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

 

 

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

 

⋅         Continuing efforts with insurance carrier to cover the costs of the business interruption and any future adverse financial effects of the shutdown;

⋅         Continuing efforts to solicit investment in the Company in the form of private placements of common shares to accredited investors not to exceed the shares authorized;

⋅         Continuing efforts to solicit investment in the Company in the form of secured and unsecured debt;

⋅         Continue to optimize production of recently expanded existing manufacturing capabilities to increase product revenues;

⋅         Continuing to focus efforts on new business development opportunities to generate revenues and expand and diversify the customer base;

⋅         Continuing development of white gemstone material to expand our product offerings and enhance our product marketability; and

⋅         Continuing to explore strategic joint ventures and technology licensing agreements to expand Company revenue and cash flow.

 

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

 

Accounting Basis

 

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts, sales returns, provision for inventory obsolescence, fair value of acquired intangible assets, useful lives of intangible assets and property and equipment, employee stock options, and contingencies and litigation, among others. The Company generally bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts recorded could differ materially from those estimates

 

                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.

 

Fair Value of Financial Instruments

 

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and notes payable approximate their fair value due to the short-term nature of  these instruments.

 

Cash and Cash Equivalents

 

For purposes of the statement of cash flows, the Company considers highly liquid financial instruments purchased with an original maturity of three months or less when purchased to be cash equivalents. At March 31, 2016 and 2015, the Company held no cash equivalents.

 

Basic and Diluted Net Loss per Share

 

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

 

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

 

		March 31, 2016			March 31, 2015
Common stock options			1,027,708			232,500
Warrants to purchase common stock			957,295			5,566,795
Non-vested restricted stock			1,885,000			—

 

Allowance for Doubtful Accounts

 

An allowance for uncollectible accounts receivable is maintained for estimated losses from customers’ failure to make payment on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience, (2) aging of accounts receivable and (3) specific information obtained by the Company on the financial condition and the current credit worthiness of its customers. The Company also maintains a provision for estimated returns and allowances based upon historical experience.  The Company has determined that an allowance was not necessary at March 31, 2016 and 2015.

 

Inventories

 

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

 

		March 31, 2016			March 31, 2015
Raw materials and supplies		$	24,179		$	58,390
Work in process			19,514			31,371
Finished goods			174,809			205,999
Inventory reserve			(28,975)			—
		$	189,527		$	295,760

 

 

Property, Plant and Equipment

 

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

 

		Years
Machinery and equipment		3–15
Furniture and fixtures		3–10
Engineering equipment		5–12

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

 

During the fiscal year ended March 31, 2016, the Company evaluated its fixed assets including those acquired from ADI and those damaged in the December 2015 production shutdown and disposed of obsolete equipment with a book value of $41,406. The Company made a similar evaluation in the fiscal year ended March 31, 2015 that resulted in a loss on disposal of fixed assets of $182,609.

 

Intangible Assets

 

 

 

Recent Accounting Pronouncements

 

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

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern,” which requires management to assess, at each annual and interim reporting period, the entity's ability to continue as a going concern within one year after the date that the financial statements are issued and provide related disclosures. The ASU is effective for the year ended March 31, 2017, with early adoption permitted. The Company has assessed the impact of this standard and does not believe that it will have a material impact on the Company’s financial statements or disclosures.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation”. This guidance changes several aspects of the accounting for share-based payment award transactions, including: (1) Accounting and Cash Flow Classification for Excess Tax Benefits and Deficiencies, (2) Forfeitures, and (3) Tax Withholding Requirements and Cash Flow Classification. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early application is permitted.  We are currently in the process of assessing the impact the adoption of this guidance will have on our financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The ASU requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than short-term leases). The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early application is permitted. We are currently in the process of assessing the impact the adoption of this guidance will have on our financial statements.

 

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

 

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

NOTE 2 — BUSINESS INTERUPTION

 

The Company experienced a water leak in our production facility in mid-December 2015 that caused damage to our diamond growers and temporarily halted production.  Product that was growing at the time of the shutdown terminated early and was not marketable.

 

The Company received $438,754 in payments from our insurance company of which $88,754 was for lost property and $350,000 was for business interruption as a result of the production shutdown that were used to reduce our cost of goods sold during the fiscal year ended March 31, 2016. An additional $36,000 of proceeds from our insurance carrier related to the production shutdown that was used to purchase replacement equipment.

 

The Company continues to work with our insurance carrier for reimbursement to offset the financial impact of this business interruption.

 

 

NOTE 6 — CAPITAL STOCK

 

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

 

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

 

In March 2016, the Company sold and issued 275,000 units at a price of $0.30 per unit with each unit consisting of a common share and warrant to purchase one addition share of common stock at an exercise price of $0.15.

 

The Company raised $77,099 from this offering net of broker fees and commissions of $5,400.  As part of the broker fee for this offering, the Company issued 6,750 warrants at an exercise price of $0.30. The Company valued these warrants using the Black-Scholes option pricing model and management has estimated these warrants had a value of $0.26 per warrant on the date of the grant.  The Black-Scholes model assumptions used were: Expected dividend yield, 0.00%; Risk-free interest rate, 0.94%; Expected life in years, 3.0; and Expected volatility, 145.5%.

 

The Company had 63,919,291 shares of common stock issued and outstanding as of March 31, 2016.

 

The following sets forth the warrants to purchase shares of the Company’s stock issued and outstanding as of March 31, 2016:

 

		Warrants			Weighted- Average Exercise Price			Weighted-Average Remaining Contractual Term
Warrants Outstanding April 1, 2014			5,566,795		$	1.53			1.55
Issued			—			—			—
Exercised			—			—			—
Expired			—			—			—
Warrants Outstanding March 31, 2015			5,566,795		$	1.53			0.55
Issued			281,750			0.15			0.79
Exercised			—			—			—
Expired			(4,891,250)			1.60			—
Warrants Outstanding March 31, 2016			957,295		$	0.71			1.38

 

During our next fiscal year ending March 31, 2017, 275,000 warrants with an exercise price of $0.15 will expire if not exercised.

NOTE 8 — OTHER INCOME AND EXPENSE

   

For the fiscal year ended March 31, 2016, the Company recognized $18,230 as its proportional share of income from its joint venture with RCDC.  In addition, the Company recognized $158,916 in interest expense related to its notes payable that were outstanding during the fiscal year.

 

For the fiscal year ended March 31, 2015, the Company recognized $29,041 as its proportional share of income from its joint venture with RCDC. In addition, the Company recognized $228,056 in interest expense related to its notes payable that were outstanding during the fiscal year.

NOTE 12 — INVESTMENT IN GRACE RICH JOINT VENTURE

 

On September 16, 2013, the Company entered into a series of agreements with SAAMABA, LLC (“SAAMABA”) and S21 Research Holdings (the “Grace Rich Agreements”) to form a joint venture with operations in the People’s Republic of China (“PRC”) to deploy a minimum of 100 Company designed diamond growing machines. Through the Grace Rich Agreements, the Company owns 30% of Grace Rich LTD, a corporation duly established pursuant to the laws of the Hong Kong Special Administrative Region of the PRC that is an investment and holding company for the factory and distribution center to be formed pursuant to the laws of the PRC as a wholly foreign owned enterprise.

 

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 revenue and 30% ownership 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.

 

The initial ownership interests in Grace Rich LTD are as follows:  SAAMABA LLC- 60%; Scio Diamond Technology Corporation – 30% and S21 Holdings- 10%. The capital contributions required to finance Grace Rich LTD are requirements of SAAMABA, and the Company is not required to make any on-going funding contributions to the joint venture and its ownership stake cannot be reduced from 30%.

 

The Company is licensing a portion of its patented technology to Grace Rich LTD and is not directly contributing any of its intellectual property. Under the license agreement, the Company received $250,000 in licensing fees and $750,000 in development fees. Once operations of Grace Rich LTD have commenced, the Company will receive $250 per machine per month in licensing fees with a minimum monthly payment of $25,000 until the joint venture starts to distribute cash to its partners.

 

The Company has determined the fair value of the license agreement does not exceed the value of the expected returns from the joint venture and accordingly established an initial investment value of $0 for its interests in the joint venture and has not recorded any gains related to its contribution to the joint venture.  Grace Rich LTD was in its development stage through March 31, 2016 and did not have any revenues. Expenses incurred by the joint venture were for planning and startup expenses.  

 

 

The Company recognized $0 and $375,000 in licensing revenues from Grace Rich during the fiscal years ended March 31, 2016 and 2015, respectively. The Company recognized $110,690 and $10,801 of product revenue from Grace Rich during the fiscal years ended March 31, 2016 and 2015, respectively.  The Company incurred $0 and $96,776 of joint venture related expenses during the fiscal years ended March 31, 2016 and 2015, respectively that were reimbursed by the Grace Rich LTD.  These reimbursements were offset against the Company’s related operating expense. The Company had no outstanding receivables from or payables due Grace Rich LTD at March 31, 2016.

NOTE 15 – SUBSEQUENT EVENTS

 

In May 2016, the Company initiated an offering of up to 7,000,000 shares of common stock at a price of $0.22 per share to accredited investors. Through July 8, 2016, the Company has sold 1,179,000 shares and raised $241,223 net of broker commission of $18,157.

 

On June 27, 2016, James Korn resigned from the Company’s Board of Directors. The Board has appointed a Special Investigation Committee comprised of independent directors to investigate and determine an appropriate response for the allegations set forth in the resignation letter of James Korn. Following a review of relevant documents and interviews of key parties involved, the Special Investigation Committee has concluded there is no basis for any of the allegations described in the resignation letter of James Korn.

Going Concern

 

 

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

 

⋅         Continuing efforts with insurance carrier to cover the costs of the business interruption and any future adverse financial effects of the shutdown;

⋅         Continuing efforts to solicit investment in the Company in the form of private placements of common shares to accredited investors not to exceed the shares authorized;

⋅         Continuing efforts to solicit investment in the Company in the form of secured and unsecured debt;

⋅         Continue to optimize production of recently expanded existing manufacturing capabilities to increase product revenues;

⋅         Continuing to focus efforts on new business development opportunities to generate revenues and expand and diversify the customer base;

⋅         Continuing development of white gemstone material to expand our product offerings and enhance our product marketability; and

⋅         Continuing to explore strategic joint ventures and technology licensing agreements to expand Company revenue and cash flow.

 

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

Accounting Basis

 

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts, sales returns, provision for inventory obsolescence, fair value of acquired intangible assets, useful lives of intangible assets and property and equipment, employee stock options, and contingencies and litigation, among others. The Company generally bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts recorded could differ materially from those estimates

 

                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.

Fair Value of Financial Instruments

 

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and notes payable approximate their fair value due to the short-term nature of  these instruments.

Cash and Cash Equivalents

 

For purposes of the statement of cash flows, the Company considers highly liquid financial instruments purchased with an original maturity of three months or less when purchased to be cash equivalents. At March 31, 2016 and 2015, the Company held no cash equivalents.

Basic and Diluted Net Loss per Share

 

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

 

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

 

		March 31, 2016			March 31, 2015
Common stock options			1,027,708			232,500
Warrants to purchase common stock			957,295			5,566,795
Non-vested restricted stock			1,885,000			—

Allowance for Doubtful Accounts

 

An allowance for uncollectible accounts receivable is maintained for estimated losses from customers’ failure to make payment on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience, (2) aging of accounts receivable and (3) specific information obtained by the Company on the financial condition and the current credit worthiness of its customers. The Company also maintains a provision for estimated returns and allowances based upon historical experience.  The Company has determined that an allowance was not necessary at March 31, 2016 and 2015.

Inventories

 

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

 

		March 31, 2016			March 31, 2015
Raw materials and supplies		$	24,179		$	58,390
Work in process			19,514			31,371
Finished goods			174,809			205,999
Inventory reserve			(28,975)			—
		$	189,527		$	295,760

 

Property, Plant and Equipment

 

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

 

		Years
Machinery and equipment		3–15
Furniture and fixtures		3–10
Engineering equipment		5–12

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

 

During the fiscal year ended March 31, 2016, the Company evaluated its fixed assets including those acquired from ADI and those damaged in the December 2015 production shutdown and disposed of obsolete equipment with a book value of $41,406. The Company made a similar evaluation in the fiscal year ended March 31, 2015 that resulted in a loss on disposal of fixed assets of $182,609.

Intangible Assets

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. Valuation allowances are provided against deferred tax assets when it is more likely than not that an asset will not be realized in accordance with ASC 740, Accounting for Income Taxes.

 

Management has evaluated the potential impact in accounting for uncertainties in income taxes and has determined that it has no significant uncertain income tax positions as of March 31, 2016 or 2015. Income tax returns subject to review by taxing authorities include March 31, 2013 through March 31, 2016.

Stock-based Compensation

 

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

Concentration of Credit Risk

 

During the year ended March 31, 2016 the Company had 35 different customers and three customers that each accounted for more than 10% of our total revenues. One of these substantial customers was the RCDC joint venture. At March 31, 2016, the Company had a receivable from RCDC $174,413. The Company expects concentration of sales to key customers to continue in the future.

 

Recent Accounting Pronouncements

 

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

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern,” which requires management to assess, at each annual and interim reporting period, the entity's ability to continue as a going concern within one year after the date that the financial statements are issued and provide related disclosures. The ASU is effective for the year ended March 31, 2017, with early adoption permitted. The Company has assessed the impact of this standard and does not believe that it will have a material impact on the Company’s financial statements or disclosures.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation”. This guidance changes several aspects of the accounting for share-based payment award transactions, including: (1) Accounting and Cash Flow Classification for Excess Tax Benefits and Deficiencies, (2) Forfeitures, and (3) Tax Withholding Requirements and Cash Flow Classification. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early application is permitted.  We are currently in the process of assessing the impact the adoption of this guidance will have on our financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The ASU requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than short-term leases). The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early application is permitted. We are currently in the process of assessing the impact the adoption of this guidance will have on our financial statements.

 

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

 

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

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

 

		March 31, 2016			March 31, 2015
Common stock options			1,027,708			232,500
Warrants to purchase common stock			957,295			5,566,795
Non-vested restricted stock			1,885,000			—

The components of inventories are as follows:

 

		March 31, 2016			March 31, 2015
Raw materials and supplies		$	24,179		$	58,390
Work in process			19,514			31,371
Finished goods			174,809			205,999
Inventory reserve			(28,975)			—
		$	189,527		$	295,760

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

 

		Years
Machinery and equipment		3–15
Furniture and fixtures		3–10
Engineering equipment		5–12

Intangible assets consist of the following:

 

				March 31,			March 31,
		Life		2016			2015
Patents, gross		6.75 – 19.46		$	9,967,433		$	8,135,063
In-process research and development		Indefinite			—			1,832,370
					9,967,433			9,967,433
Accumulated amortization					(2,741,987)			(1,919,485)
Net intangible assets				$	7,225,446		$	8,047,948

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

 

Fiscal Year Ending
March 31, 2017		$	965,490
March 31, 2018			965,490
March 31, 2019			965,490
March 31, 2020			785,809
March 31, 2021			740,592
Thereafter			2,802,575
Total		$	7,225,446

The following sets forth the warrants to purchase shares of the Company’s stock issued and outstanding as of March 31, 2016:

 

		Warrants			Weighted- Average Exercise Price			Weighted-Average Remaining Contractual Term
Warrants Outstanding April 1, 2014			5,566,795		$	1.53			1.55
Issued			—			—			—
Exercised			—			—			—
Expired			—			—			—
Warrants Outstanding March 31, 2015			5,566,795		$	1.53			0.55
Issued			281,750			0.15			0.79
Exercised			—			—			—
Expired			(4,891,250)			1.60			—
Warrants Outstanding March 31, 2016			957,295		$	0.71			1.38

The following sets forth the restricted stock outstanding as of March 31, 2016:

 

Restricted Stock		Shares
Restricted stock outstanding March 31, 2015			—
Granted			2,085,000
Vested			—
Expired/cancelled			(200,000)
Restricted stock outstanding March 31, 2016			1,885,000

The following sets forth the options to purchase shares of the Company’s stock issued and outstanding as of March 31, 2016:

 

					Weighted-		Weighted-Average
					Average Exercise				Remaining
Options		Shares			Price			Contractual Term
Options Outstanding April 1, 2014			4,342,500		$	0.77			1.75
Granted			—			—			—
Exercised			—			—			—
Expired/Cancelled			(4,110,000)			0.79			—
Options Outstanding March 31, 2015			232,500		$	0.35			1.45
Granted			685,000			1.03			9.11
Exercised			(11,125)			0.51			—
Expired/cancelled			(212,000)			0.83			—
Options Outstanding March 31, 2016			694,375		$	0.87			7.13
Exercisable at March 31, 2016			12,000		$	0.33			0.48

A summary of the status of non-vested shares as of March 31, 2016 and changes during the year ended March 31, 2016 is presented below.

 

					Weighted Average
					Grant-Date
Non-vested Shares		Shares			Fair Value
Non-vested at April 1, 2014			2,414,792		$	0.49
Granted			—			—
Vested			(122,000)			0.43
Expired/cancelled: non-vested			(2,083,417)			0.38
Non-vested at March 31, 2015			209,375			0.21
Granted			685,000			0.98
Vested			—			—
Expired/cancelled: non-vested			(212,000)			0.76
Non-vested at March 31, 2016			682,375		$	0.81

The following table summarizes information about stock options outstanding by price range as of March 31, 2016:

  

			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
$	1.03			535,000			9.11		$	1.03			—		$	—
$	0.33			159,375			0.48			0.33			12,000			0.33
				694,375			7.13		$	0.87			12,000		$	0.33

Minimum future rental payments under the leases are summarized as follows:

 

2017		$	361,660
2018			224,410
2019			224,410
2020			—
2021			—
2022 and thereafter		$	—

The deferred tax asset (liability) at March 31, 2016 and 2015 consists of the following types of temporary differences and their related tax effects:

 

		At March 31, 2016			At March 31, 2015
Accrued expenses		$	163,671		$	194,165
Property and equipment			(236,460)			(185,992)
Impairment of fixed assets			225,529			299,537
Capitalized startup/acquisition costs			423,811			461,636
Federal and state net operating loss carry-forward			6,678,551			5,344,982
Intangible assets			104,206			59,849
		$	7,359,308		$	6,174,177
Valuation allowance			(7,359,308)			(6,174,177)
Total		$	—		$	—