0001884072 false --09-30 2023 Q1 0001884072 2022-10-01 2022-12-31 0001884072 2022-12-31 0001884072 2022-09-30 0001884072 2021-10-01 2021-12-31 0001884072 us-gaap:CommonStockMember 2021-09-30 0001884072 us-gaap:AdditionalPaidInCapitalMember 2021-09-30 0001884072 us-gaap:TreasuryStockMember 2021-09-30 0001884072 us-gaap:RetainedEarningsMember 2021-09-30 0001884072 2021-09-30 0001884072 us-gaap:CommonStockMember 2022-09-30 0001884072 us-gaap:AdditionalPaidInCapitalMember 2022-09-30 0001884072 us-gaap:TreasuryStockMember 2022-09-30 0001884072 us-gaap:RetainedEarningsMember 2022-09-30 0001884072 us-gaap:CommonStockMember 2021-10-01 2021-12-31 0001884072 us-gaap:AdditionalPaidInCapitalMember 2021-10-01 2021-12-31 0001884072 us-gaap:TreasuryStockMember 2021-10-01 2021-12-31 0001884072 us-gaap:RetainedEarningsMember 2021-10-01 2021-12-31 0001884072 us-gaap:CommonStockMember 2022-10-01 2022-12-31 0001884072 us-gaap:AdditionalPaidInCapitalMember 2022-10-01 2022-12-31 0001884072 us-gaap:TreasuryStockMember 2022-10-01 2022-12-31 0001884072 us-gaap:RetainedEarningsMember 2022-10-01 2022-12-31 0001884072 us-gaap:CommonStockMember 2021-12-31 0001884072 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001884072 us-gaap:TreasuryStockMember 2021-12-31 0001884072 us-gaap:RetainedEarningsMember 2021-12-31 0001884072 2021-12-31 0001884072 us-gaap:CommonStockMember 2022-12-31 0001884072 us-gaap:AdditionalPaidInCapitalMember 2022-12-31 0001884072 us-gaap:TreasuryStockMember 2022-12-31 0001884072 us-gaap:RetainedEarningsMember 2022-12-31 0001884072 jewl:ScioDiamondTechnologyCorporationMember us-gaap:CommonStockMember 2020-02-03 2020-02-03 0001884072 jewl:ScioDiamondTechnologyCorporationMember 2020-02-03 2020-02-03 0001884072 jewl:ScioDiamondTechnologyCorporationMember 2019-10-17 0001884072 jewl:ScioDiamondTechnologyCorporationMember 2019-08-07 iso4217:USD xbrli:shares iso4217:USD xbrli:shares xbrli:pure
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2022

 

oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to

 

COMMISSION FILE NUMBER 001-41560

 

 

ADAMAS ONE CORP. 

(Exact Name of registrant as specified in its charter)

 

Nevada 83-1833607
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
17767 N. Perimeter Drive, Suite B115, Scottsdale, AZ 85255
(Address of principal executive offices) (Zip Code)

 

(480) 356-8798

(Registrant’s telephone number, including area code)

 

Title of each class:  Trading Symbol(s)  Name of each exchange on which registered:
Common Stock, $0.001 par value  JEWL  The Nasdaq Stock market, LLC (Nasdaq Capital Market)
       

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o  Accelerated filer o  Non-accelerated Filer x  Smaller reporting company x  Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of December 31, 2022, the issuer had 21,203,268 shares of Common Stock outstanding.

1

 

ADAMAS ONE CORP.

 

Table of Contents

 

    Page
     
PART I FINANCIAL INFORMATION  
Item 1. Financial Statements (unaudited)  
  Condensed Balance Sheets 3
  Condensed Statements of Operations 4
  Condensed Statements of Stockholders’ Equity (Deficit) 5
  Condensed Statements of Cash Flows 6
  Notes to Condensed Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION  
Item 1. Legal Proceedings 19
Item 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Mine Safety Disclosures 19
Item 5. Other Information 19
Item 6: Exhibits 20
SIGNATURES 21

2

 

ADAMAS ONE CORP.
CONDENSED BALANCE SHEETS

 

   December 31,   September 30, 
   2022   2022 
   (Unaudited)     
ASSETS          
Current Assets:          
Cash  $3,456,200   $88,235 
Accounts receivable, net of allowance   1,559,143    1,277,368 
Inventory    301,935    58,690 
Other current assets   -    - 
Total current assets   5,317,278    1,424,293 
           
Property and Equipment, net   1,859,150    640,002 
           
Other Assets:          
Goodwill   5,413,000    5,413,000 
Other intangible assets, net   480,000    498,000 
Right of use assets - operating leases   1,429,071    -  
Other   12,800    12,800 
Total other assets   7,334,871    5,923,800 
           
TOTAL ASSETS  $14,511,299   $7,988,095 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)          
           
Current Liabilities:          
Accrued liabilities  $1,841,282   $442,645 
Accrued interest   155,863    509,620 
Payroll and related   3,743,901    2,924,172 
Due to related party - notes payable   -    558,658 
Working capital deficit - asset purchase   457,912    457,912 
Notes payable and convertible term notes, net   727,500    7,882,500 
Current portion of operating lease liability   202,318    - 
Total current Liabilities   7,128,776    12,775,507 
           
Long-Term Liabilities:          
Operating lease liability, net of current portion   1,228,699    - 
           
Total liabilities   8,357,475    12,775,507 
           
Stockholders’ Equity (Deficit)          
           
Common stock, $0.001 par value, 100,000,000 shares authorized 21,553,268 shares issued and 21,203,268 outstanding at December 31, 2022 and 16,369,423 shares issued and outstanding at September 30, 2022   21,553    16,369 
Treasury Stock 350,000 shares, at cost   (1,200,000)   - 
Additional paid-in capital   57,625,915    36,511,950 
Accumulated deficit   (50,293,644)   (41,315,731)
Total stockholders’ equity (deficit)   6,153,824    (4,787,412)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)  $14,511,299   $7,988,095 

 

The accompanying notes are an integral part of these condensed financial statements.

3

 

ADAMAS ONE CORP.
CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 2022 and 2021
(Unaudited)

 

   2022   2021 
Net Sales          
Diamond sales  $726,125   $- 
           
Cost of goods sold   134,846    - 
Gross margin   591,279    - 
           
Operating Expenses          
           
Selling, general and administrative   2,561,479    663,598 
Employee salaries and related expenses   4,664,815    239,676 
Depreciation and amortization expense   98,852    96,250 
Total operating expenses   7,325,146    999,524 
           
Loss from Operations   (6,733,867)   (999,524)
           
Other Expenses:          
Interest expense   (2,244,046)   (104,637)
           
Total Other Expenses   (2,244,046)   (104,637)
           
Loss before income taxes   (8,977,913)   (1,104,161)
           
Provision for income taxes   -    - 
Net Loss  $(8,977,913)  $(1,104,161)
           
Loss Per Share          
Basic and fully diluted          
Weighted average number of shares outstanding   17,420,365    18,652,127 
Loss per share-basic and diluted  $(0.52)  $(0.06)
           

The accompanying notes are an integral part of these condensed financial statements.

4

 

ADAMAS ONE CORP.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the Three Months Ended December 31, 2022 and 2021
(Unaudited)

 

   Common Stock   Additional             
   Shares       Paid-In   Treasury   Accumulated     
   Outstanding   Par Value   Capital   Stock   (Deficit)   Total 
Balance at September 30, 2021   18,651,750   $18,652   $23,870,976       $(30,247,873)  $(6,358,245)
Common stock issued to board members   20,000    20    79,980            80,000 
Common stock issued for incentive to lender   14,667    15    58,653            58,668 
Net loss                   (1,104,161)   (1,104,161)
Balance at December 31, 2021   18,686,417   $18,687   $24,009,609       $(31,352,034)  $(7,323,738)
                               
Balance at September 30, 2022   16,369,423   $16,369   $36,511,950       $(41,315,731)  $(4,787,412)
Common stock issued for conversion of notes and accrued interest   88,889    89    319,911            320,000 
Common stock issued for conversion of note and accrued interest   1,332,825    1,333    4,197,066            4,198,399 
Common stock issued for conversion of note and accrued interest   250,000    250    1,124,750            1,125,000 
Common stock issued to employees   920,000    920    3,679,080            3,680,000 
Common stock issued for conversion of note and accrued interest   69,445    69    312,431            312,500 
Common stock issued for conversion of note and accrued interest   55,556    56    249,944            250,000 
Common stock issued for conversion of note and accrued interest   17,130    17    62,483            62,500 
Common stock issued for IPO, net of costs of $1,892,250   2,450,000    2,450    9,130,300            9,132,750 
Warrants issued           2,038,000            2,038,000 
Repurchase stock   (350,000)           (1,200,000)       (1,200,000)
Net loss                   (8,977,913)   (8,977,913)
Balance at December 31, 2022   21,203,268   $21,553   $57,625,915   $(1,200,000)  $(50,293,644)  $6,153,824 
                               

The accompanying notes are an integral part of these condensed financial statements.

5

 

ADAMAS ONE CORP.
CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 2022 and 2021
(Unaudited)

 

   2022   2021 
OPERATING ACTIVITIES        
Net loss  $(8,977,913)  $(1,104,161)
Adjustments to reconcile net loss to net cash provided by operations:          
Stock based compensation and expenditures   3,680,000    - 
Stock issued for interest   113,398    - 
Warrants issued for conversion   2,038,000    - 
Depreciation and amortization   98,852    96,250 
Allowance for doubtful accounts   72,600    - 
Changes in assets and liabilities          
Accounts receivable   (354,375)   - 
Inventory   (243,245)   (113,999)
Other assets   -    8,503 
Accrued liabilities   1,398,638    65,566 
Accrued interest   (353,757)   104,636 
Accrued payroll and related   819,729    59,504 
Severance obligation   -    18,000 
Total Adjustments to reconcile net loss to net cash used in operations:   7,269,840    238,460 
Net cash used in operating activities   (1,708,073)   (865,701)
           
INVESTING ACTIVITIES          
Machinery & equipment   (1,300,000)   - 
Net cash used in investing activities   (1,300,000)   - 
           
FINANCING ACTIVITIES          
Notes payable proceeds (payments)   (1,000,000)   690,000 
Due to related party   (558,658)   130,865 
Purchase of treasury stock   (1,200,000)   - 
Right of use assets - operating leases, net   1,946    - 
Cash from stock sale, net of costs of $1,892,250   9,132,750    - 
Net cash provided by financing activities   6,376,038    820,865 
           
Net cash increase (decrease) for the period  $3,367,965   $(44,836)
Cash, beginning of period   88,235    261,819 
Cash, end of the period  $3,456,200   $216,983 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $-   $- 
Cash paid for income taxes  $-   $- 
Non-cash investing and financing activities are as follows:          
Stock-based compensation  $3,680,000   $- 
Stock for interest  $113,398   $- 
Warrants issued for conversion  $2,038,000   $- 
Conversion of debt to equity  $6,155,000   $- 
Stock for board member services  $-   $80,000 
Stock for lenders incentive  $-   $58,668 
           

The accompanying notes are an integral part of these condensed financial statements.

6

 

ADAMAS ONE CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended December 31, 2022 and 2021

 

NOTE 1 – ORGANIZATION AND BUSINESS ACTIVITY

 

We were incorporated on September 6, 2018, in the state of Nevada for the purpose of acquiring existing technology that would efficiently and effectively produce lab-grown, environmentally friendly, ethically sourced diamonds. On January 31, 2019, we entered into an Amended Asset Purchase Agreement with Scio Diamond Technology Corporation, or Scio, which was subsequently amended February 3, 2020, pursuant to which we acquired substantially all of the assets of Scio, which assets consisted primarily of proprietary diamond growing chemical reactors, which we refer to as diamond growing machines, patents, and all intellectual property related thereto, for an aggregate of 1,500,000 shares of our common stock and payment to certain lenders of Scio of an aggregate of $2.1 million in cash. In addition, we agreed to pay one-half of certain other unsecured operational liabilities of Scio. The transaction was approved by a majority of the Scio stockholders voting in person or by proxy at a special meeting of stockholders held commencing on June 7, 2019 and reconvening on August 6, 2019. The transaction closed on October 17, 2019. We recorded the net value of the assets purchased and liabilities assumed at $8.65 million.

 

Since acquiring the assets of Scio, we have continued to further develop the technologies acquired from Scio, and we have begun producing diamonds for fine jewelry and diamond material for industrial uses.

 

NOTE 2 – GOING CONCERN

 

The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We incurred a net loss of $9.0 million and used approximately $1.7 million of cash in operations for the three months ended December 31, 2022. Further information related to a going concern may be obtained in NOTE 2 of the Company’s 2022 audited financial statements for the year ended September 30, 2022, and in the Going Concern Uncertainty paragraph in the Report of Independent Registered Public Accounting Firm, also contained in the above referenced financial statements. These conditions raise substantial doubt about our ability to continue as a going concern for the following year.

 

We will need additional financing to implement our full business plan and to service our ongoing operations. There can be no assurance that we will be able to secure any needed funding, or that if such funding is available, the terms or conditions would be acceptable to us. If we are unable to obtain additional financing when it is needed, we will need to restructure our operations and possibly divest all or a portion of our business. We may seek additional capital through a combination of equity offerings and debt financings. Debt financing, if obtained, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, and could increase our expenses and require that our assets secure such debt. Equity financing, if obtained, could result in dilution to our existing stockholders and/or require such stockholders to waive certain rights and preferences. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should we be unable to continue as a going concern.

7

 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Presentation

 

The condensed financial statements included herein have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements for the year ended September 30, 2022. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.

 

The accompanying condensed financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at December 31, 2022 and the results of our operations and cash flows for the periods presented.

 

Interim results are subject to seasonal variations, and the results of operations for the three months ended December 31, 2022, are not necessarily indicative of the results to be expected for the full year.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the financial statements include, but are not limited to, the following: collectability of accounts receivable, the potential impairment of goodwill, valuation of deferred tax assets, carrying value of inventories, useful lives and recovery of equipment and other intangible assets, and valuation of stock-based compensation.

 

Cash and Cash Equivalents

 

For purposes of the statements of cash flows, we consider highly liquid financial instruments purchased with a maturity of three months or less at the time of purchase to be cash equivalents.

 

Accounts Receivable

 

We follow the allowance method of recognizing uncollectible accounts receivable, which recognizes bad debt expense based on a review of the individual accounts outstanding and our prior history of uncollectible accounts receivable. We extend credit based on an evaluation of each customer’s financial condition, and our receivables are generally unsecured. Accounts receivable are stated net of an allowance for doubtful accounts in the balance sheet. We consider accounts past due if outstanding longer than contractual payment terms. We record an allowance based on consideration of a number of factors, including the length of time trade accounts are past due, our previous loss history, the creditworthiness of individual customers, economic conditions affecting specific customer industries, and economic conditions in general. We charge-off accounts receivable after all reasonable collection efforts have been exhausted. We credit payments subsequently received on such receivables to bad debt expense in the period we receive the payment.

 

As of December 31, 2022, we had established an allowance of $355,850, for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivable only if they are collected.

 

Property and Equipment

 

We recorded property and equipment purchased at cost. We compute depreciation, after equipment is placed in service, using the straight-line method at rates intended to depreciate the cost of assets over their estimated useful lives, which are generally four to ten years. Upon retirement or sale of property and equipment, we will remove the cost of the disposed assets and related accumulated depreciation from the accounts and any resulting gain or loss is credited or charged to selling, general, and administrative expenses. We charge expenditures for normal repairs and maintenance to expense as incurred. We capitalize additions and expenditures for improving or rebuilding existing assets that extend the useful life. Leasehold improvements made either at the inception of the lease or during the lease term will be amortized over the shorter of their economic lives or the lease term including any renewals that are reasonably assured.

 

Goodwill

 

Goodwill represents the excess of fair value over identifiable tangible and intangible net assets acquired in the Scio business combination. Goodwill is not amortized, instead goodwill is reviewed for impairment at least annually, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than it’s carrying value. The goodwill that arose from the Scio asset purchase agreement was independently valued at $5,413,000 as of August 7, 2019. We completed our last annual goodwill impairment test in our fourth quarter for the fiscal year ended September 30, 2022, and as a result of the annual test management determined that no change was needed to the carrying value of goodwill at September 30, 2022 or as of December 31, 2022.

8

 

Impairment of Long-Lived Assets

 

We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. No impairment expense was recognized for the three months ended December 31, 2022 and 2021.

 

Revenue Recognition

 

We generate revenue from the production and sale of diamonds. We recognize revenue according to Accounting Standards Codification 606 – Revenue from Contracts with Customers (“ASC 606”). When the customer obtains control over the promised goods or services, we record revenue in the amount of consideration that we can expect to receive in exchange for those goods. We apply the following five-step model to determine revenue recognition:

 

  identification of a contract with a customer;

 

  identification of the performance obligations in the contact;

 

  determination of the transaction price;

 

  allocation of the transaction price to the separate performance obligations; and

 

  recognition of revenue when performance obligations are satisfied.

 

We only apply the five-step model when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. Our contracts contain a single performance obligation (delivery of diamonds), and the entire transaction price is allocated to the single performance obligation. We recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Accordingly, we recognize revenue when the customer obtains control of our product, which typically occurs upon delivery of the product. Our credit terms are currently that payment is due within 90 days.

 

Disaggregated Revenue Information

 

We have no disaggregated revenue to report for the three months ended December 31, 2022 or 2021. We continue to have one wholesale customer.

 

Advertising Costs

 

We plan to expense advertising costs as they are incurred. We have incurred no advertising costs to date.

 

Inventories

 

We state inventories at the lower of cost or net realizable value. We determine cost using the average cost method on all inventory generated by our manufacturing operations upon our transition from research and development in our manufacturing facility to the full production of our products for sale. At both December 31, 2022, and September 30, 2022, our inventory consisted primarily of finished and nearly finished precious stones in various carat sizes, shapes, and colors.

 

Stock-Based Compensation

 

We account for stock-based compensation at estimated fair value on the date of grant. There were 920,000 shares of common stock granted to three employees for one year’s services of each employee and fully expensed during the three months ended December 31, 2022. These were valued at approximate $4 per share, or an aggregate of $3,680,000.

 

In addition, the Company issued 666,413 warrants upon the conversion of $4.1 million in debt. These warrants were valued at $2,038,000 using Black-Scholes with the following significant terms. Term 5 year, volatility 80%, risk-free interest rate 3%, expected dividend yield 0%.

9

 

There were no shares granted for employees nor expensed during the three months ended December 31, 2021.

 

The price per share was based upon sales of our common stock near the date of grant. The grants are fully vested and are recognized upon the date of grant.

 

Concentrations of Credit Risk

 

Accounts at banks are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. As of December 31, 2022, our bank account balance exceeded the federally insured limit. We mitigate this exposure by using a high credit financial institution. We have one wholesale customer, representing substantially all of our accounts receivable.

 

Income Taxes

 

We account for income taxes under the asset and liability method in accordance with Accounting Standards Codification 740 - Income Taxes, or ASC 740. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable amounts in years in which those temporary differences are expected to be recovered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. We reflect changes in recognition or measurement in the period in which the change in judgment occurs. We currently have substantial net operating loss carryforwards. We have recorded a valuation allowance equal to the net deferred tax assets due to the uncertainty of the ultimate realization of the deferred tax assets.

 

Contingencies

 

Certain conditions may exist as of the date the financial statements are issued that may result in a loss to us but will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to potential unasserted claims that may result in legal proceedings against us, we evaluate the perceived merits of any claims and the perceived merits of the amount of relief sought or expected to be sought therein and determine if any loss is likely.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability is reasonably estimated, the estimated liability would be accrued in our financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of range of possible loss if determinable and material, would be disclosed. There were no known loss contingencies identified as of December 31, 2022.

 

Loss Per Common Share

 

We calculate basic loss per share using the weighted average number of shares of common stock outstanding during each reporting period. Diluted loss per share includes potentially dilutive financial instruments, such as convertible term notes and related interest. We excluded 903,351 and 1,363,346 shares from the weighted average diluted common shares outstanding for December 31, 2022 and 2021, respectively, because their inclusion would have been antidilutive. These shares are what would have been issued if the convertible debt, plus accrued interest had converted for each of the three months ended December 31, 2022 and 2021.

 

Recently Issued Accounting Pronouncement

 

Adopted

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update improves financial reporting about leasing transactions by requiring a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. We adopted ASU 2016-02 in the three months ended December 31, 2022. We completed the process of aggregating and evaluating lease arrangements and implementing new processes during the three months ended December 31, 2022. As a result of evaluating the impact of adoption of the ASU on our financial statements we recognized a right-of-use asset and lease liability on our balance sheet for our real estate operating leases. At October 1, 2022 we recognized a right of use asset of $1.4 million, and a lease liability of $1.4 million.

10

 

NOTE 4 – INVENTORIES

 

As of December 31, 2022 and September 30, 2022, the inventory balances were composed of finished goods carried at the value of the costs associated with the manufacturing of the goods.

 

NOTE 5 – PROPERTY AND EQUIPMENT

 

Property and equipment are listed net of the related accumulated depreciation as of December 31, 2022 and September 30, 2022. As of December 31, 2022, the Company has a deposit on equipment on order in the amount of $1.3 million, which represents approximately 50% of the total purchase price. As the equipment is not yet in service, it is not being depreciated.

 

Depreciation expense for the three months ended December 31, 2022 and 2021 totaled $80,852 and $78,250 respectively.

 

NOTE 6 – COMMITMENTS

 

Indemnifications

 

During the normal course of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These may include (i) indemnities to vendors and service providers pertaining to claims based on negligence or willful misconduct; and (ii) indemnities involving the representations and warranties in certain contracts. In addition, under our bylaws we are committed to our directors and officers for providing for payments upon the occurrence of certain prescribed events. The majority of these indemnities and commitments do not provide for any limitation on the maximum potential for future payments that we could be obligated to make. We have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we had no liabilities recorded for these agreements as of December 31, 2022 and September 30, 2022.

 

Leases

 

We are obligated under a triple-net operating lease for our 6,475 square foot manufacturing facility located in Greenville, South Carolina, which is classified as an operating lease. The terms of the lease require a payment of approximately $10,000 per month, which includes an estimate for utilities, taxes, and repairs. This lease expires in August 2023.

 

We believe this facility will be adequate to meet our current needs based on the property and equipment currently owned. However, our business plan will require additional space, and we will be making plans to expand our building footprint at possible new or additional locations to accommodate additional manufacturing equipment. As part of the initial expansion discussed above, we have entered into a lease for 23,485 square feet of additional manufacturing space in Greenville, South Carolina, expiring in July 2036. In addition, we have a lease for 3,414 square feet of office space in Scottsdale, Arizona, expiring in September 2024. The office is to facilitate the administration and marketing of expanding the manufacturing aspect of our company as well as to administer increased management anticipated in areas of human resources, finance, accounting, and financial analysis as well as sales and marketing to manage the growth in the production output as a result of the second facility in Greenville, South Carolina. We intend to pay for these improvements using a combination of working capital, new debt financing, and equity offerings.

 

The weighted average remaining lease term and weighted average discount rate for operating leases were 11.9 years and 5.0%, respectively. The operating lease cost for the three months ended December 31, 2022 was approximately $78,000.

 

The future minimum lease payment required under our leases as of December 31, 2022 are as follows: 

 

2023  $267,537 
2024   178,649 
2025   129,168 
2026   134,060 
2027   140,910 
Thereafter   1,045,082 
Total undiscounted cash flows   1,895,406 
Less: present value discount (5% per annum)   (464,389)
Total lease liabilities  $1,431,017 

 

Employment Agreements

 

We have entered into five separate employment agreements that provide for stock to be issued annually in varying amounts through fiscal 2025. The price per share to be included in employee stock compensation expense will be based upon the fair market value of the stock on the date of grant. The grants are fully vested, pending the service requirement of continued employment.

 

We also have salary commitments contained in our various employment agreements through fiscal year 2025.

 

After 2025, one salary continues to increase at 9% per year from its approximately $280,000 2025 base salary.

11

 

Additional Compensation

 

In addition to the above stock commitments, we have agreed to provide certain executive officers with compensation paid in diamonds. These commitments amount to issuing 9.5 carats of diamonds per month through September 2024 and 2.5 carats of diamonds per month through October 2025. For the three months ended December 31, 2022 and 2021 this obligation has been accrued at a valuation of $1,000 per carat, which is based on management’s estimate of the market value of the diamonds.

 

Litigation

 

During December 2022, we became a party to a class action filing previously between Scio and a class action investor. We have retained outside counsel specifically for this matter and are working with other defendants named in this matter to increase our chance of prevailing. On February 17, 2022 the Company filed a motion to dismiss the class action in concert with Scio which filed a separate motion to dismiss this class action. Our approach will continue to seek a dismissal on all items related to this legal action. We believe the case is without merit and will defend our position vigorously. Based on the Company’s assessment of a favorable decision by the court no liability has been recorded on our balance sheet at December 31, 2022. 

  

NOTE 7 – NOTES PAYABLE AND CONVERTIBLE TERM NOTES

 

On December 23, 2022 we reduced the original balance principal by $250,000 of our December 21, 2021, 10% secured promissory note with a private lender for $250,000, which was restated in the form of a 10% secured promissory note for $255,000 with a maturity date of December 31, 2022, with the same private lender. At December 31, 2022 the balance owed was $5,000 and accrued interest.

  

On December 15, 2022 the Company converted one $50,000 note of the seven separate investors totaling an aggregate of $700,000 which had origination dates ranging from May to September 2019 which contain an interest rate of 7% and mature on the second anniversary date of the respective notes. The note was converted into 13,889 shares common stock and 1,289 shares of common stock for accrued interest. The remaining balances outstanding at December 31, 2022, on these convertible term notes was $650,000.

 

On December 15, 2022, we converted a convertible promissory note with a private lender in the original principal amount of $255,000. The note contained an interest rate of 8% per year and had a maturity date of July 31, 2022 and was amended to extend the maturity date to October 31, 2022. The note was converted into 70,833 shares of our common stock and 2,873 shares of our common stock for accrued interest through December 15, 2022.

 

On August 23, 2022, we entered into the 2022 Convertible Note with the 2022 Noteholder for an aggregate original principal amount of $4,100,000. In connection with the 2022 Convertible Note, we issued to the 2022 Noteholder a five-year warrant (referred to herein as the “2022 Noteholder Warrant”) to purchase shares of our common stock in an amount equal to 33.33% of the number of shares received by the 2022 Noteholder from the conversion of the 2022 Convertible Note, which number of shares will increase to an amount equal to 50% of the number of shares received by the 2022 Noteholder from the conversion of the 2022 Convertible Note if within 90 days after the date of the 2022 Convertible Note either (i) we have not completed an initial public offering, or (ii) the shares of common stock underlying the 2022 Noteholder Warrant are not registered for resale pursuant to an effective registration statement declared effective by the SEC. The 2022 Noteholder Warrant is exercisable upon conversion of the 2022 Convertible Note or an event of default under the 2022 Convertible Note, and the exercise price of the 2022 Noteholder Warrant is equal to 1.25 times the conversion price for the 2022 Convertible Note. On December 6, 2022, the 2022 Noteholder agreed to convert all of the 2022 Convertible Note and accrued interest into 1,332,825 shares of our common stock concurrently with and conditioned upon the pricing of our initial public offering.  As a result of such conversion of the 2022 Convertible Note, the 2022 Noteholder Warrant will be exercisable for 666,413 shares of our common stock at an exercise price of $3.94 per share. On December 6, 2022, the 2022 Noteholder was issued the 666,413 warrants related to the induced conversion of the 2022 Convertible Note. We valued these warrants at the conversion date of December 6, 2022 in the amount of $2,038,000 using Black-Scholes valuation method and assumptions that consider, among other factors, the fair value of the underlying stock, risk free interest rate, volatility, and expected life.

 

We had convertible notes with a discount with four separate investors totaling an aggregate of $1.75 million. The notes contain a provision that the debt will be paid through a conversion to common stock at a discount of 20%. As a result, we have imputed a discount of $350,000 as of the inception of the notes. The notes originated from July to September 2019, with an anticipated due date of December 31, 2022. The conversion trading price of stock was $4.50 per share, giving an effective conversion price of $3.60 per share after the discount. During December 2022, all four separate investors converted the aggregate balance outstanding during the time of $1.75 million into 392,131 shares of our common stock.

12

 

On December 19, 2022 we paid in full the $750,000 original principal balance on an a $750,000 20% Subordinated Note dated July 12, 2022. The original note had an original maturity date of the earlier of 30 days from execution or the Company’s IPO date. The maturity date was subsequently modified to a date later than the closing of the IPO on December 14, 2022 in which the Company paid the outstanding balance and accrued interest in full on December 19, 2022.

 

During the three months ended December 31, 2022 the Company paid the full outstanding balances on five separate revolving promissory notes with related entities, Lucid Technologies, LLC for $432,337, Private Co LLC for $304,410, Mix 1, LLC for $3,500, Pubco LLC for $24,000, Dolce B, LLC for $18,500. All these entities are controlled by our Chief Executive Officer. These notes were non-interest bearing, unsecured, and were payable on September 30, 2023 or earlier at the option of the Company.

 

We have a note with a private lender, dated May 14, 2019, with an original principal balance of $100,000 and an original maturity date of September 5, 2019. The note has been re-negotiated on several occasions and has a current maturity date of December 31, 2022. Accrued interest was capped at $46,500, which can be paid in shares of our common stock valued at $4 per share. The principal balance outstanding on the note at December 31, 2022 and September 30, 2022 was $72,500. The note is unsecured.

 

NOTE 8 – CAPITAL STOCK

 

Our authorized capital consists of 100,000,000 shares of common stock with a par value of $0.001 per share and 10,000,000 shares of preferred stock with a par value of $0.001 per share.

 

As of December 31, 2022, and 2021, we had no shares of preferred stock issued or outstanding.

 

As of December 31, 2022, there were 21,553,268 shares of common stock issued and 21,203,268 shares outstanding. During the three months ended December 31, 2022, we issued 5,183,845 shares of common stock as follows:

 

    2,450,000 shares were sold to investors for $11,025,000, before expenses of the offering in the Company’s IPO;

 

    1,332,825 shares were issued to note holder electing to convert upon IPO valued at $4,198,399;

 

    920,000 shares valued at $3,680,000 were granted to employees as compensation;

 

    481,020 shares were issued for $2,070,000 for incentive to lenders: and

 

    In addition, we purchased 350,000 shares of treasury stock for $1,200,000.

 

NOTE 9 – RELATED PARTY

 

Amounts due to related parties on December 31, 2022 and September 30, 2022 were $0 and $558,658, respectively, primarily for non-interest bearing, due on demand advances to our company from our President and Chief Executive Officer or entities controlled by him.

 

In addition, we have various employment contracts and additional compensation agreements with members of the executive team, which are discussed in Note 6 – Commitments.

 

We also have payroll and related liabilities outstanding as of December 31, 2022 and September 30, 2022 that are primarily owed to our principal officers.

 

NOTE 10 – INCOME TAXES

 

We compute income taxes using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance for the amount of deferred tax assets that, based on available evidence, are more likely than not to be realized. Realization of our net operating loss carryforward was not reasonably assured as of December 31, 2022 and September 30, 2022, and we have recorded a related valuation allowance against deferred tax assets in excess of deferred tax liabilities in the accompanying financial statements.

 

As of December 31, 2022 and September 30, 2022, we had federal income tax net operating loss carryforwards. We are subject to limitations existing under Internal Revenue Code Section 382 (Change of Control) relating to the availability of the operating loss, therefore utilization of a portion of our net operating loss may be limited in future years.

 

As of December 31, 2022 and September 30, 2022 we had no Internal Revenue Service or state tax examinations. Therefore, all periods since inception are subject to audit.

 

NOTE 11 – SUBSEQUENT EVENTS

 

We have analyzed our operations subsequent to the balance sheet and determined that there were no other significant subsequent events or transactions that would require recognition or disclosure in the financial statements for the three months ended December 31, 2022.

13

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This document contains certain “forward-looking statements”. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies, goals and objectives of management for future operations; any statements concerning proposed new products and services or developments thereof; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.

 

Forward looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,” “believe,” “expect,” or “anticipate,” or other similar words, or the negative thereof. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. You should, however, consult further disclosures and risk factors we included in the section titled Risk Factors contained herein.

 

Overview

 

We are a high-tech diamond company that uses our proprietary technology to produce high-quality, single crystal diamonds and diamond materials through a CVD process, which we refer to as our Diamond Technology. Lab-grown diamonds have the exact physical, chemical, and optical properties of the best mined diamonds. Lab-grown diamonds are composed of a pure carbon lattice, just like mined diamonds, and are not considered synthetic or simulant diamonds like cubic zirconia and moissanite. Simulants are other chemical compounds that resemble diamonds but do not possess the same hardness, thermal characteristics, band gap energy, and light reflectivity as diamond, whether mined or lab-grown.

14

 

We use our Diamond Technology to produce finished diamonds that we intend to sell wholesale and retail for jewelry and rough unfinished diamond materials that we intend to sell wholesale and retail for industrial uses. We are in the initial phases of commercializing diamonds and diamond materials, and our primary mission is the development of a profitable and sustainable commercial production model for the manufacture and sale of diamonds and diamond materials, which are suitable for known, emerging, and anticipated industrial, technology, and consumer applications.

 

Since acquiring the Scio assets over three years ago, we have focused our efforts on research and development of improvements to the fundamental CVD process. Like most high-tech manufacturers, the philosophy of continuous improvement is at our core. Our development efforts have focused on commercialization of the diamonds and diamond materials we produce, improvements in our white diamond process, improvements in our diamond seed processes, automation in our machine operation, expansion of our capacity with our existing machines, and improvements in our laser cutting procedures. The guiding principle of these efforts is to provide the highest quality diamonds and diamond materials in a consistent and high-yield manner.

 

We currently have limited available commercial products and have to date sold minimal diamonds or diamond materials to consumers or commercial buyers. Our current operations, until just recently, have been dedicated to the research and development of our Diamond Technology and the exploration of markets that we may exploit in the future. While we are unable to predict the timing of our entry into any market in the future, we will strive to produce on a large scale high-quality finished and raw diamond materials and to pursue related commercial opportunities.

 

Results of Operations

 

The following table presents summarized financial information taken from our statements of operations for the three months ended December 31, 2022 compared with the three months ended December 31, 2021:

 

   For the Three Months Ended 
  

December 31,

(unaudited)

 
   2022   2021 
Net Sales  $726,125   $- 
Cost of Goods Sold   134,846    - 
Gross Margin   591,279    - 
           
Total operating expenses   7,325,146    999,524 
Loss from operations   (6,733,867)   (999,524)
Other expenses          
Interest expense   (2,244,046)   (104,637)
Loss before income taxes  $(8,977,913)  $(1,104,161)

15

 

Components of Results of Operations

 

Net Sales

 

During the three months ended December 31, 2022, we had net sales of $726,125 compared to no net sales for the three months ended December 31, 2021.

 

We anticipate deriving continuing future revenue from the following business lines:

 

  Direct Sales of Diamonds: The sale of diamond gemstones direct to the consumer through our website and the sale of industrial grade diamonds direct to industrial manufacturing companies.

 

  Wholesale of Diamonds: The sale of diamonds to wholesalers, distributors, and jewelers.

 

Cost of Goods Sold

 

Cost of goods sold includes direct costs (parts, material, and labor), indirect manufacturing costs (manufacturing overhead, depreciation, plant operating lease expense, and rent), shipping, lab services, and logistics costs.

 

Costs of goods sold for the three months ended December 31, 2022, were $134,846.

 

Gross margin for the three months ended December 31, 2022, was $591,279 or a gross profit margin on diamond sales of 81% for the three months ended December 31, 2022.

 

There were no costs of goods sold nor any related gross margin for the three months ended December 31, 2021, to compare to the current year.

 

Research and Development Expense

 

We conduct research and development activities to enhance existing processes and products and develop new processes and products at our facilities in Greenville, South Carolina, utilizing our personnel and strategic relationships. We expense all costs associated with our research and development efforts through either our cost of goods sold, as they are performed by the same employees who produce our finished product, or through our general and administrative expenses if the product has not been brought to market.

 

We expect our research and development expenses to increase for the foreseeable future as we continue to invest in research and development activities to achieve our operational and commercial goals.

 

Operating Expense

 

Operating expense includes selling, general and administrative expense, employee salaries and related expense and depreciation and amortization expense. Selling, general, and administrative expenses consist primarily of legal and professional, consulting services and all non-personnel-related expenses or depreciation and amortization. Personnel-related expenses consist of salaries, payroll taxes, benefits, and stock-based compensation. Depreciation and amortization expenses are related to the Company’s fixed assets and intangible assets.

 

Operating expense for the three months ended December 31, 2022, included in the statement of operations was $7.3 million compared to $1.0 million in the comparison to the comparable prior period.

 

We expect our operating expense to increase for the foreseeable future as we scale headcount and expenses with the growth of our business, build out our manufacturing facilities, refine our production processes, drive for productivity improvements, acquire new and retain existing customers, and incur additional costs as a result of being a public company.

 

Other Expenses

 

Interest Expense

 

Interest expense consists of interest paid and accrued on our notes payable, promissory notes and the amortization of debt issue costs.

 

Interest expense was $2.2 million for the three months ended December 31, 2022, compared to $0.1 million for the three months ended December 31, 2021. This increase in interest expense was due primarily the warrants issued for notes converted and partly to higher net borrowings and outstanding indebtedness for the three months ended December 31, 2022, versus the three months ended December 31, 2021.

16

 

Net Loss

 

Primarily as a result of the above factors we had a net loss of $9.0 million compared to a net loss of $1.1 million for the three months ended December 31, 2022, and December 31, 2021, respectively.

 

Liquidity and Capital Resources

 

As of December 31, 2022, we had $3.5 million of cash and cash equivalents, an increase of $3.4 million from September 30, 2022.

 

Changes in cash flows are summarized as follows:

 

Operating Activities

 

For the three months ended December 31, 2022, net cash used in operating activities totaled approximately $1.7 million. This was primarily the result of net loss of approximately $9.0 million, increases to our period end accounts receivable of $0.3 million and accrued interest decrease of $0.4 million which was offset primarily by increases in accrued liabilities of $1.4 million, inventory of $0.2 million and accrued payroll and related of $0.8 million along with an offset by the benefit of non-cash expenses for employee stock compensation of $3.7 million and warrants issued for conversion of $2.0 million.

 

For the three months ended December 31, 2021, net cash used in operating activities totaled approximately $.9 million. This was primarily the result of net loss of approximately $1.1 million.

 

Investing Activities

 

During the three months ended December 31, 2022, we used $1.3 million for investing activities related to purchase of machinery and equipment.

 

During the three months ended December 31, 2021, we used no cash for investing activities.

 

Financing Activities

 

During the three months ended December 31, 2022, net cash provided by financing activities was approximately $6.4 million. This was the net effect of $9.1 million we received as net proceeds from our IPO which closed on December 14, 2022 offset by $0.6 million used to reduce related party notes, $1.0 million to reduce notes payable and $1.2 million to acquire treasury stock during the three months ended December 31, 2022.

 

During the three months ended December 31, 2021, net cash provided by financing activities was approximately $0.8 million. This was primarily the net effect of $0.7 million of increased note borrowings and $0.1 million in related party activity.

 

These conditions raise substantial doubt about our ability to continue as a going concern for the ensuing year. Our independent auditors have added an explanatory paragraph in their audit opinion in regard to this uncertainty and can be found in the Company’s Annual Form 10K filing with the Securities and Exchange Commission.

 

Satisfaction of our Cash Obligations for the Next 12 Months

 

Our recent IPO which closed on December 14, 2022 gave us gross proceeds of $11.0 million before direct IPO expenses and fees associated with underwriting. These funds along with the ability to obtain additional capital through additional equity and/or debt financing are anticipated to meet our operating needs. We are not currently generating sufficient revenue to meet operating needs. In the event we cannot obtain additional capital to pursue our strategic plan, however, this would materially impact our ability to continue as a going concern.

 

Since inception, we have financed cash flow requirements through debt financing and the private issuance of common stock for cash and services along with advances from our CEO as well as our CEO and CFO deferring significant compensation and benefits that were earned under their respective employment contracts. If we continue to experience cash flow deficiencies, we would be required to obtain additional financing to fund operations through private common stock offerings and debt borrowings to the extent necessary to provide working capital. However, there is no assurance we would be able to obtain such financing on commercially reasonable terms, if at all.

17

 

We intend to implement and successfully execute our business and marketing strategy, continue to develop, and upgrade technology and products, respond to competitive developments, and attract, retain, and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition, and results of operations.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the condensed consolidated financial statements include the valuation of allowances for doubtful accounts, valuation of deferred tax assets, inventories, useful lives of assets, goodwill, intangible assets, and stock-based compensation. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended September 30, 2022, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There have been no significant changes to these policies during the three months ended December 31, 2022. For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2022.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2022. Based on the evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were not effective. Our controls were ineffective due to the size of the Company and available resources. There are limited personnel to assist with the accounting and financial reporting function, which results in: (i) a lack of segregation of duties and (ii) controls that may not be adequately designed or operating effectively. Despite the existence of material weaknesses, the Company believes the financial information presented herein is materially correct and fairly presents the financial position and operating results of the three months ended December 31, 2022, and 2021 in accordance with GAAP.

 

Changes in internal controls

 

There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, during the quarterly period from October 1, 2022 to December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

18

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are involved in or subject to, or may become involved in or subject to, routine litigation, claims, disputes, proceedings, and investigations in the ordinary course of business. While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in the opinion of management, individually or in the aggregate, no such lawsuits are expected to have a material effect on our financial position, results of operations or cash flows. We record accruals for contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated.

 

Please reference the Contingencies section of Note 3 of our Financial Statements for additional disclosure.

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The authorized capital of the Company is 100,000,000 shares of Common Stock with a par value of $0.001 per share and 10,000,000 shares of Preferred Stock with a $0.001 par value per share.

 

There were no unregistered sales of the Company’s equity securities during the quarter ended December 31, 2022 that were not previously reported in a Current Report on Form 8-K except as follows:

 

We issued 481,020 shares of our Common Stock for conversion of notes and accrued interest with a total value of $2,070,000.

 

We issued 920,000 shares of our Common Stock for employee stock grants with a total value of $3,680,000.

 

The previously mentioned securities were issued in reliance on the exemptions from registration under the Securities Act in Section 4(a)(2) of the Securities Act and/or Regulation D thereunder.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5. OTHER INFORMATION

 

None

19

 

ITEM 6. EXHIBITS

 

Exhibit No.   Exhibit
31.1*   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for John G. Grdina.
31.2*   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Steven Staehr.
32.1**   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for John G. Grdina.
32.2**   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Steven Staehr.
     
101.INS*   Inline XBRL Instance Document
101.SCH*   Inline XBRL Taxonomy Extension Schema Document
101.CAL*   Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*   Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*   Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*   Inline XBRL Taxonomy Extension Definition Linkbase Document
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*Filed Herewith.

 

**Furnished Herewith.

20

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ADAMAS ONE CORP.

 

February 21, 2023   By: /s/ John G. Grdina
      John G. Grdina
      Chief Executive Officer

 

ADAMAS ONE CORP.

 

February 21, 2023   By: /s/ Steven Staehr
      Steven Staehr
      Chief Financial Officer

21