The accompanying notes are an integral
part of these financial statements.
The accompanying notes are an integral
part of these financial statements.
The accompanying notes are an integral
part of these financial statements.
The accompanying notes are an integral
part of these financial statements.
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Business
Scio Diamond Technology Corporation (referred
to herein as the “Company”, “we”, “us” or “our”) was incorporated under the laws
of the State of Nevada as Krossbow Holding Corp. on September 17, 2009. The Company’s focus is on man-made diamond
technology development and commercialization.
Going Concern
The Company has generated little revenue to date and consequently
its operations are subject to all risks inherent in the establishment and commercial launch of a new business enterprise. The
Company continues to develop its diamond technology while operating its factory to maximize revenue. The Company experienced
a process water leak in our facility in mid-December 2015 causing damage to our diamond growers and a temporary interruption in
production. The shutdown had a significant negative impact on revenue and delayed attainment of the Company’s near-term
business objectives. While the Company’s insurance carrier provided it with $350,000 to cover the cost of the business
interruption, the Company anticipates there may be on-going negative impact on its business as it has returned to full production
capacity.
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
|
|
At March 31, 2016, the Company
maintains an inventory reserve for instances where finished good inventory may yield lower than expected results. The Company
has determined that an inventory reserve was not necessary at March 31, 2015. During the fiscal year ended March 31, 2015,
we experienced selling prices lower than cost and as a result we recorded a lower of cost or market write down of $68,722 to
the value of our inventory which was included in cost of goods sold. The estimation of the total write-down involved
management judgments and assumptions including assumptions regarding future selling price forecasts, the estimated costs to
complete, disposal costs and a normal profit margin.
Property, Plant and Equipment
Depreciation of property, plant and equipment
is on a straight line basis beginning at the time it is placed in service, based on the following estimated useful lives:
|
|
Years
|
|
Machinery and equipment
|
|
3–15
|
|
Furniture and fixtures
|
|
3–10
|
|
Engineering equipment
|
|
5–12
|
|
Leasehold improvements which are included
in facility fixed assets on the balance sheet are depreciated over the lesser of the remaining term of the lease or the life of
the asset (generally three to seven years).
Expenditures for major renewals and betterments
that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred. Manufacturing equipment was placed into service beginning July 1, 2012. The Company incurred total depreciation
expense of $623,984 and $619,656 for the years ended March 31, 2016 and 2015, respectively. During the fiscal year ended March
31, 2016, $612,591 of depreciation expense was recorded in cost of goods sold and $11,393 was recorded as general and administrative
expense. During the fiscal year ended March 31, 2015, $603,604 of depreciation expense was recorded in cost of goods sold and
$16,052 was recorded as general and administrative expense.
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
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 fiscal year ended March 31, 2016. During the fiscal year ended
March 31, 2015, management evaluated assets included in IPRD and determined that certain projects will no longer be pursued for
further development resulting in an impairment charge of $418,065 being recognized during the fiscal year.
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.
Revenue Recognition
We recognize product revenue when persuasive
evidence of an arrangement exists, delivery of products has occurred, the sales price is fixed or determinable, and collectability
is reasonably assured. For our Company, this generally means that we recognize revenue when we or our fabrication vendor has shipped
finished product to the customer. Our sales terms do not allow for a right of return except for matters related to any manufacturing
defects on our part.
For product sales
to our joint venture partners for further processing and finishing, we currently defer all revenues when products are shipped.
We currently recognize revenue when the joint venture partner sells the finished goods manufactured from our materials. Licensing
and development revenues are recognized in the month as detailed in appropriate licensing and development contracts. In the event
that licensing funds are received prior to the contractual commitment, the Company will recognize deferred revenue (liability)
for the amount received.
Recent Accounting Pronouncements
On May 28,
2014, the 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 3 — INTANGIBLE ASSETS
The assigned values of all patents considered
in service by the Company are being amortized on a straight-line basis over the remaining effective lives of the patents.
Intangible assets, such as acquired
in-process research and development costs (“IPRD”), 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. During the fiscal year ended March 31, 2016, IPRD of $1,832,370 was placed in service and is being amortized over its
remaining legal useful life.
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 amortization expense during the years
ended March 31, 2016 and 2015 was $822,502 and $774,627, respectively.
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
|
|
NOTE 4 — NOTES PAYABLE
On December 16, 2014 the Company entered
into a Loan Agreement (the “HGI Loan Agreement”) and a Security Agreement (the “HGI Security Agreement”)
with Heritage Gemstone Investors, LLC (“HGI”) providing for a $2,000,000 secured non-revolving line of credit (the
“HGI Loan”). The HGI Loan, which is represented by a Promissory Note dated as of December 15, 2014 (the “HGI
Note”), matures on December 15, 2017. Borrowings accrue interest at the rate of 7.25% per annum and the Company intends
to make monthly interest payments. On December 18, 2014, $2,000,000 was drawn on the HGI Loan. The Company utilized funds drawn
on the HGI Loan to repay its existing indebtedness and to continue to fund its ongoing operations. The HGI Loan Agreement contains
a number of restrictions on the Company’s business, including restrictions on its ability to merge, sell assets, create
or incur liens on assets, make distributions to its stockholders and sell, purchase or lease real or personal property or other
assets or equipment. The HGI Loan Agreement contains standard provisions relating to a default and acceleration of the Company’s
payment obligations thereunder upon the occurrence of an event of default, which includes, among other things, the failure to
pay principal, interest, fees or other amounts payable under the agreement when due; failure to comply with specified agreements,
covenants or obligations; cross-default with other indebtedness; the making of any material false representation or warranty;
commencement of bankruptcy or other insolvency proceedings by or against the Company; and failure by the Company to maintain a
book net worth of at least $4,000,000 at all times. The Company’s obligations under the HGI Loan Agreement are not guaranteed
by any other party. The Company may prepay borrowings without premium or penalty upon notice to HGI as provided in the HGI Loan
Agreement. The HGI Loan Agreement requires the Company to enter into the HGI Security Agreement. Under the HGI Security Agreement,
the Company grants HGI a first priority security interest in the Company’s inventory, equipment, accounts and other rights
to payments and intangibles as security for the HGI Loan.
During the fiscal year ended March 31,
2016, the Company paid $0 in principal on the HGI Note and recognized $128,526 in interest expense, net of $19,031 of capitalized
interest. The Company recognized $228,056 in interest expense during the fiscal year ended March 31, 2015.
Also on December 16, 2014, the Company
entered into an agreement for the sale and lease of diamond growing equipment (the “Grower Sale-Lease Agreement”)
with HGI to allow for the expansion of current growers and the purchase of new growers. Pursuant to the Grower Sale-Lease Agreement,
the Company agreed to a sale-leaseback arrangement for certain diamond growers produced by the Company during the term of the
Grower Sale-Leaseback Agreement by which the Company will sell diamond growers to HGI and then lease the growers back from HGI.
The term of the Grower Sale-Leaseback Agreement is ten years. For the new and upgraded growers, the direct profit margin generated
from the growers as defined in the Grower Sale-Lease Agreement will be split between the Company and HGI in accordance with the
Grower Sale-Lease Agreement. The Grower Sale-Lease Agreement requires the Company to operate and service the growers, and requires
HGI to up-fit certain existing growers and to make capital improvements to the new growers under certain circumstances. At the
end of the Grower Sale-Leaseback Agreement, the Company takes ownership of the leased equipment. The Company will also have the
right to repurchase the leased growers upon the occurrence of certain events prior to the expiration of the Grower Sale-Leaseback
Agreement.
As of March 31, 2016, HGI has advanced
the Company $300,000 that funded improvements to our current growers that expanded manufacturing capacity in our production facility
and the Company considers this advance as notes payable. The Company has completed the grower expansion and the assets have been
placed in service.
Payments to HGI for the portion of notes
payable that funded capital improvements are contingent on the direct profit margin generated by the upgraded equipment and are
expected to continue through August 2018. The Company has estimated our expected payments to HGI for the direct profit sharing
related to these borrowings and determined that the current portion of this note payable is $98,999 at March 31, 2016, which is
considered a current liability. During the fiscal year ended March 31, 2016, the Company paid $0 in principal on the HGI notes
payable and recognized $21,541 in interest expense.
NOTE 5 – CAPITAL LEASES
As discussed in Note 4, the Company entered
in the Grower Sale-Lease Agreement with HGI on December 16, 2014. HGI has advanced the Company $200,000 for the purchase of new
grower equipment under the Sale-Leaseback Agreement. The Company considered this advance as a notes payable at March 31, 2015.
The sale and leaseback transaction occurred during the fiscal year ended March 31, 2016, and the Company has put the assets into
service. Since the sale and leaseback has occurred, the Company has reclassified the $200,000 from notes payable to capital lease
obligations. The value of the assets sold and leased back was $200,000 and the Company did not recognize any gain or loss on the
sale and lease back transaction.
Payments to HGI under the capital
lease are contingent on the direct profit margin generated by the equipment as defined in the Grower Sale-Lease Agreement and
will continue until the lease obligation is satisfied at which time the Company will expenses the sharing obligation until
the ten year term of the agreement expires. The Company has estimated our expected payments to HGI for the direct profit
margin sharing related to the equipment under capital lease and determined that the current portion of this capital lease
obligation is $122,495 at March 31, 2016, which is considered a current liability. During the fiscal year ended March 31,
2016, the Company paid $5,511 in capital lease obligation and incurred $8,849 in interest expense.
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 7 — SHARE-BASED COMPENSATION
The Company currently has one equity-based
compensation plan under which stock-based compensation awards can be granted to directors, officers, employees and consultants
providing bona fide services to or for the Company. The Company’s 2012 Share Incentive Plan was adopted on May 7, 2012
(the “2012 Share Incentive Plan” or “Plan”) and allows the Company to issue up to 5,000,000 shares of
its common stock pursuant to awards granted under the 2012 Share Incentive Plan. The Plan permits the granting of stock options,
stock appreciation rights, restricted or unrestricted stock awards, phantom stock, performance awards, other stock-based awards,
or any combination of the foregoing. The only awards that have been issued under the Plan are stock options and restricted stock.
Because the Plan has not been approved by our shareholders, all issued stock option awards are non-qualified stock options.
On May 7, 2015, the Board of Directors
of the Company approved restricted stock awards for Mr. Gerald McGuire, the Company President and Chief Executive Officer and
Mr. Jonathan Pfohl, the Company Chief Financial Officer. Mssrs. McGuire and Pfohl were granted 400,000 and 385,000 restricted
shares of stock, respectively, that will vest on July 1, 2018. The restricted shares are valued at $1.03, the closing price of
the Company’s stock on May 7, 2015.
Also on May 7, 2015, the Board of
Directors granted Renaissance Diamond Inc. a restricted stock award of 200,000 shares. On July 1, 2015, an additional
restricted stock award of 550,000 shares was granted to Renaissance Diamond Inc. These stock awards only vest based on the
attainment of specific future performance criteria and awards for 200,000 shares were cancelled in December 2015 due to the
performance criteria not being met.
On August 14, 2015, the Board of Directors
of the Company approved restricted stock awards for Mr. McGuire and Mr. Pfohl. Mssrs. McGuire and Pfohl were granted 400,000 and
150,000 restricted shares of stock, respectively, that will vest on July 1, 2018. The restricted shares are valued at $0.85, the
closing price of the Company’s stock on August 14, 2015.
The Company recognizes compensation expense
for the restricted stock awards to Company executives on a straight line basis over the vesting period. The Company recognized
$340,912 in compensation expenses for these awards during the fiscal year ended March 31, 2016. For the restricted stock awards
to Renaissance Diamond, Inc., the Company does not anticipate recognizing any financial impact for these restricted stock awards
until it is deemed likely that the performance criteria will be met.
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
|
|
|
On May 7, 2015, the Board of Directors
granted Renaissance Diamond Inc. non-qualified stock options for 333,333 shares of common stock. These options will vest on June
29, 2016 if the RCDC joint venture attains specific performance criteria. The strike price of these options will be set at fifty
percent of the market closing price upon vesting. The options will need to be exercised within 60 days of vesting. The Company
does not anticipate recognizing any financial impact for these options and expects them to expire unvested.
In addition, on May 7, 2015, the
Company granted seven non-executive employees options to purchase a total of 685,000 shares of the Company’s stock. The
vesting schedule for these options call for 33.3% to vest upon the first, second and third anniversaries of the grant date.
The exercise price of $1.03 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 these options had a value of $0.98 per
option on the date of the grant. The Black-Scholes model assumptions used were: Expected dividend yield, 0.00%; Risk-free
interest rate, 2.18%; Expected life in years, 10.0; and Expected volatility, 124.3%. None of these
options were vested upon issuance and the Company recognized $140,193 in compensation costs for these options during the
fiscal year ended March 31, 2016.
The following sets forth the employee options
to purchase shares of the Company’s stock issued and outstanding as of March 31, 2016 and does not include options granted
to Renaissance Diamond Inc.:
The following sets forth the options to
purchase shares of the Company’s stock issued and outstanding as of March 31, 2016:
Options
|
|
Shares
|
|
|
Weighted-
Average Exercise
Price
|
|
|
Weighted-Average
Remaining
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
|
|
The intrinsic value of options outstanding
and exercisable at March 31, 2016 and 2015 was $0 and $0, respectively.
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
|
|
For the years ended March 31, 2016 and
2015, the Company recognized $140,193 and $0, respectively, as compensation cost for options issued, and recorded related deferred
tax asset of $0 for all periods.
At March 31, 2016, unrecognized compensation
costs related to non-vested employee awards was $415,056. Of this unrecognized compensation cost, $30,949 is only expected to
be recognized if certain performance criteria are attained over a weighted average period of 0.48 years.
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 9 — OPERATING LEASES
The Company leases office space at a location
in Greenville, South Carolina. Under the terms of the lease, the Company is obligated to pay escalation rentals for certain operating
expenses and real estate taxes. The Company’s lease in Greenville, South Carolina expires in March 2019. The Company leases
electrical equipment in its production facility in South Carolina with these leases expiring during the 2017 fiscal year.
The Company recognizes lease expense on
a straight-line basis and recognized $393,874 and $398,590 in lease expense for the fiscal years ending March 31, 2016 and 2015,
respectively. The Company has other liabilities consisting of deferred rent payable of $88,569 and $118,092 at March 31, 2016
and 2015, respectively. 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
|
|
$
|
—
|
|
NOTE 10 — RELATED PARTIES
On August 7, 2015, the Company reached
an amendment to the separation, waiver and release agreement executed on December 4, 2012 with our former Chief Executive Officer
Mr. Joseph Lancia. This amendment allowed for no further severance payments to Mr. Lancia and resulted in the Company reversing
$137,561 in previously accrued severance liabilities. The Company included this adjustment as a forgiveness of severance liability
in statement of operations for the fiscal year ended March 31, 2016.
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 recognized
$0 and $375,000 in licensing revenues 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. Additional detail on the Grace
Rich joint venture is provided in Item 8, Note 12.
During the fiscal years ended March 31,
2016 and 2015, the Company sold product to RCDC valued at $142,800 and $241,950, respectively. The Company defers recognition
of revenues and expenses on these sales to RCDC until finished goods are sold by RCDC or RCDC pays the Company for its purchases.
For the fiscal year ended March 31, 2016 and 2015, the Company recognized revenue for product sold to RCDC of $183,895 and $26,575,
respectively. As of March 31, 2016, the Company has deferred $174,280 of revenue and $142,471 of expenses related to our sales
to RCDC. In addition, at March 31, 2016, the Company had a receivable from RCDC of $174,413. Additional detail on the RCDC joint
venture is provided in Item 8, Note 13.
RCDC has periodically marketed finished gemstones
to shareholders of Scio, Bernard McPheely, Scio’s Chairman of the Board, made a one-time purchase of gemstones for
$16,365 under these marketing programs.
The Company recognized $36,850 and $23,044
of product revenue from Renaissance Diamond Inc. (“Renaissance”), our partner in the RCDC joint venture, during the
fiscal years ended March 31, 2016 and 2015, respectively. The Company has granted Renaissance restricted stock awards totaling
750,000 shares that only vest based on the attainment of specific performance criteria. During the fiscal year ended March 31,
2016, 200,000 of the restricted shares were cancelled resulting in Renaissance holding 550,000 non-vested restricted shares at
March 31, 2016. In addition, the Company has granted Renaissance non-qualified stock options for 333,333 shares of common
stock. These options will vest on June 29, 2016 if the RCDC joint venture attains specific performance criteria. The strike price
of these options will be set at fifty percent of the market closing price upon vesting. The options will need to be exercised within
60 days of vesting. The Company does not anticipate recognizing any financial impact for these options and expects them to expire
unvested.
NOTE 11 — INCOME TAXES
There was no current or deferred tax expense (benefit)
for the years ended March 31, 2016 and 2015.
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
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company recorded a valuation allowance
against its net deferred tax asset at March 31, 2016 and March 31, 2015, as the Company believes that it is more likely than not
that this asset will not be realized.
|
|
At March 31, 2016
|
|
|
At March 31, 2015
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Tax at statutory federal income tax rate
|
|
$
|
(1,231,950
|
)
|
|
|
(34.0
|
)%
|
|
$
|
(1,408,162
|
)
|
|
|
(34.0
|
)%
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax expense
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
0.0
|
%
|
Change in valuation allowance
|
|
|
1,067,827
|
|
|
|
29.5
|
%
|
|
|
1,406,400
|
|
|
|
34.0
|
%
|
Incentive stock options
|
|
|
163,576
|
|
|
|
4.5
|
%
|
|
|
—
|
|
|
|
0.0
|
%
|
Other, net
|
|
|
547
|
|
|
|
0.0
|
%
|
|
|
1,762
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
|
0.0
|
%
|
|
$
|
—
|
|
|
|
0.0
|
%
|
The Company had federal and state net operating
loss carry-forwards of $17,888,714 and $16,447,935 at March 31, 2016 and 2015 respectively. These carry-forwards start to expire
in the year 2031.
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.
As of March 31, 2016,
the Company has not guaranteed obligations of the joint venture nor has it committed to provide additional funding. Therefore,
the Company’s share of the joint venture’s net loss for the years ended March 31, 2016 or 2015 were not recognized
because the initial carrying value of the Company’s ownership interest in the joint venture was zero.
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 13 — INVESTMENT IN RCDC JOINT VENTURE
On December 18, 2014 the Company entered
into an arrangement with Renaissance through the execution of a limited liability company agreement (the “LLC Agreement”)
of Renaissance Created Diamond Company, LLC, a Florida limited liability company (“RCDC”), pursuant to which the Company
and Renaissance are each 50% members of RCDC.
The LLC Agreement provides that RCDC is
a manager-managed limited liability company, and each of the Company and Renaissance will appoint one manager, with both such
managers appointing a third manager. The managers will manage the day-to-day operations of RCDC, subject to certain customary
limitations on managerial actions that require the consent of the Company and Renaissance, including but not limited to making
or guaranteeing loans, distributing cash or other property to the members of RCDC, entering into affiliate transactions, amending
or modifying limited liability company organizational documents, and entering into major corporate events, such as a merger, acquisition
or asset sale.
The arrangement was entered into in order
to facilitate the development of procedures and recipes for, and to market and sell, lab-grown fancy-colored diamonds. Pursuant
to the LLC Agreement, the arrangement will last three years, unless terminated earlier, with the option to automatically renew
for additional two-year periods.
The Company made an initial $1,000 investment
in RCDC and was granted a 50% equity stake. RCDC has the right of first refusal to purchase diamond gemstones from the Company,
including rough diamond preforms or processed stones. Renaissance may sell seed stock to RCDC for production by the Company.
RCDC purchase rough diamond material produced by the Company, finishes the rough gemstones and, in turn, sells the finished stones
to various retailers and other participants in the market for gemstones. Profits generated by RCDC’s operations will
be distributed between the Company and Renaissance according to the terms of the LLC Agreement.
Through March 31, 2016 the operations of
RCDC have been focused on the development and processing of diamond material into finished gemstone material and establishing
sales and distribution channels for the finished goods. During the fiscal years ended March 31, 2016 and 2015, the Company sold
product to RCDC valued at $142,800 and $241,950, respectively. The Company defers recognition of revenues and expenses on these
sales to RCDC until finished goods are sold by RCDC or RCDC pays the Company for its purchases. For the fiscal year ended March
31, 2016 and 2015, the Company recognized revenue for product sold to RCDC of $183,895 and $26,575, respectively. As of March
31, 2016, the Company has deferred $174,280 of revenue and $142,471 of expenses related to our sales to RCDC. The Company anticipates
recognizing this deferred revenue and expense at the earlier date of RCDC selling through its inventory or the Company collects
its receivables from RCDC.
The Company utilizes the equity method
of accounting for its investment in RCDC. As such, the Company recognized $18,230 and $29,041 as its proportional shares of RCDC’s
net income during the fiscal years ended March 31, 2016 and 2015, respectively.
Rollforward of the Company’s
ownership interest in the joint venture for the year ended March 31, 2016:
Balance of ownership interest in joint venture at December 18, 2014
|
|
$
|
1,000
|
|
Aggregate fiscal 2015 equity gain – share of joint venture income
|
|
|
29,041
|
|
Balance of ownership interest in joint venture at March 31, 2015
|
|
$
|
30,041
|
|
Aggregate fiscal 2016 equity gain – share of joint venture income
|
|
|
18,230
|
|
Balance of ownership interest in joint venture at March 31, 2016
|
|
$
|
48,271
|
|
|
|
|
|
|
Cumulative recognized income on ownership interest in joint venture at March 31, 2016
|
|
$
|
47,271
|
|
Selected financial results
for RCDC for the fiscal year ended March 31, 2016 are as follows:
Revenues
|
|
$
|
540,163
|
|
Expenses
|
|
|
503,704
|
|
Net Income
|
|
$
|
36,459
|
|
|
|
|
|
|
Total Assets
|
|
$
|
503,759
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
407,217
|
|
Total Partners Capital
|
|
|
96,542
|
|
Total Liabilities and Partner Capital
|
|
$
|
503,759
|
|
NOTE 14 — LITIGATION
We are subject, from time to time, to various
claims, lawsuits or actions that arise in the ordinary course of business. As of March 31, 2016 there were no material outstanding
claims by the Company or against the Company. On May 16, 2014 the Company received a subpoena issued by the SEC ordering the provision
of documents and related information concerning various corporate transactions between the Company and its predecessors and other
persons and entities. The Company continues to cooperate with this inquiry.
During the fiscal year ended March 31, 2016, the Company revised its estimates of legal liabilities related
to litigation settled in 2014 and reversed $192,576 of legal accounts payable.
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.
END NOTES TO FINANCIALS