SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Sep. 30, 2023

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Preparation

The accompanying financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for financial information and with the instructions to Form 10-K as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, these financial statements include all of the disclosures required by generally accepted accounting principles for complete financial statements.

The Company’s fiscal year begins on October 1 and ends on September 30. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.

Reclassification

Certain prior period amounts in the balance sheet, statement of cash flows and accompanying notes have been reclassified to conform to the current period’s presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP 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, debt discounts and valuations, 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 September 30, 2023, we had established an allowance of $1.7 million for potentially uncollectible accounts receivable. As of September 30, 2022, we had established an allowance of $0.3 million 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. Depreciation of property, plant and equipment is on a straight-line basis beginning at the time it is placed in service and based on the estimated useful lives.

Schedule of Estimated useful lives

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

Leasehold improvements which are included in the 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 3 – 5 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 other income and expense. 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.

Intangible Assets

As of September 30, 2023, and 2022, we held the following number of patents:

Jurisdiction	No. of Patents
United States	28
Foreign	8
Total	36

Our patents were filed during the period of 1999 to 2012, with the expiration of such patents occurring between 2019 and 2032. Our patents contain an aggregate of over 750 claims, including methods for forming single crystal diamond using a CVD technique, methods for forming synthetic diamond (a term which is no longer used in the industry and has been replaced with lab-grown diamond), techniques for seed removal, methods of seed removal, applications of diamond for semiconductors, forming structures in diamond, using diamond as wave guides, techniques for cutting diamonds, methods for forming boron doped Schottky diode devices, and methods for detection of lab-grown diamonds. In addition to patents, we have also developed proprietary recipes, techniques, workflows, and other know-how.

Of our 36 patents, 15 of them have expired, and we are working to restore 12 of such patents. One of our patents, System and Method for Producing Synthetic Diamond, has run its full course of 20 years and has expired. There are several follow-on system and method patents that are still in effect. Our patent portfolio spans the method of producing lab-grown diamond to many application patents where lab-grown diamond can be used. Our portfolio includes patents that should expire from as early as 2023 to as late as 2032. While all of the patents are important, we consider the method patents the most material of our portfolio. We have method patents with filing dates of 2003, 2004, 2006, 2008, 2011, and 2012, which will begin to expire from as early as April 2023 to as late as 2032. The expiration of our patents should not have a material effect on our ability to market or sell our diamonds in the future.

While patents are important, other intellectual property, most notably, know-how is also critical. We continue to improve, evolve, and update our processes, recipes, procedures, and proprietary equipment on a continuous basis. All our employees are under strict non-disclosure, non-compete, and non-solicitation restrictions as part of their employment agreements.

Our research and development staff will continue efforts to develop proprietary manufacturing processes and equipment designed to enhance our manufacturing facilities, improve yield, and reduce manufacturing costs. All our employees have executed intellectual property and proprietary rights agreements. These agreements also include confidentiality, non-compete, and non-solicitation provisions.

Schedule of Intangible Assets

Intangible assets – Research and Development (fully depreciated)	$	1,700,000
Intangible assets – Technology (10 year amortization)		720,000
Total intangible assets		2,420,000
Less accumulated amortization as of September 30, 2021		(1,850,000	)
Net intangible assets as of September 30, 2021		570,000
Less amortization for September 30, 2022		(72,000	)
Net intangible assets as of September 30, 2022		498,000
Less amortization for September 30, 2023		(72,000	)
Net intangible assets as of September 30, 2023	$	426,000

We recorded amortization expense for intangible assets in the amounts of $72,000 for each of the fiscal years ended September 30, 2023 and 2022. Future amortization will be $72,000 per year for the following five years and $66,000 for the sixth year. 

Research and development was fully amortized as of September 30, 2023. Intangible assets – technology is being amortized over 10 years.

Goodwill

We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general economic conditions.

The Company’s 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 from the Scio asset purchase was valued at $5,413,000. The Company completed the annual goodwill impairment test in the fourth quarter and determined the fair value of the reporting unit exceeded the carrying value. No impairment expense was recognized for the years ended September 30, 2023 or 2022.

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 years ended September 30, 2023 or 2022.

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.

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.

Shipping costs consists of fees charged to customers for shipping of sold items by the Company. The performance obligation is to ship the item sold as initiated by the customer. The price is set based on the third-party service provider selected to be used by the customer as well as the speed and location of shipment. Revenue is recognized at a point in time when the shipping label is printed.

Disaggregated Revenue Information

We have no disaggregated revenue to report for the years ended September 30, 2023 or 2022.

Advertising Costs

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

Research and Development

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 anticipate that it may become necessary to reclassify research and development costs into our operating expenditures for reporting purposes as we begin to develop new lines of jewelry and extend into the semiconductor industry.

Research and Development costs are accounted for in accordance with ASC 730, Research and Development. All of our R&D for the years ended September 30, 2023 and September 30, 2022 is recognized as an expense and incurred in accordance with ASC 730-10-25. The expenses related to research and development for the years ended September 30, 2023 and 2022 included in the Statement of Operations were approximately $200,000 and $220,000, respectively.

Fair Value of Financial Instruments

Accounting Standards Codification (“ASC”) requires disclosure of the fair value of financial statements held by the Company. ASC 820 specifies a valuation hierarchy based on whether the inputs to those valuation techniques are observable or unobservable.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own assumptions. These two types of inputs have created the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets;

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model- derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires the use of observable market data, if available, when estimating fair value. These financial instruments include cash, accounts receivable, accounts payable, accrued expenses, amounts due to related parties, and notes payable. The fair values of these financial instruments approximate their carrying values using Level 3 inputs, based on their short maturities or, for notes payable, based on borrowing rates currently available to us for loans with similar terms and maturities.

Inventories

Inventories are stated at the lower of cost or net realizable value, and consist of various diamond pieces, jewelry pieces, and work in process. Work-in-process and finished goods included the cost of materials, direct labor and overhead. At the closing of each reporting period, the Company evaluates its inventory in order to adjust the inventory balance for obsolete and slow-moving items. We also purchase lab-grown diamonds from a vendor who cuts and polishes the majority of our manufactured diamonds as the vendor has access to other lab-grown diamonds that may supplement the inventory needed by the Company or which may be unique in nature which may appeal to our customers or be used in design of our proprietary jewelry line which is under development. We carry the value of these purchased diamonds at the lower of cost or net realizable value. Included in inventory is work in process which states the average cost method of these items at their state of completion at the balance sheet date. At September 30, 2023 and September 30, 2022 our inventory consisted of finished precious stones in various carat sizes, shapes, and colors that we produced or purchased and work in process.

Stock-Based Compensation

We account for stock-based compensation at fair value in accordance with Accounting Standards Codification 718 – Compensation – Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors. On October 01, 2022, we adopted ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” Accordingly, stock-based compensation is valued using market value of our Common Stock. Stock-based compensation is recognized on a straight-line basis over the vesting periods and forfeitures are recognized in the periods they occur. We account for common stock purchase option awards by estimating the fair value of each option award on the grant date using the Black-Scholes option pricing model that uses assumption and estimates that we believe are reasonable.

We account for stock-based compensation at estimated fair value on the date of grant. There were 1,933,500 shares of common stock granted and issued to employees for services during the fiscal year ended September 30, 2023. These were valued at an average price per share of $3.10, for an aggregate of $5,994,067. There were 850,000 shares of common stock granted and issued to five employees for services during the fiscal year ended September 30, 2022. These were valued at $4.00 per share, or an aggregate of $3,400,000.

The price per share is $4.00 for all shares granted prior to the first day of public trading December 9, 2022, and the closing price of the day of the grant for all grants after December 9, 2022. The grants are fully vested and are recognized upon the date of grant.

Severance Expense

We account for severance expenses in accordance with ASC 710-10-25-1, Compensation-General. The severance program, prior to being waived by the CEO and CFO, provided for benefits to those two key executive employees, to be paid upon their termination, whether initiated by us or at the employee’s discretion. These benefits were fully vested and had an annual escalation provision and were expensed as they were incurred. As part of the Company’s IPO, the CEO and CFO waived their contractual severance related amounts previously recorded to help meet various formal and informal valuation analysis and the NASDAQ listing guidelines requirement at the initial listing date. The effect of this waiver was to reduce the liability and record an increase in paid-in capital in the amount of $5,768,000 as of September 30, 2022. As a result of the above-mentioned waivers there was no severance expense during the year ended September 30, 2023.

Concentrations of Credit Risk

Accounts at banks are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. As of September 30, 2023, and September 30, 2022 our bank account balances did not exceed the federally insured limit.

Income Taxes

We filed federal and state income tax returns in accordance with the applicable rules of each jurisdiction. We account for income taxes under the asset and liability method in accordance with Accounting Standards Codification 740 – Income Taxes, or ASC 740. The provision for income taxes includes federal, state, and local income taxes currently payable, and deferred taxes. 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. In accordance with ASC 740, we recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We measure recognized income tax positions at the largest amount that is greater than 50% likely of being realized. We reflect changes in recognition or measurement in the period in which the change in judgment occurs.

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 was a contingency consideration identified as of September 30, 2023 Refer to Note 7 for commitments and contingencies.

The Company retained outside counsel and filed a motion to dismiss and joined in Scio’s motion to dismiss on February 17, 2023. Specifically, the Company believes it was mis-joined to the lawsuit and that no claims are adequately pled against it. The Company further contended the court lacked subject matter jurisdiction. The case was re-assigned to Hon. Cristina D. Silva. Judge Silva’s on July 5, 2023. On June 14, 2024, the court ordered additional briefing based on the Company’s motion to dismiss for lack of subject matter jurisdiction. The briefing was to commence on June 28, 2024, however, as a result of the court’s inclination to grant the Company’s motion to dismiss, the Plaintiff stipulated to dismiss the claims against the Company, Mr. Grdina, and Scio’s management and filed a voluntary dismissal of all of the claims as of June 28, 2024.

We have accrued for contingencies totaling approximately $2.9 million year ended September 30, 2023, respectively. There were no other known contingencies as of September 30, 2023.

Recent Accounting Pronouncements Adopted

In February 2016, the FASB issued Accounting Standards Update (“ASC”) 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 effective October 1, 2022 as required for private companies, given the Company went public in December 2022. We have applied the modified retrospective approach to adopt the new leasing standard. This approach typically applies the new standard to all existing leases existing at the date of initial application and does not require a restatement of comparative periods. We completed the process of aggregating and evaluating lease arrangements and implementing new processes during the fiscal year ended at September 30, 2023. As a result of evaluating the impact of adoption of the ASC 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.

Recent Accounting Pronouncements

In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40) (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in US GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2020-06 on its financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326),” which replaces the current incurred loss impairment methodology for most financial assets with the current expected credit loss, or CECL, methodology. The series of new guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. The guidance should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. The guidance is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact that the new guidance will have on our financial statements, but since we have yet to recognize revenue, adoption is not anticipated to have a material effect.

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2023-09 (“ASU 2023-09”), Income Taxes, which enhances the transparency of income tax disclosures by expanding annual disclosure requirements related to the rate reconciliation and income taxes paid. The amendments are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis. Retrospective application is permitted. The Company is currently evaluating this ASU to determine its impact on the Company’s disclosures.

We do not believe that any other recently issued, but not yet effective, accounting standards would have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.

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 1,712,088 and 1,994,979 shares from the weighted average diluted common shares outstanding for September 30, 2023 and 2022, respectively, because their inclusion would have been antidilutive. These shares are what would have been issued if the convertible debt, plus accrued interest had been converted for each of the years ended September 30, 2023 and 2022. In addition, we have excluded 1,200,000 shares from the weighted average diluted common shares outstanding for the years ended September 30, 2023. These shares would have been issued had both the Chief Executive Officer and the Chief Financial Officer elected to terminate their employment with us prior to waiving their respective contractual rights to these shares.