The accompanying notes are an integral
part of these unaudited condensed financial statements.
The accompanying notes are an integral
part of these unaudited condensed financial statements.
The accompanying notes are an integral
part of these unaudited condensed financial statements.
The accompanying notes are an integral
part of these unaudited condensed financial statements.
The accompanying notes are an integral
part of these unaudited condensed 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 during the fiscal year ended March
31, 2016, 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 accompanying unaudited financial statements
of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the accompanying
unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly
the Company’s financial position as of June 30, 2016 and March 31, 2016 and the results of operations and cash flows
for the three month interim periods ended June 30, 2016 and 2015. The interim amounts have not been audited, and the results of
operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for future
periods or the year. The balance sheet at March 31, 2016 has been derived from the audited financial statements at that date
but does not include all of the information and footnotes required by GAAP for complete financial statements. These financial
statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the
Form 10-K Annual Report of the Company for the year ended March 31, 2016.
In accordance with Accounting Standards
Codification (“ASC”) 323, Investments—Equity Method and Joint Ventures, the Company uses the equity method of
accounting for investments in corporate joint ventures for which the Company has the ability to exercise significant influence
but does not control and is not the primary beneficiary. Significant influence typically exists if the Company has a 20% to 50%
ownership interest in the venture unless predominant evidence to the contrary exists. Under this method of accounting, the Company
records its proportionate share of the net earnings or losses of equity method investees and a corresponding increase or decrease
to the investment balances. Cash payments to equity method investees such as additional investments, loans and advances and expenses
incurred on behalf of investees, as well as payments from equity method investees such as dividends, distributions and repayments
of loans and advances are recorded as adjustments to investment balances. When the Company’s carrying value in an equity
method investee is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company
guaranteed obligations of the equity method investee or has committed additional funding. When the equity method investee subsequently
reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously
recognized. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate
that the carrying amounts of such investments may not be recoverable.
Basic and Diluted Net Loss per Share
Net loss per share is presented under two
formats: basic net loss per common share, which is computed using the weighted average number of common shares outstanding 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:
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
Common stock options
|
|
|
694,375
|
|
|
|
1,035,208
|
|
Warrants to purchase common stock
|
|
|
1,039,825
|
|
|
|
3,028,045
|
|
Non-vested restricted stock
|
|
|
1,885,000
|
|
|
|
985,000
|
|
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 has determined that
an allowance was not necessary at June 30, 2016 or March 31, 2016.
Inventories
Inventories are stated at the lower of average cost or market. The carrying value of inventory is reviewed
and adjusted based upon net realizable value, 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:
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
Raw materials and supplies
|
|
$
|
19,053
|
|
|
$
|
24,179
|
|
Work in process
|
|
|
30,075
|
|
|
|
19,514
|
|
Finished goods
|
|
|
141,527
|
|
|
|
174,809
|
|
Inventory reserve
|
|
|
(30,484
|
)
|
|
|
(28,975
|
)
|
|
|
$
|
160,171
|
|
|
$
|
189,527
|
|
The Company maintains an inventory reserve
for instances where finished good inventory may yield lower than expected results.
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 to15
|
|
Furniture and fixtures
|
3 to10
|
|
Engineering equipment
|
5 to 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. The Company incurred total depreciation expense of $158,095 and $143,412 for the three months ended June
30, 2016 and 2015, respectively.
Intangible Assets
The Company’s intangible assets consist of its patent portfolio related to its diamond growing technology.
These patents are considered definite-life intangible assets and management reviews them for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has allocated values to the
individual patents and is amortizing this value over the remaining statutory lives of the individual patents ranging from 6.75
to 19.46 years.
Stock-based Compensation
Stock-based compensation expense 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.
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 have shipped finished product to
the customer. Our sales terms do not allow for a right of return except for matters related to any manufacturing defects on our
part. The Company has an allowance for returns of $4,681 at June 30, 2016. This allowance has reduced reported revenues and is
considered an accrued expense in the balance sheet. The allowance was $8,681 at March 31, 2016.
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 at the earlier of when the joint venture partner sells the finished goods manufactured from our
materials or we are paid for our goods.
Concentration of Credit Risk
During the three months ended June 30, 2016,
the Company had fifteen different customers and three customers that each accounted for more than 10% of our total revenues. At
June 30, 2016, the Company had a receivable from Renaissance Created Diamond Company, LLC, a Florida limited liability company
(“RCDC”) of $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.
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. This business interruption affected the Company’s operation through April 2016. The Company has received
payments from our insurance carrier for coverage of this business interruption and property losses during the fiscal year ended
March 31, 2016. 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 Company’s intangible assets consist of its patent portfolio. The assigned values of all patens
are being amortized on a straight-line basis over the remaining effective lives of the patents. The following set forth the intangible
assets at June 30, 2016 and March 31, 2016:
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
Life
|
|
2016
|
|
|
2016
|
|
Patents, gross
|
|
6.75 – 19.46
|
|
$
|
9,967,433
|
|
|
$
|
9,967,433
|
|
Accumulated amortization
|
|
|
|
|
(2,983,359
|
)
|
|
|
(2,741,987
|
)
|
Net intangible assets
|
|
|
|
$
|
6,984,074
|
|
|
$
|
7,225,446
|
|
Total amortization expense for the quarter
ending June 30, 2016 and 2015 was $241,372 and $193,710, respectively.
Total annual amortization expense of finite
lived intangible assets is estimated to be as follows:
Fiscal Year Ending
|
|
|
|
Nine months ending March 31, 2017
|
|
$
|
724,118
|
|
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
|
|
$
|
6,984,074
|
|
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. 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 three months ended June 30, 2016,
the Company paid $0 in principal on the HGI Loan and recognized $37,056 in interest expense. The Company recognized $44,849 in
interest expense during the three months ended June 30, 2015. The outstanding balance on the HGI Loan was $2,000,000 at June 30,
2016, and is considered a non-current note payable.
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.
During the fiscal year ended March 31, 2016,
HGI 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 (“Expansion Note”). The Company completed the grower
expansion and the assets were placed in service during the second quarter of fiscal 2016.
Payments to HGI for the Expansion Note 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 the Expansion Note and determined that
the current portion of this note payable is $98,999 at June 30, 2016, which is considered a current liability. The remaining $201,001
on the Expansion Note is considered a non-current note payable at June 30, 2016. During the three months ended June 30, 2016, the
Company paid $0 in principal on the Expansion Note and recognized $15,036 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 sale and leaseback transaction occurred during the fiscal year ended March
31, 2016, and the Company put the assets into service during the second quarter of fiscal 2016. The Company considers this advance
from HGI as a capital lease obligation.
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 expense 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 and June 30, 2016, which is considered a current liability. During the three months ended June 30, 2016, the Company paid
$0 in capital lease obligation and incurred $10,024 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.
During the three months ended June 30,
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. The Company has sold 1,179,000 shares and raised $227,776 net of cash commissions and fees of $31,604. In addition,
as part of the broker fee for this offering, the Company issued 82,530 warrants at an exercise price of $0.22. The Company valued
these warrants using the Black-Scholes option pricing model and management has estimated these warrants had a value of $0.13 per
warrant on the date of the grant. The total value of the warrants issued was $10,729. The Black-Scholes model assumptions used
were: Expected dividend yield, 0.00%; Risk-free interest rate, 1.08%; Expected life in years, 5.0; and Expected volatility, 129.0%.
The Company had 65,098,291 shares of common
stock issued and outstanding as of June 30, 2016. This total includes 1,885,000 shares of non-vested restricted stock.
The following sets forth the warrants to
purchase shares of the Company’s stock issued and outstanding as of June 30, 2016:
|
|
Warrants
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Warrants Outstanding April 1, 2016
|
|
|
957,295
|
|
|
$
|
0.71
|
|
|
|
1.38
|
|
Issued
|
|
|
82,530
|
|
|
|
0.22
|
|
|
|
4.98
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Warrants Outstanding June 30, 2016
|
|
|
1,039,825
|
|
|
$
|
0.67
|
|
|
|
1.43
|
|
During our 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. Because the Plan
has not been approved by our shareholders, all such stock option awards are non-qualified stock options.
The following sets forth the restricted
stock outstanding as of June 30, 2016:
Restricted Stock
|
|
Shares
|
|
Restricted stock outstanding March 31, 2016
|
|
|
1,885,000
|
|
Granted
|
|
|
—
|
|
Vested
|
|
|
—
|
|
Expired/cancelled
|
|
|
—
|
|
Restricted stock outstanding June 30, 2016
|
|
|
1,885,000
|
|
The following sets forth the employee options
to purchase shares of the Company’s stock issued and outstanding as of June 30, 2016:
Options
|
|
Shares
|
|
|
Weighted-
Average Exercise
Price
|
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Employee options outstanding March 31, 2016
|
|
|
694,375
|
|
|
$
|
0.87
|
|
|
|
7.13
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Employee options outstanding June 30, 2016
|
|
|
694,375
|
|
|
$
|
0.87
|
|
|
|
6.88
|
|
Exercisable at June 30, 2016
|
|
|
190,333
|
|
|
$
|
0.99
|
|
|
|
8.31
|
|
A summary of the status of non-vested employee
options as of June 30, 2016 and changes during the three months ended June 30, 2016 is presented below.
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Grant-Date
|
|
Non-vested Shares
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested at March 31, 2016
|
|
|
682,375
|
|
|
|
0.81
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(178,333
|
)
|
|
|
0.98
|
|
Expired/cancelled: non-vested
|
|
|
—
|
|
|
|
—
|
|
Non-vested at June 30, 2016
|
|
|
504,042
|
|
|
$
|
0.75
|
|
The following table summarizes information
about employee stock options outstanding by price range as of June 30, 2016:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining
Contractual Life
(years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
$
|
1.03
|
|
|
|
535,000
|
|
|
|
8.86
|
|
|
$
|
1.03
|
|
|
|
178,333
|
|
|
$
|
1.03
|
|
$
|
0.33
|
|
|
|
159,375
|
|
|
|
0.24
|
|
|
|
0.33
|
|
|
|
12,000
|
|
|
|
0.33
|
|
|
|
|
|
|
694,375
|
|
|
|
6.88
|
|
|
$
|
0.87
|
|
|
|
190,333
|
|
|
$
|
0.99
|
|
At June 30, 2016, unrecognized compensation
cost related to non-vested employee awards was $385,744. 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 0.24 years.
During the fiscal year ended March 31, 2016,
the Company granted Renaissance Diamond Inc. (“Renaissance”), our partner in the RCDC joint venture (See Note 10),
non-qualified stock options for 333,333 shares of common stock. These options expired unvested during the three months ended June
30, 2016 and the Company did not recognize any expense related to these options.
NOTE 8 — RELATED PARTIES
During the three months ended June 30,
2016 and 2015, the Company sold product to RCDC valued at $0 and $156,800, 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
three months ended June 30, 2016 and 2015, the Company recognized revenue for product sold to RCDC of $0 and $123,250, respectively.
As of June 30, 2016, the Company has deferred $174,280 of revenue and $142,471 of expenses related to our sales to RCDC. In addition,
at June 30, 2016, the Company had a receivable from RCDC of $174,413. Additional detail on the RCDC joint venture is provided
in Note 10.
Renaissance holds 550,000 non-vested restricted
shares that only vest based on the attainment of specific performance criteria. The Company has not recognized any expense for
these restricted shares and will only recognize expense if vesting of the restricted stock becomes likely.
NOTE 9 – LITIGATION
We are subject, from time to time, to various
claims, lawsuits or actions that arise in the ordinary course of business. As of June 30, 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.
NOTE 10 — 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”)
to form 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. RCDC purchases rough diamond material produced by the Company. RCDC then
processes and finishes the rough gemstones into retail-grade gemstones. RCDC then markets the finished stones to various retailers
and other gemstone market participants. Profits and losses generated by RCDC’s operations are distributed between the Company
and Renaissance according to the terms of the LLC Agreement.
The Company utilizes the equity method of
accounting for its investment in RCDC. As such, the Company recognized $(20,369) and $16,339 as its proportional shares of RCDC’s
net loss and income during the three months ended June 30, 2016 and 2015, respectively, as other income (loss).
Rollforward
of the Company’s ownership interest in the joint venture for the three months ended June 30, 2016:
Balance of ownership interest in joint venture
at March 31,2016
|
|
$
|
48,271
|
|
Aggregate fiscal 2017
equity loss – share of joint venture income
|
|
|
(20,369
|
)
|
Balance of ownership interest
in joint venture at June 30, 2016
|
|
$
|
27,902
|
|
Cumulative recognized income on
ownership interest in joint venture at June 30, 2016
|
|
$
|
26,902
|
|
Selected financial
results for RCDC for the three months ended June 30, 2016 are as follows:
Revenues
|
|
$
|
7,111
|
|
Expenses
|
|
|
47,849
|
|
Net loss
|
|
$
|
(40,738
|
)
|
|
|
|
|
|
Total assets
|
|
$
|
513,766
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
457,962
|
|
Total partner capital
|
|
|
55,804
|
|
Total liabilities and partner
capital
|
|
$
|
513,766
|
|
END NOTES TO FINANCIALS