gross
 
486,859 
 
538,948 
Inventory reserves
 
(55,508)
 
 
Inventory, net
 
$ 431,351 
 
$ 538,948 
Machinery and equipment |
Minimum
 
 
 
 
Property, Plant and Equipment
 
 
 
 
Estimated useful lives
 
3 years 
 
 
Machinery and equipment |
Maximum
 
 
 
 
Property, Plant and Equipment
 
 
 
 
Estimated useful lives
 
15 years 
 
 
Furniture and fixtures |
Minimum
 
 
 
 
Property, Plant and Equipment
 
 
 
 
Estimated useful lives
 
3 years 
 
 
Furniture and fixtures |
Maximum
 
 
 
 
Property, Plant and Equipment
 
 
 
 
Estimated useful lives
 
10 years 
 
 
Engineering equipment |
Minimum
 
 
 
 
Property, Plant and Equipment
 
 
 
 
Estimated useful lives
 
5 years 
 
 
Engineering equipment |
Maximum
 
 
 
 
Property, Plant and Equipment
 
 
 
 
Estimated useful lives
 
12 years 
 
 
Leasehold improvements |
Minimum
 
 
 
 
Property, Plant and Equipment
 
 
 
 
Estimated useful lives
 
3 years 
 
 
Leasehold improvements |
Maximum
 
 
 
 
Property, Plant and Equipment
 
 
 
 
Estimated useful lives
 
7 years 
 
 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) (USD $)
6 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Intangible Assets
 
 
Impairment charges
$ 0 
$ 0 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 3) (USD $)
6 Months Ended
Sep. 30, 2013
Warrants with exercise prices of $.70 per share
Sep. 30, 2013
Warrants with exercise prices of $1.60
Jun. 5, 2012
ADGC
Aug. 31, 2011
Nonrecurring basis
Level 3
ADI
Jun. 5, 2012
Nonrecurring basis
Level 3
ADGC
Fair Value Measurement
 
 
 
 
 
Fair value of subscription rights
 
 
$ 770,000 
$ 11,040,000 
$ 770,000 
Warrants
 
 
 
 
 
Warrants outstanding
425,545 
200,000 
 
 
 
Exercise price (in dollars per share)
$ 0.70 
$ 1.60 
 
 
 
Fair value (in dollars per share)
$ 0.52 
$ 0.57 
 
 
 
ASSET PURCHASES (Details) (ADGC Asset Purchase, USD $)
0 Months Ended 6 Months Ended
Jun. 5, 2012
Sep. 30, 2013
ADGC Asset Purchase
 
 
Asset Purchases
 
 
Cash portion of purchase price
$ 100,000 
 
Number of shares of common stock issued as consideration for acquisition
1,000,000 
988,380 
Price per share of common stock issuable as subscription rights (in dollars per share)
$ 0.01 
 
Fair value of subscription rights
770,000 
 
Purchase price allocation of the assets
 
 
Inventory
269,000 
 
In-process research and development
601,000 
 
Total
$ 870,000 
 
INTANGIBLE ASSETS (Details) (USD $)
3 Months Ended 6 Months Ended 6 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Mar. 31, 2013
Sep. 30, 2013
Patent
Mar. 31, 2013
Patent
Jun. 30, 2013
Patent
ADGC Asset Purchase
Sep. 30, 2013
Patent
Minimum
Sep. 30, 2013
Patent
Maximum
Sep. 30, 2013
In-process research and development
Mar. 31, 2013
In-process research and development
INTANGIBLE ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Acquired finite lived intangible assets
 
 
 
 
 
$ 8,135,063 
$ 7,534,063 
$ 601,000 
 
 
$ 2,250,435 
$ 2,851,435 
Gross intangible assets
10,385,498 
 
10,385,498 
 
10,385,498 
 
 
 
 
 
 
 
Accumulated amortization
757,353 
 
757,353 
 
369,847 
 
 
 
 
 
 
 
Net intangible assets
9,628,145 
 
9,628,145 
 
10,015,651 
 
 
 
 
 
 
 
Amortization period
 
 
 
 
 
 
 
 
6 years 9 months 
19 years 5 months 16 days 
 
 
Amortization expense
$ 193,753 
$ 0 
$ 387,506 
$ 0 
 
 
 
 
 
 
 
 
INTANGIBLE ASSETS (Details 2) (USD $)
Sep. 30, 2013
Estimated annual amortization expense of intangible assets
 
Six months ending March 31, 2014
$ 387,506 
2015
775,011 
2016
775,011 
2017
775,011 
2018
775,011 
Thereafter
$ 3,890,160 
NOTES PAYABLE (Details) (USD $)
0 Months Ended 6 Months Ended
Oct. 11, 2013
Sep. 30, 2013
Line of Credit
Jun. 21, 2013
Line of Credit
Sep. 30, 2013
Line of Credit
Maximum
Notes payable
 
 
 
 
Maximum borrowing capacity
 
 
$ 1,000,000 
 
Annual interest rate (as a percent)
 
18.00% 
 
 
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 
 
 
Outstanding balance
 
974,105 
 
 
Remaining balance available
 
25,895 
 
 
Additional borrowing capacity
$ 500,000 
 
 
 
CAPITAL STOCK (Details) (USD $)
0 Months Ended 3 Months Ended 6 Months Ended 0 Months Ended
Sep. 25, 2013
Jun. 4, 2013
Sep. 30, 2013
Sep. 30, 2013
Sep. 30, 2012
Mar. 31, 2013
Jun. 4, 2013
Arque Capital LTD.
Jun. 4, 2013
Maxwell Simon
Jun. 4, 2013
Stonegate Securities, Inc.
Sep. 30, 2013
Warrants with exercise prices of $1.53 per share
Jul. 26, 2013
ADI and ADGC
CAPITAL STOCK
 
 
 
 
 
 
 
 
 
 
 
Common shares, authorized
 
 
75,000,000 
75,000,000 
 
75,000,000 
 
 
 
 
 
Common stock, par value (in dollars per share)
 
 
$ 0.001 
$ 0.001 
 
$ 0.001 
 
 
 
 
$ 0.01 
Number of units issued (in shares)
 
 
 
 
2,538,750 
 
 
 
 
 
 
Number of shares of common stock in each unit issued
 
 
 
 
 
 
 
 
 
 
Number of warrants in each unit issued
 
 
 
 
 
 
 
 
 
 
Strike price (in dollars per share)
 
 
 
 
$ 1.60 
 
 
 
 
 
 
Issue price per share (in dollars per share)
 
 
 
 
$ 0.80 
 
 
 
 
 
 
Total net cash proceeds from sale of units
 
 
 
 
$ 1,998,920 
 
 
 
 
 
 
Common stock issued as partial compensation for engagements (in shares)
 
 
 
 
 
 
165,000 
162,500 
200,000 
 
 
Expense recognized related to share issued for services
 
200,450 
 
 
 
 
 
 
 
 
 
Common stock issued in exchange for past legal services (in shares)
1,000,000 
 
 
 
 
 
 
 
 
 
 
Common stock issued in exchange for past legal services
$ 153,272 
 
 
$ 153,272 
 
 
 
 
 
 
 
Common stock, issued (in shares)
 
 
50,264,312 
50,264,312 
 
47,736,812 
 
 
 
 
 
Common stock, outstanding (in shares)
 
 
50,264,312 
50,264,312 
 
47,736,812 
 
 
 
 
 
Shares held in treasury
 
 
1,000,000 
1,000,000 
 
1,000,000 
 
 
 
 
 
Warrants outstanding
 
 
 
 
 
 
 
 
 
5,516,795 
 
Exercise price (in dollars per share)
 
 
 
 
 
 
 
 
 
$ 1.53 
 
Warrants issued (in shares)
 
 
 
 
 
 
 
 
 
SHARE-BASED COMPENSATION (Details) (USD $)
6 Months Ended 12 Months Ended 9 Months Ended 0 Months Ended 6 Months Ended
Sep. 30, 2013
Sep. 30, 2013
Stock options
item
Sep. 30, 2012
Stock options
Mar. 31, 2013
Stock options
May 7, 2012
Stock options
Dec. 31, 2012
Stock options
Minimum
Dec. 31, 2012
Stock options
Maximum
Sep. 30, 2013
Non-executive employee
Stock options
Sep. 25, 2013
Non-executive employee
Stock options
item
Sep. 30, 2013
Non-executive employee
Stock options
Share-based compensation
 
 
 
 
 
 
 
 
 
 
Number of equity-based compensation plans
 
 
 
 
 
 
 
 
 
Number of shares of common stock authorized under the 2012 Share Incentive Plan
 
 
 
 
5,000,000 
 
 
 
 
 
Remaining shares available for issuance under the plan
813,750 
 
 
 
 
 
 
 
 
 
Number of employees to whom options to purchase shares of the company's stock are given
 
 
 
 
 
 
 
 
 
Assumptions used to calculate fair value of options
 
 
 
 
 
 
 
 
 
 
Expected dividend yield (as a percent)
 
0.00% 
 
 
 
 
 
 
 
 
Risk-free interest rate (as a percent)
 
0.66% 
 
 
 
 
 
 
 
 
Expected life
 
3 years 
 
 
 
 
 
 
 
 
Expected volatility (as a percent)
 
102.30% 
 
 
 
 
 
 
 
 
Weighted average calculated value of options granted (in dollars per share)
 
$ 0.21 
 
 
 
 
 
 
 
 
Options
 
 
 
 
 
 
 
 
 
 
Options outstanding at the beginning of the period (in shares)
 
4,092,500 
 
 
 
 
 
 
 
 
Granted (in shares)
 
500,000 
 
 
 
 
 
 
 
 
Expired/cancelled (in shares)
 
(406,250)
 
 
 
 
 
 
 
 
Options outstanding at the end of the period (in shares)
 
4,186,250 
 
4,092,500 
 
 
 
 
 
 
Options exercisable at the end of the period (in shares)
 
1,703,833 
 
 
 
 
 
 
 
 
Weighted Average Exercise Price
 
 
 
 
 
 
 
 
 
 
Options outstanding at the beginning of the period (in dollars per share)
 
$ 0.87 
 
 
 
 
 
 
 
 
Granted (in dollars per share)
 
$ 0.33 
 
 
 
$ 0.70 
$ 0.80 
 
 
 
Expired/cancelled (in dollars per share)
 
$ 0.88 
 
 
 
 
 
 
 
 
Options outstanding at the end of the period (in dollars per share)
 
$ 0.79 
 
$ 0.87 
 
 
 
 
 
 
Options exercisable at the end of the period (in dollars per share)
 
$ 0.82 
 
 
 
 
 
 
 
 
Weighted-Average Remaining Contractual Term
 
 
 
 
 
 
 
 
 
 
Options outstanding at the beginning of the period
 
1 year 10 months 13 days 
 
2 years 6 months 14 days 
 
 
 
 
 
 
Weighted average contractual term
 
2 years 11 months 26 days 
 
 
 
 
 
 
 
 
Options outstanding at the end of the period
 
1 year 10 months 13 days 
 
2 years 6 months 14 days 
 
 
 
 
 
 
Exercisable
 
2 years 4 days 
 
 
 
 
 
 
 
 
Intrinsic value of options outstanding and of options exercisable
 
 
 
 
 
 
 
 
 
 
Intrinsic value of options outstanding
 
$ 0 
 
$ 299,900 
 
 
 
 
 
 
Intrinsic value of options exercisable
 
 
176,109 
 
 
 
 
 
 
Shares
 
 
 
 
 
 
 
 
 
 
Non-vested at the beginning of the period (in shares)
 
2,466,278 
 
 
 
 
 
 
 
 
Granted (in shares)
 
500,000 
 
 
 
 
 
 
 
 
Vested (in shares)
 
(343,750)
 
 
 
 
 
 
 
Expired/cancelled: non-vested (in shares)
 
(200,000)
 
 
 
 
 
 
 
 
Non-vested at the end of the period (in shares)
 
2,482,417 
 
2,466,278 
 
 
 
 
 
 
Weighted Average Grant-Date Fair Value
 
 
 
 
 
 
 
 
 
 
Non-vested at the beginning of the period (in dollars per share)
 
$ 0.65 
 
 
 
 
 
 
 
 
Granted (in dollars per share)
 
$ 0.21 
 
 
 
 
 
 
 
 
Vested (in dollars per share)
 
$ 0.73 
 
 
 
 
 
 
 
 
Expired/cancelled: non-vested (in dollars per share)
 
$ 0.43 
 
 
 
 
 
 
 
 
Non-vested at the end of the period (in dollars per share)
 
$ 0.57 
 
$ 0.65 
 
 
 
 
 
 
Total compensation costs
 
133,409 
1,267,749 
 
 
 
 
 
 
Deferred tax asset recorded, relating to recognized compensation cost
 
 
 
 
 
 
 
 
Unrecognized compensation cost
 
 
 
 
 
 
 
 
 
 
Unrecognized compensation cost related to nonvested awards
 
1,134,425 
 
 
 
 
 
 
 
 
Weighted average period to recognize unrecognized compensation cost related to nonvested awards
 
2 years 9 months 
 
 
 
 
 
 
 
 
Fair value of shares vested
 
$ 133,409 
$ 997,165 
 
 
 
 
 
 
 
RELATED PARTIES (Details) (USD $)
0 Months Ended 6 Months Ended 6 Months Ended 0 Months Ended 6 Months Ended
Jun. 5, 2012
ADGC
Sep. 30, 2013
ADGC
Sep. 30, 2013
AdamsMonahan, LLP
Sep. 30, 2012
AdamsMonahan, LLP
Jul. 2, 2013
AdamsMonahan, LLP
Sep. 30, 2013
Michael R. Monahan
Sep. 30, 2013
Theodorus Strous
May 14, 2013
Theo Strous and Michael R. Monahan
Sep. 30, 2013
Theo Strous and Michael R. Monahan
May 21, 2013
Messrs. Adams and Monahan
Related parties
 
 
 
 
 
 
 
 
 
 
Expenses for professional and consulting services provided by related party
 
 
$ 19,658 
$ 64,266 
 
$ 11,000 
$ 4,000 
$ 25,000 
$ 45,000 
 
Cash portion of purchase price
100,000 
 
 
 
 
 
 
 
 
 
Number of shares of common stock forming part of subscription rights
1,000,000 
988,380 
 
 
 
 
 
 
 
 
Price per share of common stock issuable as subscription rights (in dollars per share)
$ 0.01 
 
 
 
 
 
 
 
 
 
Fair value of subscription rights
770,000 
 
 
 
 
 
 
 
 
 
Deemed shares issued previously allocated for indemnification of directors
 
 
 
 
 
 
 
 
 
1,000,000 
Remaining indemnification liability
 
 
 
 
117,305.93 
 
 
 
 
 
Remaining indemnification liability per month
 
 
 
 
$ 7,500 
 
 
 
 
 
LITIGATION (Details) (USD $)
0 Months Ended
Sep. 30, 2013
Mar. 31, 2013
Jul. 26, 2013
ADI
Jul. 26, 2013
ADGC
Jul. 26, 2013
ADI and ADGC
Litigation
 
 
 
 
 
Maximum number of shares that can be acquired
 
 
16,000,000 
1,000,000 
 
Common stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
 
 
$ 0.01 
SUBSEQUENT EVENTS (Details) (USD $)
0 Months Ended 0 Months Ended 0 Months Ended
Oct. 11, 2013
Sep. 30, 2013
Sep. 30, 2013
Original Loan
Jun. 21, 2013
Original Loan
Oct. 11, 2013
Subsequent events
Amended Loan Agreement
Oct. 11, 2013
Subsequent events
Original Loan
Oct. 11, 2013
Subsequent events
Additional Loan
Oct. 2, 2013
Subsequent events
Board of Directors
Oct. 2, 2013
Subsequent events
Edward S. Adams
Oct. 2, 2013
Subsequent events
Robert Linares
Oct. 2, 2013
Subsequent events
Theodorus Strous
Subsequent events
 
 
 
 
 
 
 
 
 
 
 
Number of options approved for issuance (in shares)
 
813,750 
 
 
 
 
 
 
68,750 
68,750 
68,750 
Number of options to each director for each board meeting held
 
 
 
 
 
 
 
6,250 
 
 
 
Stock options issued
 
 
 
 
 
 
 
206,250 
 
 
 
Exercise price (in dollars per share)
 
 
 
 
 
 
 
$ 0.42 
 
 
 
Additional borrowing capacity
$ 500,000 
 
 
 
$ 500,000 
 
 
 
 
 
 
Maximum borrowing capacity
 
 
 
1,000,000 
 
1,000,000 
 
 
 
 
 
Amount drawn under facility
 
 
974,105 
 
 
 
280,750 
 
 
 
 
Applicable fees
 
 
 
 
 
 
30,750 
 
 
 
 
Annual interest rate (as a percent)
 
 
18.00% 
 
18.00% 
 
 
 
 
 
 
Service charge on late payment (as a percent)
 
 
3.00% 
 
3.00% 
 
 
 
 
 
 
Interest reserve established
 
 
 
 
 
90,000 
133,500 
 
 
 
 
Accommodation fees
 
 
 
 
25,000 
 
 
 
 
 
 
Closing fees
 
 
 
 
$ 3,250