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.
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. Due to the on-going negative impact of the shutdown on our business, our insurance carrier has provided
an additional $235,395 in extended business indemnity payments through September 30, 2016.
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 September 30, 2016 and March 31, 2016 and the results of operations and cash
flows for the three and six month interim periods ended September 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:
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
Common stock options
|
|
|
468,333
|
|
|
|
2,015,753
|
|
Warrants to purchase common stock
|
|
|
1,039,825
|
|
|
|
988,045
|
|
Non-vested restricted stock
|
|
|
1,885,000
|
|
|
|
2,085,000
|
|
Reserved for issuance upon conversion of convertible notes
|
|
|
758,143
|
|
|
|
—
|
|
Allowance for Doubtful Accounts
An allowance for uncollectible accounts receivable
is maintained for estimated losses from customers’ failure to make payment on accounts receivable due to the Company. Management
determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical
experience, (2) aging of accounts receivable and (3) specific information obtained by the Company on the financial condition
and the current credit worthiness of its customers. The Company has determined that an allowance was not necessary at September
30, 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:
|
|
September 30, 2016
|
|
|
March 31, 2016
|
|
Raw materials and supplies
|
|
$
|
18,522
|
|
|
$
|
24,179
|
|
Work in process
|
|
|
10,298
|
|
|
|
19,514
|
|
Finished goods
|
|
|
76,073
|
|
|
|
174,809
|
|
Inventory reserve
|
|
|
(16,004
|
)
|
|
|
(28,975
|
)
|
|
|
$
|
88,889
|
|
|
$
|
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 $150,617 for the three months ended September
30, 2016 and 2015, respectively and $316,190 and $294,029 for the six months ended September 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 September 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 September 30,
2016, the Company had twenty-one different customers and two customers that each accounted for more than 10% of our total revenues.
At March 31, 2016 and September 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 INTERRUPTION
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’s business interruption insurance includes extended
period indemnity coverage that pays for lost business income during an extended recovery period through October 2016. The Company
received $235,395 in payments under this extended coverage during the three months ended September 30, 2016 and accounted for these
payments as proceeds from insurance in other income. The Company anticipates that it will continue to receive payments under this
extended insurance coverage through October 2016.
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 September 30, 2016 and March 31, 2016:
|
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
Life
|
|
2016
|
|
|
2016
|
|
Patents, gross
|
|
6.75 – 19.46
|
|
$
|
9,967,433
|
|
|
$
|
9,967,433
|
|
Accumulated amortization
|
|
|
|
|
(3,224,732
|
)
|
|
|
(2,741,987
|
)
|
Net intangible assets
|
|
|
|
$
|
6,742,701
|
|
|
$
|
7,225,446
|
|
Amortization expense for the quarter ending
September 30, 2016 and 2015 was $241,372 and $193,710, respectively. Amortization expense for the six months ending September 30,
2016 and 2015 was $482,745 and $387,420, respectively.
Total annual amortization expense of finite
lived intangible assets is estimated to be as follows:
Fiscal Year Ending
|
|
|
|
Six months ending March 31, 2017
|
|
$
|
482,745
|
|
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
|
|
$
|
6,742,701
|
|
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 and six months ending September 30, 2016 the Company recognized $36,702 and $73,758, respectively in interest expense
for the HGI Loan. During the three and six months ended September 30, 2015, the Company recognized $26,482 and $71,331 in interest
expense.
During
the three and six months ended September 30, 2016 and 2015, the Company did not repay any principal on the HGI Loan. The outstanding
balance on the HGI Loan was $2,000,000 at March 31, 2016 and September 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 March 31, 2016 and September 30, 2016, which is considered a current liability. The
remaining $201,001 on the Expansion Note is considered a non-current note payable at March 31, 2016 and September 30, 2016. During
the three and six months ended September 30, 2016, the Company recognized $19,709 and $34,745, respectively in interest expense
for the Expansion Note. The Company did not recognize any interest expense on the Expansion Note for the three and six months ended
September 30, 2015.
During the three months ending September 30,
2016, the Company initiated an offering to accredited investors of up to $750,000 in convertible notes that will mature on September
15, 2017. The Company issued $105,600 in notes through September 30, 2016. The notes carry an interest rate of 8% and interest
accrues through maturity. The notes can be called by the Company at 101% plus accrued interest. The notes are convertible into
common shares of the Company at $0.14 per share.
The Company has accounted for these convertible
notes as if they are conventional debt and includes them in its current liabilities on the balance sheet due to their maturities
being less than one year. During the three and six months ending September 30, 2016, the Company incurred $540 in interest expense
on these convertible notes.
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 September 30, 2016, which is considered a current liability. The remaining $71,994 of the capital lease obligation is
considered a non-current obligation at March 31, 2016 and September 30, 2016. During the three months and six months ended September
30, 2016, the Company incurred $13,113 and $23,137, respectively in interest expense for the capital lease. The Company did not
recognize any interest expense on the capital lease for the three and six months ended September 30, 2015.
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 six months ended September 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 September 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 September 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
|
|
|
|
4.73
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Warrants Outstanding September 30, 2016
|
|
|
1,039,825
|
|
|
$
|
0.67
|
|
|
|
1.18
|
|
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 September 30, 2016:
Restricted Stock
|
|
Shares
|
|
Restricted stock outstanding March 31, 2016
|
|
|
1,885,000
|
|
Granted
|
|
|
—
|
|
Vested
|
|
|
—
|
|
Expired/cancelled
|
|
|
—
|
|
Restricted stock outstanding September 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 September 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
|
|
|
(226,042
|
)
|
|
|
—
|
|
|
|
—
|
|
Employee options outstanding September 30, 2016
|
|
|
468,333
|
|
|
$
|
1.03
|
|
|
|
8.61
|
|
Exercisable at September 30, 2016
|
|
|
178,333
|
|
|
$
|
1.03
|
|
|
|
8.61
|
|
A summary of the status of non-vested employee
options as of September 30, 2016 and changes during the three months ended September 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
|
|
|
(214,042
|
)
|
|
|
0.45
|
|
Non-vested at September 30, 2016
|
|
|
290,000
|
|
|
$
|
0.98
|
|
The following table summarizes information about
employee stock options outstanding by price as of September 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
|
|
|
|
468,333
|
|
|
|
8.61
|
|
|
|
1.03
|
|
|
|
178,333
|
|
|
|
1.03
|
|
|
|
|
|
|
468,333
|
|
|
|
8.61
|
|
|
$
|
1.03
|
|
|
|
178,333
|
|
|
$
|
1.03
|
|
At September 30, 2016, unrecognized compensation
cost related to non-vested employee awards was $223,916.
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 six months ended September
30, 2016 and the Company did not recognize any expense related to these options.
NOTE 8 — RELATED PARTIES
The Company did not have any product sales to
RCDC during the three and six months ended September 30, 2016. During the three and six months ended September 30, 2015, the Company
sold product to RCDC valued at $27,200 and $184,000, 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. The Company did not recognize any
revenue related to product sales to RCDC for the three months and six months ended September 30, 2016. For the three and six months
ended September 30, 2015, the Company recognized revenue for product sold to RCDC of $60,645 and $183,895, respectively. As of
September 30, 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 and September 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.
Two members of our Board of Directors, Bern
McPheely and Lewis Smoak, each purchased $20,000 of convertible notes in our recent offering.
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 September 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 $(8,372) and $18,363 as its proportional shares of RCDC’s net
loss and income during the three months ended September 30, 2016 and 2015, respectively, as other income (loss). The Company recognized
$(28,741) and $34,702 as its proportional share of RCDC’s net loss and income during the six months ended September 30, 2016
and 2015, respectively.
The financial performance of RCDC has not met
the Company’s expectations since it was established. As a result, the Company believes this is a breach of the LLC agreement
and we are seeking to terminate the joint venture. The Company provided a termination notice to RCDC and Renaissance on October
31, 2016. Upon termination, the Company believes it will receive a portion of the inventory of RCDC that will meet or exceed the
book value of our investment and net receivable in RCDC.
Rollforward of the
Company’s ownership interest in the joint venture for the six months ended September 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
|
|
|
(28,741
|
)
|
Balance of ownership interest in joint venture at September 30, 2016
|
|
$
|
19,530
|
|
Cumulative recognized income on ownership interest in joint venture at September 30, 2016
|
|
$
|
18,530
|
|
Selected financial
results for RCDC for the six months ended September 30, 2016 are as follows:
Revenues
|
|
$
|
24,701
|
|
Expenses
|
|
|
82,183
|
|
Net loss
|
|
$
|
(57,482
|
)
|
|
|
|
|
|
Total assets
|
|
$
|
503,951
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
464,892
|
|
Total partner capital
|
|
|
39,059
|
|
Total liabilities and partner capital
|
|
$
|
503,951
|
|
NOTE 11 — SUBSEQUENT EVENTS
The Company has continued its convertible note
offering and has issued an additional $64,000 in notes for a total of $169,600 through November 15, 2016.
The financial performance of RCDC has not met
the Company’s expectations since it was established. As a result, the Company believes this is a breach of the LLC agreement
and we are seeking to terminate the joint venture. The Company provided a termination notice to RCDC and Renaissance on October
31, 2016.
As of September 30, 2016, the Company was
engaged in a joint venture named Grace Rich, LTD (“Grace Rich”) to manufacture diamond utilizing the
Company’s technology in the People’s Republic of China. SAAMABA, LLC (“SAAMABA”) is the
managing partner of the joint venture. This joint venture has significantly underperformed the Company’s expectations
and is not in commercial operations. On or about November 21, 2016, the Company entered into a Settlement Agreement
and Mutual Release with Grace Rich and SAAMABA that terminates all existing agreements and mutually releases any potential
claims amongst the parties. Scio has agreed to transfer its shares of Grace Rich to SAAMABA and/or Grace Rich for a
nominal amount and enter into an amended license with Grace Rich and SAAMABA that allows them to continue to operate
using our diamond manufacturing technology. The Company has been paid a one-time fee of $600,000 for the amended
license.
END NOTES TO FINANCIALS