UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION
FILE NUMBER
(Exact Name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) |
(Registrants telephone number, including area code)
Title of each class: | Trading Symbol(s) | Name of each exchange on which registered: | ||
The (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 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).
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 | Smaller reporting company | Emerging growth company |
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.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o
As of December 31, 2023, the issuer had shares of Common Stock outstanding.
1
EXPLANATORY NOTE
No other changes have been made to the Form 10-Q. This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.
ADAMAS ONE CORP.
Table of Contents
2
ADAMAS ONE CORP. |
CONDENSED BALANCE SHEETS |
At December 31, | At September 30, | |||||||
2023 | 2023 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | $ | ||||||
Accounts receivable, net of allowance | ||||||||
Inventory, net | ||||||||
Total current assets | ||||||||
Property and Equipment, net | ||||||||
Non-Current Assets: | ||||||||
Goodwill | ||||||||
Intangible assets, net | ||||||||
Right of use assets - operating leases | ||||||||
Investment | ||||||||
Other non-current assets | ||||||||
Total non-current assets | ||||||||
TOTAL ASSETS | $ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accrued liabilities | $ | $ | ||||||
Accrued interest | ||||||||
Due to related party - payroll and related | ||||||||
Assumed liabilities - asset purchase | ||||||||
Notes payable and convertible term notes, net | ||||||||
Accrued warrant issuance | ||||||||
Warrant liability | ||||||||
Derivative liability | ||||||||
Current portion of operating lease liability | ||||||||
Contingent consideration for debt compliance related to notes payable | ||||||||
Total current liabilities | ||||||||
Non-Current Liabilities: | ||||||||
Operating lease liability, net of current portion | ||||||||
Total non-current liabilities | ||||||||
TOTAL LIABILITIES | ||||||||
Stockholders Equity | ||||||||
Preferred stock, $ | par value, shares authorized, shares issued or outstanding as of December 31, 2023 and September 30, 2023||||||||
Common stock, $ | par value, shares authorized with shares issued and outstanding at December 31, 2023 and shares issued and outstanding at September 30, 2023||||||||
Treasury Stock | shares, at cost( | ) | ( | ) | ||||
Shares to be issued- strategic entity | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Total stockholders equity | ||||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY | $ | $ |
The accompanying notes are an integral part of these condensed financial statements.
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ADAMAS ONE CORP. |
CONDENSED STATEMENTS OF OPERATIONS |
For the Three Months Ended December 31, 2023 and 2022 |
(Unaudited) |
2023 | 2022 | |||||||
Net Sales | ||||||||
Diamond sales | $ | $ | ||||||
Cost of revenues | ||||||||
Gross Profit | ( | ) | ||||||
Operating Expenses | ||||||||
Selling, general and administrative | ||||||||
Employee salaries and related expenses | ||||||||
Depreciation and amortization expense | ||||||||
Total operating expenses | ||||||||
Loss from Operations | ( | ) | ( | ) | ||||
Other Expenses: | ||||||||
Interest expense | ||||||||
Warrant issuance expense | ||||||||
Financing costs | ||||||||
Change in fair value of derivative liability | ||||||||
Total Other Expenses | ||||||||
Loss before income taxes | ( | ) | ( | ) | ||||
Provision for income taxes | ||||||||
Net Loss | $ | ( | ) | $ | ( | ) | ||
Loss Per Share | ||||||||
Basic and fully diluted | ||||||||
Weighted average number of shares outstanding | ||||||||
Loss per share-basic and diluted | $ | ( | ) | $ | ( | ) |
The accompanying notes are an integral part of these condensed financial statements.
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ADAMAS ONE CORP. |
CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) |
For the Three Months Ended December 31, 2023 and 2022 |
(Unaudited) |
Common Stock | Additional | |||||||||||||||||||||||||||
Shares | Paid-In | Shares | Treasury | Accumulated | ||||||||||||||||||||||||
Outstanding | Par Value | Capital | To Be Issued | Stock | (Deficit) | Total | ||||||||||||||||||||||
Balance at September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
Adjustment to opening balance | - | - | - | - | - | |||||||||||||||||||||||
Balance at October 01, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
Common stock issued for conversion of notes and accrued interest | $ | |||||||||||||||||||||||||||
Common stock issued to employees | ||||||||||||||||||||||||||||
Common stock issued for IPO | ||||||||||||||||||||||||||||
Warrants issued | - | |||||||||||||||||||||||||||
Repurchase of stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
Prior period reclassification on warrant liability | - | - | - | - | - | |||||||||||||||||||||||
Balance at October 01, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
Common stock issued to employees | ||||||||||||||||||||||||||||
Common stock issued for consulting services | ||||||||||||||||||||||||||||
Common stock issued to board members | ||||||||||||||||||||||||||||
Common stock issued for inducement to lenders | ||||||||||||||||||||||||||||
Common stock issued - strategic entity | ( |
) | ||||||||||||||||||||||||||
Common stock issued for conversion of notes and accrued interest | ||||||||||||||||||||||||||||
Common stock issued from sale of treasury stock | ||||||||||||||||||||||||||||
Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
Balance at December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ |
The accompanying notes are an integral part of these condensed financial statements.
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ADAMAS ONE CORP. |
CONDENSED STATEMENTS OF CASH FLOWS |
For the Three Months Ended December 31, 2023 and 2022 |
(Unaudited) |
2023 | 2022 | |||||||
OPERATING ACTIVITIES | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash provided by operations: | ||||||||
Stock issued to employees | ||||||||
Stock issued to board members | ||||||||
Stock issued to consultants | ||||||||
Stock issued for loan inducement | | |||||||
Stock issued for interest | ||||||||
Warrants issued for conversion | ||||||||
Inventory reserve | ||||||||
Depreciation and amortization | ||||||||
Allowance for doubtful accounts | ( | ) | ||||||
Derivative liability | ||||||||
Change in fair value of derivative liability | ||||||||
Warrant expense | ||||||||
Changes in assets and liabilities | ||||||||
Accounts receivable | ( | ) | ||||||
Inventory | ( | ) | ( | ) | ||||
Accrued liabilities | ( | ) | ||||||
Accrued interest | ( | ) | ||||||
Accrued payroll and related | ||||||||
Right of use assets- operating leases, net | ||||||||
Total Adjustments to reconcile net loss to net cash used in operations: | ||||||||
Net cash used in operating activities | ( | ) | ( | ) | ||||
INVESTING ACTIVITIES | ||||||||
Property & equipment | ( | ) | ||||||
Net cash used in investing activities | ( | ) | ||||||
FINANCING ACTIVITIES | ||||||||
Notes payable proceeds | ||||||||
Payments on notes payable | ( | ) | ||||||
Due to related party | ( | ) | ||||||
Purchase of treasury stock | ( | ) | ||||||
Cash from stock sale, net of costs | ||||||||
Net cash provided by financing activities | ||||||||
Net cash increase for the period | $ | $ | ||||||
Cash, beginning of period | ||||||||
Cash, end of the period | $ | $ | ||||||
Non-cash investing and financing activities are as follows: | ||||||||
Stock for investment | $ | $ | ||||||
Warrants issued for conversion | $ | $ | ||||||
Stock for conversion of debt to equity and accrued interest | $ | $ |
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, 2023 and 2022 |
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
The assets and liabilities were valued using ASC 805, the fair value of assets acquired and liabilities assumed in a business combination, which requires the measurement of assets acquired and liabilities assumed to be recognized at their acquisition-date fair values.
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 $3.0 million and used approximately $0.7 million of cash in operations for the three months ended December 31, 2023. Further information related to a going concern may be obtained in the Going Concern Uncertainty paragraph in the Report of Independent Registered Public Accounting Firm, also contained in the above referenced condensed 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 condensed 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.
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.
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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 customers 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, 2023, we had established an allowance of $
Fair Value Measurement
ASC Topic 820, “Fair Value Measurement”, requires that certain financial instruments be recognized at their fair values at our balance sheet dates. However, other financial instruments, such as debt obligations, are not required to be recognized at their fair values, but GAAP provides an option to elect fair value accounting for these instruments. GAAP requires the disclosure of the fair values of all financial instruments, regardless of whether they are recognized at their fair values or carrying amounts in our balance sheets. For financial instruments recognized at fair value, GAAP requires the disclosure of their fair values by type of instrument, along with other information, including changes in the fair values of certain financial instruments recognized in income or other comprehensive income. For financial instruments not recognized at fair value, the disclosure of their fair values is provided below under “Financial Instruments.”
Nonfinancial assets, such as property, plant and equipment, and nonfinancial liabilities are recognized at their carrying amounts in the Company’s balance sheets. GAAP does not permit nonfinancial assets and liabilities to be remeasured at their fair values. However, GAAP requires the remeasurement of such assets and liabilities to their fair values upon the occurrence of certain events, such as the impairment of property, plant and equipment. In addition, if such an event occurs, GAAP requires the disclosure of the fair value of the asset or liability along with other information, including the gain or loss recognized in income in the period the remeasurement occurred.
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
The Company did not have any Level 1 or Level 2 assets and liabilities at December 31, 2023, or September 30, 2023. The Derivative liabilities are Level 3 fair value measurements.
The following is a summary of activity of Level 3 liabilities for the period ended December 31, 2023:
Balance - September 30, 2023 | $ | |||
Additions | ||||
Settlements | ||||
Change in fair value | ||||
Balance - December 31, 2023 | $ |
During 2023, the Company issued note payable agreements which contain conversion provisions meeting the definition of a derivative liability which therefore require bifurcation. Further, pursuant to the Company’s contract ordering policy, equity linked instruments subsequently issued resulted in derivative liabilities.
At December 31, 2023, the Company estimated the fair value of the conversion feature derivatives embedded in the notes payable based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock of $0.61; risk-free interest rate of 5.50%; expected volatility of the Company’s common stock of 98% based on the historical volatility of the Company’s common stock; exercise price of $0.4659; and terms three months.
8
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 income and other 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
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.
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 its carrying value.
The goodwill that arose from the Scio asset purchase agreement was independently valued at $
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, 2023 and 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. |
9
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.
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 three months ended December 31, 2023 or 2022. 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
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 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.
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 shares of common stock granted to one employee
for one years services and fully expensed during the three months ended December 31, 2023. These were valued at
an aggregate of $
There
were
The price per share was based upon the market closing price on the day of the 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, 2023, 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.
10
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 condensed 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 September 30, 2023.
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 and shares from the weighted average diluted common shares outstanding for December 31, 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 converted for each of the three months ended December 31, 2023 and 2022.
Recently Issued Accounting Pronouncement
Adopted
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 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. The new guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. The guidance will be effective for fiscal years beginning after December 15, 2024 and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. We are currently evaluating the impact that the new guidance will have on our condensed 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. This guidance would have to be adopted by October 1, 2023. 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 condensed financial statements, but since we have yet to recognize revenue, adoption is not anticipated to have a material effect.
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, 2023. We completed the process of aggregating and evaluating lease arrangements and implementing new processes during the three months ended December 31, 2023. As a result of evaluating the impact of adoption of the ASU on our condensed financial statements we recognized a right-of-use asset and lease liability on our balance sheet for our real estate operating leases as of December 31, 2023, we recognized a right of use asset of $1.6 million, and a lease liability of $1.6 million.
NOTE 4 – INVENTORIES
As of December 31, 2023 and September 30, 2023, the inventory balances were composed of purchased products carried at the lower of cost or net realizable value, finished products and work in process carried at the value of the costs associated with the manufacturing of the goods. As of December 31, 2023, finished products and work in process were $764,986 and $691,106. As of December 31, 2023, finished products and work in process were $903,409 and $651,813, respectively. There was no inventory obsolescence in the periods ended December 31, 2023 and September 30, 2022, respectively.
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment are listed net of the related accumulated depreciation as of December 31, 2023 and September 30, 2023. As of December 31, 2023, 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, 2023 and 2022 totaled $
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NOTE 6 – COMMITMENTS & CONTINGENCIES
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, 2023 and September 30, 2023.
Contingent Consideration
The Companys contingent consideration liabilities related to certain lenders compliance guidelines are included as a current liability on the Balance Sheet at December 31, 2023 and included herein.
Leases
As the Company’s leases generally do not provide an implicit discount rate, the Company uses the estimated collateralized incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments for use in the calculation of the operating lease liabilities and right-of-use assets. This rate is determined using a portfolio approach based on the risk-adjusted rate of interest and requires estimates and assumptions including credit rating, credit spread, and adjustments for the impact of collateral. The Company believes that this is the rate it would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar lease term. Operating lease liabilities and corresponding right-of-use assets include options to extend lease terms that are reasonably certain of being exercised. The Company does not record a lease liability and corresponding right-of-use asset for leases with terms of 12 months or less, and accounts for lease and non-lease components as a single lease component. The Company's lease portfolio is comprised of operating leases with the lease cost recorded on a straight-line basis over the lease term.
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 2028.
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 4.9 years and 80%, respectively. The operating lease cost for the three months ended December 31, 2023 was approximately $91,000.
The future minimum lease payment required under our leases as of December 31, 2023 are as follows:
2024 | $ | 285,732 | ||
2025 | ||||
2026 | ||||
2027 | ||||
2028 | ||||
Thereafter | ||||
Total undiscounted cash flows | ||||
Less: present value discount (8% per annum) | ||||
Total lease liabilities | $ |
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.
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, 2023 and 2022 this obligation has been accrued at a valuation of $1,000 per carat, which is based on managements estimate of the market value of the diamonds.
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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 Companys assessment of a favorable decision by the court no liability has been recorded on our balance sheet at December 31, 2023.
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.
NOTE 7 – NOTES PAYABLE AND CONVERTIBLE TERM NOTES
On December 15, 2023, we entered into a promissory note with a private lender with the original balance of $750,000 plus a loan origination fee of $50,000 with a maturity date of June 15, 2024. The Note has a fixed interest payment at $9,500 per month with the principal balance due maturity date. The Note has a stock origination fee of 150,000 shares of common stock. The principal balance outstanding on the note at December 31, 2023 was $750,000.
On October 18, 2023, we entered into a promissory note with a private lender for with the original principal balance of $150,000 with a maturity date of January 18, 2024. The Note bears a fixed interest rate of 30,000 shares of common stock with a default interest rate of 50,000 shares of common stock per month after January 18, 2024. The principal outstanding balance as of December 31, 2023 was $165,443.48.
On September 14, 2023, we entered into a securities purchase agreement with a lender with an original principal balance of approximately $272,000 and an original maturity date 12 months after the effective date. The note contains an interest rate of 8% which is payable according to a schedule of seven monthly amortization payments beginning on March 14, 2024 with final payment and accrued interest due on at maturity along with the outstanding principal balance due on September 14, 2024. The securities purchase agreement contained an original issue discount of approximately $21,800 which is being amortized as interest expense over the turn of the agreement. As an inducement to enter into the note 33,240 shares of the Company’s common stock was issued upon the effective date of this note to the lender. The note also included a 5 year warrant to purchase 16,620 shares of the Company’s common stock at a price of $2.50 per share (“First Warrant”). The Company determined that the fair value of these warrants at the time the agreement was executed to be $9,018 which is being amortized as interest expense over the term of the agreement. A second 5 year warrant to purchase 2,500,000 shares of the Company’s common stock at a price of $.01 per share (“Second Warrant”) was issued to the lender and was viable in the event the Company did not file their quarterly report for the period ending June 30, 2023 by September 13, 2023. The Company determined that the fair value of these warrants at the time the agreement was executed to be $2,025,000 which is being amortized as interest expense over the term of the agreement. The note does not provide for prepayment or repayment of the principal balance and is required to be repaid according to an agreed upon amortization schedule. The note is convertible in full or part at a rate of $2.00 per share. The note is also convertible in part or in total into common shares of the Company at $2.00 per share. The agreement contains an escrow agreement for 3,500,000 shares of the Company’s common stock to be reserved by the Company’s transfer agent as collateral for the security of the note. The Company has also pledged the majority of its assets as additional security and as part of a security agreement entered into in conjunction with this securities purchase agreement. The principal balance outstanding on the note at December 31, 2024 was $271,739.
On July 31, 2023, we entered into a note with a private lender with an original principal balance of $250,000 and an original maturity date 45 days after the effective date. The note contains a fixed interest rate of 5,000 shares of common stock which is payable at maturity along with the outstanding principal balance. As an inducement to enter into the note 25,000 shares of the Company’s common stock was issued upon the acceptance of this note by the private lender. On March 22, 2024, an extension was granted effective as of September 30, 2023, with an extension until December 31, 2024 in return for an interest rate of 5,000 shares of common stock per week. The principal balance outstanding on the note at December 31, 2023 was $250,000, and as of December 31, 2023, all interest shares have been issued.
On June 9, 2023, we entered into a securities purchase agreement with a lender with an original principal balance of $1,635,000 and an original maturity date of June 9, 2024 (12 months) after the effective date. The note contains an interest rate of 8% which is payable according to a schedule of seven monthly amortization payments beginning on December 9, 2023 with final payment and accrued interest due on at maturity along with the outstanding principal balance due on June 9, 2024. The securities purchase agreement contained an original issue discount of $180,300 which is being amortized as interest expense over the turn of the agreement. As an inducement to enter into the note 200,000 shares of the Company’s common stock was issued upon the effective date of this note to the lender. The note also included a 5 year warrant to purchase 100,000 shares of the Company’s common stock at a price of $2.50 per share. The Company determined that the fair value of these warrants at the time the agreement was executed to be $80,491 which is being amortized as interest expense over the term of the agreement. The note does not provide for prepayment or repayment of the principal balance and is required to be repaid according to an agreed upon amortization schedule. The note is convertible in full or part at a rate of $2.00 per share. The note is also convertible in part or in total into common shares of the Company at $2.00 per share. The agreement contains an escrow agreement for 2,752,000 shares of the Company’s common stock to be reserved by the Company’s transfer agent as collateral for the security of the note. The Company has also pledged the majority of its assets as additional security and as part of a security agreement entered into in conjunction with this securities purchase agreement. The principal balance outstanding on the note at December 31, 2023 was $1,635,000.
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On June 2, 2023, we entered into a note with a private lender with an original principal balance of $50,000 and an original maturity date 30 days after the effective date. The note has been re-negotiated and has a current maturity date of December 31, 2025. The note contains an interest rate of 15% which is payable at maturity along with the outstanding principal balance. As an inducement to enter into the note 20,000 shares of the Companys common stock was issued upon the acceptance of this note by the private lender. The principal balance outstanding on the note at December 31, 2023 was $55,100.
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 with the most recent extension executed December 1, 2022 with a maturity date of December 31, 2024. Accrued interest was capped at 46,500 shares of the Company’s common stock which were issued to the private lender on November 29, 2023. The principal balance outstanding on the note at December 31, 2023 was $72,500. The note is unsecured.
NOTE 8 – CAPITAL STOCK
Our authorized capital consists of shares of common stock with a par value of $ per share and shares of preferred stock with a par value of $ per share.
As of December 31, 2023, and September 30, 2023, we had no shares of preferred stock issued or outstanding.
As of December 31, 2023, there were shares of common stock issued and outstanding. During the three months ended December 31, 2023, we issued 1,353,179 shares of common stock as follows:
shares were issued for $ for incentive to lenders:
shares valued at $180,000 were issued for ownership in a strategic entity.
NOTE 9 – RELATED PARTY
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, 2023 and September 30, 2023 that are primarily owed to our principal officers.
December 31, 2023 | September 30, 2023 | |||||
CEO- Payroll and related | $ | $ | ||||
CFO- Payroll and related | ||||||
COO- Payroll and related | ||||||
Total Due to related Party - payroll and related | $ | $ |
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, 2023 and September 30, 2023, and we have recorded a related valuation allowance against deferred tax assets in excess of deferred tax liabilities in the accompanying condensed financial statements.
As of December 31, 2023 and September 30, 2023, 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, 2023 and September 30, 2023 we had no Internal Revenue Service or state tax examinations. Therefore, all periods since inception are subject to audit.
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NOTE 11 – SUBSEQUENT EVENTS
On
On
On
NOTE 12 – ADJUSTMENT TO OPENING BALANCE – STATEMENT OF STOCKHOLDERS EQUITY
At September 30, 2023, the warrant fair value allocation of $298,839, arising from debt issuance should had been classified as Additional paid-in capital but was recorded as a warrant liability. This adjustment is to correctly reclassify the amount to Additional paid-in capital at October 1, 2023. The Statement of Stockholders Equity includes an adjustment to the opening balance of $298,839 for October 1, 2023.
Management determined the prior period financial statements were not materially misstated; therefore, the Company is not required to notify users that they can no longer rely on the prior period financial statements.
Opening Balance, additional paid-in capital | $ | ||||
Adjustment | |||||
Adjusted opening balance as of October 1, 2023 | $ |
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ITEM 2. MANAGEMENTS 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.
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, 2023 compared with the three months ended December 31, 2022:
For the Years Ended December 31, | ||||||||
2023 | 2022 | |||||||
Net Sales | $ | 219,804 | $ | 726,125 | ||||
Cost of Revenues | 286,769 | 134,846 | ||||||
Gross Profit (Loss) | (66,965 | ) | 591,279 | |||||
Total operating expenses | 1,793,312 | 7,325,146 | ||||||
Loss from Operations | (1,860,278 | ) | (6,733,867 | ) | ||||
Other expenses | ||||||||
Interest expense, warrant issuance expense, finance costs- change in derivative | 1,168,010 | (2,244,046 | ) | |||||
Loss before income taxes | $ | (3,028,288 | ) | $ | (8,977,913 | ) |
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Net Sales
During the three months ended December 31, 2023, we had net sales of $219,804 compared to net sales of $726,125 for the three months ended December 31, 2022. 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 revenues for the three months ended December 31, 2023 and December 31, 2022 were $286,769 and $134,846 respectively.
Gross loss for the three months ended December 31, 2023, was $66,965 or a gross loss margin on diamond sales of 30.4% for the three months ended December 31, 2023.
Gross profit for the three months ended December 31, 2022, was $591,279 or a gross profit margin on diamond sales of 81.14% for the three months ended December 31, 2022.
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 Companys fixed assets and intangible assets.
Operating expense for the three months ended December 31, 2023, included in the statement of operations was $2.3 million compared to $7.3 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 $207,224 for the three months ended December 31, 2023, compared to $2.2 million for the three months ended December 31, 2022. This decrease in interest expense was due primarily the conversion of debt into common shares of stock during the fiscal year ended September 30, 2023, versus the three months ended December 31, 2022.
Net Loss
Primarily as a result of the above factors we had a net loss of $3.0 million compared to a net loss of $9 million for the three months ended December 31, 2023, and December 31, 2022, respectively.
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Liquidity and Capital Resources
As of December 31, 2023, we had $340,424 of cash and cash equivalents, a decrease of $3 million from the prior year comparable period.
Changes in cash flows are summarized as follows:
Operating Activities
For the three months ended December 31, 2023, net cash used in operating activities totaled approximately $0.7 million.
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 million.
Investing Activities
During the three months ended December 31, 2023, we had no investing activities related to purchase of machinery and equipment. During the three months ended December 31, 2022, we used $1.3 million for investing activities.
Financing Activities
During the three months ended December 31, 2023, net cash provided by financing activities was approximately $1 million.
During the three months ended December 31, 2022, net cash provided by financing activities was approximately $6.4 million. This was primarily the net effect of sale of stock from our IPO.
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 Companys Annual Form 10K filing with the Securities and Exchange Commission.
Satisfaction of our Cash Obligations for the Next 12 Months
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.
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 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, 2023, under Managements 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, 2023. For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2023.
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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 Commissions 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, 2023. 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, 2023, and 2022 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, 2023 to December 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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.
On January 10, 2023, the Company was joined as a defendant to an existing lawsuit in the United States District Court for the District of Nevada (case no. 2:22-cv-00256) between Theodorus Strous, a shareholder of Scio Diamond Technology Corp. (Scio), and Scio executives, brought as a proposed derivative shareholder class action. The second amended complaint added the Company and John G. Grdina as defendants, expanding the claim to assert a proposed derivative shareholder class action against the Company as well as Scio.
The Company retained outside counsel and filed a motion to dismiss and joined in Scios 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 Silvas on July 5, 2023. On June 14, 2024, the court ordered additional briefing based on the Companys motion to dismiss for lack of subject matter jurisdiction. The briefing was to commence on June 28, 2024, however, as a result of the courts inclination to grant the Companys motion to dismiss, the Plaintiff stipulated to dismiss the claims against the Company, Mr. Grdina, and Scios management and filed a voluntary dismissal of all of the claims as of June 28, 2024.
Please reference the Contingencies section of Note 3 of our condensed 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 110,000,000 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 unregistered sales of the Companys equity securities during the quarter ended December 31, 2023 that were not previously reported in a Current Report on Form 8-K as follows:
178,215 shares valued at $106,038 were granted to employees as compensation;
180,000 shares were issued for $91,200 for incentive to lenders:
566,964 shares valued at $461,331 were issued for consulting services;
30,000 shares valued at $16,950 were issued for the conversion of notes and accrued interest;
18,000 shares valued at $25,000 were issued from the sale of stock
80,000 valued at $43,700 shares were issued to our board of directors as fees; and
300,000 shares valued at $180,000 were issued for ownership in a strategic entity.
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
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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. |
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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.
August 23, 2024 | By: | /s/ John G. Grdina | ||
John G. Grdina | ||||
Chief Executive Officer |
ADAMAS ONE CORP.
August 23, 2024 | By: | /s/ Steven Staehr | ||
Steven Staehr | ||||
Chief Financial Officer |
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