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SCIO > SEC Filings for SCIO > Form 10-Q on 13-Aug-2013All Recent SEC Filings




Quarterly Report



Information included in this Quarterly Report Form 10-Q contains forward-looking statements that reflect the views of the management of the Company with respect to certain future events. Forward-looking statements made by penny stock issuers such as the Company are excluded from the safe harbor in Section 21E of the Securities Exchange Act of 1934. Words such as "expects," "should," "may," "will," "believes," "anticipates," "intends," "plans," "seeks," "estimates" and similar expressions or variations of such words, and negatives thereof, are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that matters anticipated in our forward-looking statements will come to pass.

Forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those anticipated. Such risk and uncertainties include, but are not limited to: (1) if the Company is not able to obtain further financing, its business operations may fail, (2) the Company has only started generating revenue and has not generated positive operating cash flow, and as a result, faces a high risk of business failure,
(3) the Company's lack of diversification increases the risks associated with its business and an investment in the Company, and the Company's financial condition may deteriorate rapidly if it fails to succeed in developing its business, (4) the Company may not effectively execute its business plan or manage its potential future business development, (5) the Company's business could be impaired if it fails to comply with applicable regulations, (6) the Company has experienced substantial turnover of key management personnel and may not be able to attract and retain key management personnel to manage the Company or laboratory scientists to carry out its business operations, which could have a material adverse effect on its business, (7) the Company has expended time and resources in connection with the restatement of its financial statements and other disclosures and the Company may expend a substantial amount of time and in connection with responding to potential inquiries or legal actions by the Securities and Exchange Commission, stockholders or other parties, which may impair its ability to raise capital and to operate its business, (8) the Company's revenues have derived primarily from a single customer and may continue to be concentrated in the future, and (9) such other risks and uncertainties as have been disclosed or are hereafter disclosed from time to time in the Company's filings with the Securities and Exchange Commission, including, without limitations described under Risk Factors set forth in Part I, Item 1A of the Company's Form 10-K for the fiscal year ended March 31, 2013.

You are cautioned not to place undue reliance on forward-looking statements. You are also urged to review and consider carefully the various disclosures made in the Company's other filings with the Securities and Exchange Commission, including any amendments to those filings. Except as may be required by applicable laws, the Company undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.


Corporate History

We were incorporated on September 17, 2009 in the State of Nevada under the name Krossbow Holdings Corporation ("Krossbow"). Krossbow's original business plan was focused on offsetting carbon dioxide emissions through the creation and protection of forest-based carbon "sinks." Krossbow planned to assess carbon resource potentials, prescribe and implement ecosystem restorations to develop those resources, and thereby generate carbon offset products. However, we have since abandoned that original business plan and restructured our business to focus on man-made diamond technology development. We decided to acquire existing technology and to seek to efficiently and effectively produce man-made diamond. In connection with this change in business purpose, Krossbow changed its name to Scio Diamond Technology Corporation to reflect its new business direction.

On August 5, 2011, Edward S. Adams and Michael R. Monahan acquired control of the Company through the purchase of 2,000,000 shares of the Company's issued and outstanding common stock from Jason Kropp, Krossbow's sole director and executive officer at that time, in accordance with a common stock purchase agreement among Mr. Kropp, Mr. Adams and Mr. Monahan. Concurrent with the execution of the stock purchase agreement, Mr. Kropp resigned from all positions with Krossbow, including, but not limited to, that of President, Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and Director. Mr. Adams currently serves on the Company's Board of Directors and Mr. Monahan also served on the Board until his resignation on June 30, 2013.

On August 5, 2011, the Company executed an Asset Purchase Agreement (the "Scio Asset Purchase Agreement") with another privately-held Nevada corporation that also had the name "Scio Diamond Technology Corporation" ("Private Scio"). Under

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the terms of the Scio Asset Purchase Agreement, the Company purchased the name "Scio Diamond Technology Corporation" and acquired other rights from Private Scio for 13,000,000 newly issued shares of common stock of the Company. Messrs. Adams and Monahan were directors of Private Scio, and Joseph D. Lancia, our former President and Chief Executive Officer, was an officer of Private Scio, and Messrs. Adams, Monahan and Lancia owned 31.5%, 31.5% and 15.4%, respectively, of Private Scio. Messrs. Adams and Monahan each acquired, directly or indirectly, 4,100,000 shares of our common stock pursuant to the Scio Asset Purchase Agreement, and Mr. Lancia acquired 2,000,000 shares pursuant to the Scio Asset Purchase Agreement.

On August 31, 2011, the Company acquired certain assets of Apollo Diamond, Inc. ("ADI") (the "ADI Asset Purchase"), consisting primarily of diamond growing machines and intellectual property related thereto, for which the Company paid ADI an aggregate of $2,000,000 in a combination of cash and a promissory note to ADI with a September 1, 2012 maturity date. This promissory note had an outstanding balance of $125,000 at March 31, 2012 and was paid in full as of March 31, 2013. In connection with the ADI Asset Purchase, the Company also agreed to provide certain current and former stockholders of ADI qualifying as accredited investors the opportunity to acquire up to approximately 16 million shares of common stock of the Company for $0.01 per share (the "ADI Offering"). Both Mr. Adams, in an executive role, and Mr. Monahan previously served in various capacities with ADI through early 2011.

On June 5, 2012, the Company acquired substantially all of the assets of Apollo Diamond Gemstone Corporation ("ADGC") (the "ADGC Asset Purchase"), consisting primarily of lab-grown diamond gemstone-related know-how, inventory, and various intellectual property, in exchange for $100,000 in cash and the opportunity for certain current and former stockholders of ADGC qualifying as accredited investors to acquire up to approximately 1 million shares of common stock of the Company for $0.01 per share (the "ADGC Offering") with the intent that ADI Offering be conducted substantially concurrently with the ADGC Offering (collectively, the "ADI/ADGC Offering"). Mr. Adams and Mr. Monahan served in various capacities with ADGC through early 2011.

The ADI/ADGC Offering was completed in March 2013 and resulted in the issuance of an aggregate of 16,766,773 shares of the Company's common stock.

Business Overview

The Company's primary mission is the development of profitable and sustainable commercial production of its diamond materials, which are suitable for known, emerging and anticipated industrial, technology and consumer applications. The Company intends to pursue progressive development of its core diamond materials technologies and related intellectual property that the Company hopes will evolve into product opportunities across various applications. We believe these opportunities may be monetized though a combination of end product sales, joint ventures and licensing arrangements with third parties, and through continued development of intellectual property. Anticipated application opportunities for the Company's diamond materials include the following: precision cutting devices, diamond gemstone jewelry, power switches, semiconductor processors, optoelectronics, geosciences, water purification, and MRI and other medical science technology.

Nearly all of the Company's present production capacity is being sold for use in precision cutting devices and gemstones. As of June 30, 2013 we had generated $1,140,728 in net revenue since inception from sales of our diamond materials. To date, most of our product has been sold overseas and 100% of these sales have been to external customers. We expect continued development of an international market for our diamond materials.


Three Month Period Ended June 30, 2013 Compared to the Three Month Period Ended June 30, 2012

During the three month period ended June 30, 2013, we recorded net revenue of $258,980, compared to $11,952 in net revenue during the three months ended June 30, 2012. The increase in revenue is primarily due to the Company's commencement and continuation of commercial operation, production, and sales activities.

Our net loss for the three month period ended June 30, 2013 was $1,543,196, compared to a net loss of $1,821,499 during the three months ended June 30, 2012. During the three month period ended June 30, 2013, we incurred total operating expenses of $1,797,594, compared to total operating expenses of $1,832,615 during the three months ended June 30, 2012. We incurred salary and benefit expense including direct labor costs recorded in cost of goods sold of $411,891 during the three months ended June 30, 2013 and $1,344,097 during the three months ended June 30, 2012. This reduction is due to lower stock-based incentive compensation for executive officers of the Company. We also incurred $514,362 in professional and consulting fees during the three months ended June 30, 2013, compared to $224,922 for the three months ended June 30, 2012. This increase was primarily due to consulting fees recognized for stock issued for capital raising services. With production and sales of manufactured products

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continuing, we had cost of goods sold expense of $694,110 during the three month period ended June 30, 2013 versus $14,986 for the three months ended June 30, 2012.

Depreciation expense of $172,352 and $0 was recorded in cost of goods sold during the three months ended June 30, 2013 and 2012, respectively. This increase is due to the commencement of manufacturing operations.

We have generated limited revenue to offset our expenses, and so we have incurred net losses. Our net loss per share for the three month period ended June 30, 2013 was ($0.03) per share, compared to a net loss per share of ($0.06) for the three months ended June 30, 2012. The weighted average number of shares outstanding was 48,316,097 and 28,089,734, respectively, for the three month periods ended June 30, 2013 and 2012.


At June 30, 2013, we had total assets of $15,068,866, compared to total assets of $15,256,450 at March 31, 2013. We had cash of $613,485 at June 30, 2013 compared to cash of $223,257 at March 31, 2013. The increase in cash is due to borrowings from our note payable offset by cash used in operations for the three months ended June 30, 2013.

Total liabilities at June 30, 2013 were $2,131,023, compared to total liabilities of $1,066,544 at March 31, 2013. Total liabilities at June 30, 2013 were comprised primarily of accounts payable and accrued expenses and notes payables. The increase in total liabilities is primarily due to our borrowings under our note payable.

Total shareholders' equity was $12,937,843 at June 30, 2013, compared to $14,189,906 at March 31, 2013. Shareholders' equity decreased $1,252,063 during the period due to our operating net loss offset by common stock issued for services.


Operating Activities

We have not generated positive cash flows from operating activities. For the three month period ended June 30, 2013, net cash flows used in operating activities were $484,495 consisting primarily of a net loss of $1,543,196 offset by depreciation and changes in assets and liabilities, compared to net cash flows used in operating activities for the three months ended June 30, 2012 of $1,103,080. The primary reason for this decrease in cash used in operating activities is the Company's commencement of operations and revenue generation and changes in working capital.

Investing Activities

For the three month period ended June 30, 2013, net cash flows used in investing activities were $15,407, consisting of the purchase of property, plant and equipment. Net cash flows used in investing activities were $407,950 for the three months ended June 30, 2012. This reduction in cash used in investing activities is due to ongoing operational status of our assets in the three months ended June 30, 2012 versus the start-up status of our operations during the three months ended June 30, 2012.

Financing Activities

We have financed our operations primarily through the issuance of equity and debt securities. For the three month periods ended June 30, 2013 and June 30, 2012, we generated $890,130 and $1,977,508, respectively, from financing activities.


We expect that working capital requirements will continue to be funded through a combination of our existing funds, further issuances of securities, and future credit facilities or corporate borrowings. Our working capital requirements are expected to increase in line with the growth of our business. Effective June 21, 2013, we entered into a $1,000,000 secured credit facility with Platinum Capital Partners, LP ("Platinum") to provide near-term liquidity for working capital requirements.

Existing cash of $613,485 as of June 30, 2013, is not expected to be adequate to fund our operations through the end of the fiscal year ending March 31, 2014. As of June 30, 2013, other than our agreement with Platinum, we had no lines of credit or other bank financing arrangements. We are pursuing on-going solicitations of investment in the Company in the form of a private placement of common shares, secured and unsecured debt to accredited investors to provide addition liquidity and working capital requirements.

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Additional issuances of equity or convertible debt securities will result in dilution to our current stockholders. Such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on commercial acceptable terms, if at all, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations.


On June 21, 2013, the Company entered into a loan agreement with Platinum providing for a $1 million secured revolving line of credit that the Company may draw on to fund working capital and other corporate purposes. As of June 30, 2013, $935,000 was outstanding on this facility. The Company plans to utilize these funds to fund our ongoing operations. Borrowings under the loan agreement accrue interest at the rate of 18% per annum, payable monthly on or before the last calendar day of each month, and a service charge of 3% applies to late payments. The loan agreement also provides for payment of an accommodation fee of up to 10% of the commitment amount as provided in the loan agreement, and payment of a monthly collateral monitoring fee of $2,000 per month for the first six months and $1,000 per month for the last six months of the term of the loan agreement. The credit facility matures on June 20, 2014. The loan agreement contains a number of restrictions on our business, including restrictions on our ability to merge, sell assets, create or incur liens on assets, make distributions to its shareholders and sell, purchase or lease real or personal property or other assets or equipment. The loan agreement also contains affirmative covenants and events of default. The Company may prepay borrowings without premium or penalty upon notice to Platinum as provided in the loan agreement. Under a security agreement entered into in connection with the loan agreement, we granted Platinum a first priority security interest in the Company's inventory, equipment, accounts and other rights to payments and intangibles as security for the loan.

On June 30, 2013, the Consulting Agreements, dated March 6, 2013 (the "Consulting Agreement"), between the Company and Michael R. Monahan and Theo Strous were terminated effective June 30, 2013. Pursuant to the Consulting Agreements, Messrs. Monahan and Strous had been providing certain management and consulting services, as well as other services, to the Company. The Company did not incur any early termination penalties in connection with the termination of the Consulting Agreements.


As of the date of this Quarterly Report, 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, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.


We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States ("GAAP"). We describe our significant accounting policies in the notes to our audited financial statements filed with our Form 10-K for the fiscal year ended March 31, 2013.

Some of the accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of our assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors that we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates and could materially affect the carrying values of our assets and liabilities and our results of operations.

The following is a summary of the more judgmental estimates and complex accounting principles, which represent our critical accounting policies.

Asset Purchases

On June 5, 2012, we completed the ADGC Asset Purchase and we paid the $100,000 cash portion of the purchase price during the month of December 2012. We obtained a third-party valuation to support the fair value of the assets acquired. This valuation determined a value of $770,000 for the subscription rights. The amounts allocated to the ADGC assets acquired are based upon the results of that valuation appraisal and the following table reflects our final purchase price allocation of the assets:

Inventory                             $ 269,000
In-process research and development     601,000
Total                                 $ 870,000

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The ADGC Offering was completed in March 2013 and resulted in the issuance of an aggregate of 988,380 shares of our common stock.

We believe that the acquisition of these assets from ADGC was not the acquisitions of a "business" within the definition set forth in GAAP or Rule 11-01(d).

Property, Plant and Equipment

Depreciation of property, plant and equipment is on a straight line basis
beginning at the time it is placed in service, based on the following estimated
useful lives:

Machinery and equipment   3-15
Furniture and fixtures    3-10
Engineering equipment     5-12

Leasehold improvements are depreciated at the lesser of the remaining term of the lease or the life of the asset (generally three to seven years).

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

Intangible Assets

Intangible assets, such as acquired in-process research and development "IPRD" costs, are considered to have an indefinite useful life until such time as they are put into service at which time they will be amortized on a straight-line basis over the shorter of their economic or legal useful life. Management's estimate of useful life of any patents when placed in service is a critical judgment. Management evaluates indefinite life intangible assets for impairment on an annual basis and on an interim basis if events or changes in circumstances between annual impairment tests indicate that the asset might be impaired. The ongoing evaluation for impairment of its indefinite life intangible assets requires significant management estimates and judgment. Management reviews definite life intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment charges as of June 30, 2013.

During the quarter ended June 30, 2013, management of the Company conducted a strategic review of its intellectual property portfolio and determined that a portion of the portfolio should be considered for placement in service due to the Company's recent entrance into the gemstone marketplace. As a result, intangible assets in the amount of $601,000 previously classified as IPRD were assigned to specific patents and considered placed in service. These patents are being amortized over a period ranging from 16.33 to 19.46 years corresponding to their remaining life.

The Company continues to classify the remaining patent portfolio as IPRD and believes that the IPRD has alternative future use and value. At such time that production begins and commercialization of this portion of the intellectual property portfolio begins, then the segmentation and bifurcation of the remaining IPRD asset to finite-lived commercialized intellectual property assets will be considered. Applicable accounting guidance requires an indefinite life for IPRD assets until such time as the commercialization can be reasonably estimated at which time the assets will be available for their intended use. At such time as those requirements are met, we believe that consideration of the legal life of the intellectual property protection should be of considerable importance in determining the useful life. Upon commercialization and determination of the useful life of the intellectual property assets, consideration will be given to the eventual expiration of the intellectual property rights underlying certain critical aspects of our manufacturing process.

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