ADAMAS ONE CORP. 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 two 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.
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Recent Developments and the Covid-19 Pandemic
On
As the COVID-19 pandemic continues, the extent of the impact to our results of
operations, sales, cash flows, liquidity, and financial condition will be
primarily driven by the severity and duration of the COVID-19 pandemic, the
pandemic's impact on the
Also, because of the COVID-19 pandemic, we have been experiencing significant
delivery delays from our suppliers since
Impact of the War in
The short- and long-term implications of
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Inflationary Pressures
We are currently experiencing inflationary pressures in our manufacturing processes. Costs for our industrial equipment, raw materials, services, and shipping have increased and continue to trend upward. Over the past couple of years, raw materials used in our manufacturing processes, such as refractory metals, lab-grade gases, and their associated gas delivery systems, have all shown increases between 4% and 15%; chemical solvents, adhesives, and other consumables have shown annual increases from 4% to 25%; and industrial electronic equipment, such as power supplies and gas generators, have also seen increases between 10% and 15%. Shipping rates are up nearly 6% for the year. To date, we believe these inflationary increases have had a minimal impact on our business overall. However, to mitigate such inflationary pressures, we continue to evaluate price increases for our products, negotiate volume discounts, seek alternative products and suppliers, and explore opportunities to bring several non-critical services inside our company.
Results of Operations
The following table presents summarized financial information taken from our
statements of operations for the year ended
For the Years Ended
September 30,
2022 2021
Net Sales $ 1,788,642 $ -
Cost of Goods Sold (603,276 ) -
Gross Margin 1,185,366 -
Total operating expenses 10,121,817 11,790,785
Loss from operations (8,936,451 ) (11,790,785 )
Other expenses - -
Interest expense (2,131,407 ) (322,452 )
Loss before income taxes $ (11,067,858 ) $ (12,113,237 ) Components of Results of Operations
Net Sales
During the fiscal year ended
We anticipate deriving continuing future revenue from the following business
lines:
? Direct Sales of Diamonds: The sale of diamond gemstones direct to the
consumer through our website and the sale of industrial grade diamonds
direct to industrial manufacturing companies.
? Wholesale of Diamonds: The sale of diamonds to wholesalers,
distributors, and jewelers.
Cost of Goods Sold
Cost of goods sold includes direct costs (parts, material, and labor), indirect manufacturing costs (manufacturing overhead, depreciation, plant operating lease expense, and rent), shipping, lab services, and logistics costs.
Costs of goods sold for the year ended
Gross margin for the year ended
There were no costs of goods sold nor any related gross margin for the year
ended
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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
We expect our research and development expenses to increase for the foreseeable future as we continue to invest in research and development activities to achieve our operational and commercial goals.
Operating Expense
Operating expense includes selling, general and administrative expense, employee salaries and related expense and depreciation and amortization expense. Selling, general, and administrative expenses consist primarily of legal and professional, consulting services and all non-personnel-related expenses or depreciation and amortization. Personnel-related expenses consist of salaries, payroll taxes, benefits, and stock-based compensation. Depreciation and amortization expenses are related to the Company's fixed assets and intangible assets.
Operating expense for the year ended
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
Net Income (loss)
Primarily as a result of the above factors we had a net loss of
Liquidity and Capital Resources
As of
Changes in cash flows are summarized as follows:
Operating Activities
For the year ended
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For the year ended
Investing Activities
During the year ended
During the year ended
Financing Activities
During the year ended
During the year ended
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.
Satisfaction of our Cash Obligations for the Next 12 Months
Our recent IPO which closed on
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.
Summary of
Since acquiring the Scio assets over two years ago, we have primarily focused our efforts on research and development of improvements to the fundamental CVD process. 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. In the future, our research and development projects will include further improvements in the CVD process, primarily in capacity expansion per diamond growing machine. We are planning to invest in other parts of the manufacturing chain as well to develop our own diamond seeds, which are thin slices of diamond upon which our diamonds are grown; add color enhancement; and add additional laser capabilities.
Expected Purchase or Sale of Significant Equipment
We anticipate that we will purchase the necessary equipment required to ramp up our production of lab-grown diamonds and increase our capabilities during the next 12 months. Specifically, we anticipate expenditures on additional proprietary diamond growing machines to increase our overall capacity, expenditures to double the capacity of each existing and new diamond growing machine, expenditures in lasering equipment to better prepare diamonds for gemstone cutting and industrial applications, and expenditures to synthesize seeds.
Significant Changes in the Number of Employees
As of
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.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue, and expenses. We have identified several accounting principles that we believe are key to the understanding of our financial statements. These important accounting policies require our most difficult subjective judgements.
Use of Estimates
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 financial statements include, but are not limited to, the following: collectability of accounts receivable, the potential impairment of goodwill; the valuation of deferred tax assets; inventories; carrying value of inventory; useful lives and recovery of equipment and other intangible asset; debt discounts and valuations; and valuation of stock-based compensation.
Goodwill
We evaluate goodwill for impairment annually or more frequently when an event
occurs or circumstances change that indicate the carrying value may not be
recoverable. 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 units. If the fair value is determined
to be less than the book value or qualitative factors indicate that it is more
likely than not that goodwill is impaired, a second step is performed to compute
the amount of impairment as the difference between the estimated fair value of
goodwill and the carrying value. We estimate the fair value of the reporting
units using discounted cash flows. Forecasts of future cash flows are based on
our best estimate of future net sales and operating expenses, based primarily on
expected category expansion, pricing, market segment share, and general economic
conditions. The measurement date of our annual goodwill impairment test is
Accounts Receivable and Allowance for Doubtful Accounts
Our accounts receivable represents amounts due from customers for products sold
and include an allowance for uncollectible accounts which is estimated based on
the aging of the accounts receivable and specific identification of
uncollectible accounts. On
Inventory
We state inventories at the lower of cost and net realizable value. We determine
cost using the average cost method on all inventory generated by our
manufacturing operations upon our transition from research and development in
our manufacturing facilities to the full production of our products for sale. We
only produce diamonds and not other precious gemstones such as rubies or
sapphires. Therefore, any time we refer to our inventory, it will consist solely
of diamonds as raw materials, work in progress, and finished goods. When we use
the words "stones" or "precious stones" when describing our inventory, we are
also talking solely of diamonds. As of
Research and Development
To date, we have expensed all costs associated with developing our product
specifications, manufacturing procedures, and products through our cost of goods
sold, as this work was done by the same employees
Revenue Recognition
We generate revenue from the sale of diamonds and diamond materials. We recognize revenue according to Accounting Standards Codification, or 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 and services. 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.
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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 assesses whether each promised good or service is distinct. If a contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. We anticipate that our contracts will contain a single performance obligation, 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 (net) when the customer obtains control of our product, which will typically occur upon shipment of the product.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to us as of
Income Taxes
We follow ASC subtopic 740 - Income Taxes, or ASC 740, for recording the provision for income taxes. ASC 740-10 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Stock-Based Compensation
We grant stock-based compensation to key employees and directors as a means of attracting and retaining highly qualified personnel. We also grant stock in lieu of cash compensation for key consultants and service providers. We recognize expense related to stock-based payment transactions in which we receive employee or non-employee services in exchange for equity. We measure stock-based compensation based on sales of our common stock near the date of the grant.
In addition to our base of employees, we also use the services of several contract personnel and other professionals on an "as needed basis." We plan to continue to use consultants, legal and patent attorneys, engineers, and accountants, as necessary. We may also expand our staff to support the market roll-out of our products to both commercial and government-related organizations. A portion of any key employee compensation likely would include direct stock grants, which would dilute the ownership interest of holders of existing shares of our common stock and our new investors.
Severance Expense
We account for severance expense in accordance with ASC 710, Compensation-General. The severance program provides for benefits to certain key executive employees, to be paid upon their termination, whether initiated by us or at the employee's direction. These benefits are fully vested and have an annual escalation provision and are expensed as they are incurred. Certain key executives entitled to severance compensation have waived these payments prior to the Company's IPO.
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