ITEM 1A. RISK FACTORS
Purchasing our Common Stock involves a high degree of risk. You should carefully consider the following risk factors, together with all of the information included in this Form 10-K Report, before you decide to purchase shares of our Common Stock. We believe the risks and uncertainties described below are the most significant we face. Additional risks and uncertainties of which we are unaware, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, operating results, and financial condition could be materially and adversely affected. In that case, the trading price of our Common Stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
Because we have recently commenced business operations, we face a risk of business failure.
We were formed on September 6, 2018. Most of our efforts to date have been related to executing our business plan, raising capital, negotiating the acquisition transaction with Scio, and commencing business operations. The prior businesses that utilized our Diamond Technology have failed. From inception through December 31, 2021, we have had no revenue, and we have had revenue through September 30, 2023. We face a risk of business failure. Our likelihood of success must be considered in light of the expenses, complications, and delays frequently encountered in connection with the establishment and expansion of new business and the competitive environment in which we will operate. There can be no assurance that future revenue from sales of our intended products or services will occur or be significant enough or that we will be able to sell at a profit, if at all. Future revenue or profits, if any, will depend on many factors, including initial (and continued) market acceptance of our products or services and the successful implementation of the planned strategy.
We only recently formed our Company and acquired our operating assets through the Scio acquisition. From the asset acquisition date, we continue our efforts to ramp up our operations as we bring all of the diamond growing machines acquired in the Scio acquisition into operation and increase our production scale through the preparation of additional factory space and the purchase, commissioning, and operation of additional diamond growing machines. Increasing our production scale, the number of diamond crystals grown per month, is our current challenge. For us to increase our production, we must be able to secure the necessary financing and distribution channels. If we are unable to secure adequate financing, we may not be able to fully increase our operations to scale.
Our future profitability, if any, could be materially and adversely impacted if we are unable to produce marketable diamonds or diamond materials on a large scale. Our ability to achieve profitability will be dependent on the ability of our future products or services to generate sufficient operating cash flow to fund the continuation of our business and future growth or acquisitions. There can be no assurance that our future results of operations will be profitable or that our strategy will be successful or even begin to generate any substantial revenue.
There is substantial doubt about our ability to continue as a going concern.
For the year ended September 30, 2023, we incurred a net loss of $22.5 million and used approximately $6.8 million of cash in operations. For the year ended September 30, 2022, we incurred a net loss of $11.1 million and used approximately $3.2 million of cash in operations. As of September 30, 2023, we had an accumulated deficit of $63.6 million. These conditions raise substantial doubt about our ability to continue as a going concern. Turner, Stone & Company, LLP, our independent registered public accounting firm, included an explanatory paragraph in its report on our financial statements as of, and for the year ended, September 30, 2023, describing the existence of substantial doubt about our ability to continue as a going concern.
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 private and public equity offerings and debt financing. 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, require that our assets secure such debt, or provide for high interest rates, discounted conversion prices, or other unfavorable terms. Equity financing, if obtained, could result in dilution to our then-existing stockholders and/or require such stockholders to waive certain rights and preferences. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should we be unable to continue as a going . We may be required to operations which could result in our stockholders all or almost all of their investment.
Loss of key members of management or our inability to attract and retain qualified personnel could adversely affect our business.
Our success depends substantially on the efforts and abilities of our senior management and key personnel. The competition for qualified management and key personnel is intense. Although we maintain noncompetition and nondisclosure covenants with many of our key personnel, and we have employment agreements with the key personnel, all our employees are employees at will. The loss of services of one or more of our key employees or the inability to hire, train, and retain additional key personnel could delay the development and sale of our products, disrupt our business, and interfere with our ability to execute our business plan.
In addition, our ability to maintain our competitive position is dependent to a large degree on the efforts and skills of our senior management team, including Mr. John G. Grdina, our President and Chief Executive Officer. The loss of the services of one or more of our key personnel could materially and adversely affect our operations.
The inability of our senior management and board of directors to ensure the timely filing of our periodic reports pursuant to Section 13 or 15(d) of the Exchange Act could result in the termination of our registration status or revocation by the SEC of the registration of our securities pursuant to Section 12(j) of the Exchange Act.
Our future survival as a public company will largely depend on the ability of our senior management and board of directors to ensure the timely filing of our periodic reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Pursuant to the list set forth below at the end of this risk factor, while each of our named executive officers and one of our directors were executive officers and/or directors of certain other public companies in the past, such companies in certain instances did not timely file their respective periodic reports in accordance with the rules of the SEC. As a result, such companies were required to terminate their registration status pursuant to the filing of a Form 15 or had their securities registration revoked by the SEC pursuant to Section 12(j) of the Exchange Act. Such companies may also have been delisted from their respective national securities exchanges.
The potential failure to timely file such information for our company would result in stockholders and/or prospective investors not having complete current business and financial information about our company. Therefore, the potential occurrence of such an event could cause the existence of inadequate public information available about our company to properly evaluate our common stock or the general status of our company.
Mr. John G. Grdina, our President and Chief Executive Officer and Chairman of the Board, served as Chief Executive Officer and a director of NOHO, Inc., and Mr. Staehr, our Chief Financial Officer, served as Chief Financial Officer of NOHO, Inc. from October 2013 to May 2015. During their respective tenures, NOHO, Inc. filed Forms 12b-25 notifying the public of the late filings of its (a) Form 10-K on March 31, 2015; and (b) Forms 10-Q on the following dates: March 19, 2013; August 14, 2013; November 14, 2013; May 15, 2014; and November 14, 2014. NOHO, Inc. failed to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and on May 19, 2015, NOHO, Inc. filed a Form 15 to terminate its registration under Section 12(g) of the Exchange Act.
Mr. Staehr, our Chief Financial Officer, served as Chief Financial Officer for Mix 1 Life, Inc. from October 2016 to August 2018 and served as the sole officer and director from February 2017 to August 2018. During his tenure, Mix 1 Life, Inc. filed Forms 12b-25 notifying the public of the late filings of its (a) Form 10-K on November 30, 2016; and (b) Form 10-Q on January 17, 2017. Mix 1 Life, Inc. failed to file its (a) Annual Report on Form 10-K for the fiscal year ended August 31, 2016; (b) Quarterly Reports on Form 10-Q for the quarterly periods ended November 30, 2016, February 28, 2017, and May 31, 2017; (c) Annual Report on Form 10-K for the fiscal year ended August 31, 2017; (d) Quarterly Reports on Form 10-Q for the quarterly periods ended November 30, 2017, February 28, 2017, and May 31, 2017; and (e) Annual Report on Form 10-K for the fiscal year ended August 31, 2018. On August 6, 2018, Mix 1 Life, Inc. filed a Form 15 to terminate its registration under Section 12(g) of the Exchange Act.
Mr. McGuire, our Chief Operating Officer, served as President and Chief Executive Officer of Scio Diamond Technology Corporation from June 14 until its acquisition by our company in September 2019. During his tenure, Scio Diamond Technology Corporation filed Forms 12b-25 notifying the public of the late filings of its (a) Forms 10-K on July 12, 2017; and (b) Forms 10-Q on the following dates: November 14, 2016; August 14, 2017; November 15, 2017; and February 15, 2018. Scio Diamond Technology Corporation failed to file its (a) Annual Report on Form 10-K for the fiscal year ended March 31, 2017; (b) Quarterly Reports on Form 10-Q for the quarterly periods ended July 12, 2017, September 30, 2017, and December 31, 2017; (c) Annual Report on Form 10-K for the fiscal year ended March 31, 2018; (d) Quarterly Reports on Form 10-Q for the quarterly periods ended July 12, 2018, September 30, 2018, and December 31, 2018; and (e) Annual Report on Form 10-K for the fiscal year ended March 31, 2019. Effective August 9, 2019, pursuant to Section 12(j) of the Exchange Act, the registration of each class of Scio Diamond Technology Corporations securities registered pursuant to Section 12 of the Exchange Act were revoked by the SEC.
Mr. Vassilakos, a director of our company, served on the Board of Directors of Cross Border Resources, Inc. from April 2012 to February 2016. During his tenure, Cross Border Resources, Inc. filed Forms 12b-25 notifying the public of the late filings of its Forms 10-Q on November 15, 2013 and November 17, 2014. On August 14, 2015, Cross Border Resources, Inc. filed a Form 15 to terminate its registration under Section 12(g) of the Exchange Act.
Mr. Vassilakos, a director of our company, served as interim President and Chief Executive Officer of Red Mountain Resources, Inc. from February 2011 to March 2011 and also served on the Board of Directors of Red Mountain Resources, Inc. from October 2011 to February 2016. During his tenure, Red Mountain Resources, Inc. filed Forms 12b-25 notifying the public of the late filings of its Forms 10-Q on October 14, 2011 and November 12, 2014. On November 13, 2015, Red Mountain Resources, Inc. filed a Form 15 to terminate its registration under Section 12(g) of the Exchange Act.
Our Chairman of the Board, President and Chief Executive Officer has limited experience in the diamond gemstone and diamond industrial market. and is not required to devote his full time and attention to our business, and there are significant potential conflicts of interest.
Our Chairman of the Board, President, and Chief Executive Officer, John G. Grdina, has spent most of his prior career in various aspects of manufacturing, production, distribution, and marketing multiple products and categories. Mr. Grdina has limited experience in the diamond gemstone or diamond industrial market.
We have a limited operating history and have incurred losses to date. We have only recently begun to generate revenue, and therefore it is difficult to evaluate our business and prospects.
Our company is in its early stages of operation, is not a profitable enterprise, and may incur substantial losses for the foreseeable future. As a company in the early stages of operation, our business is subject to all the risks inherent in a new business enterprise. We have no substantial operating history for investors to consider in evaluating our business and prospects. When making the decision to invest in our common stock, investors should consider the risks, expenses, and difficulties that we may encounter as a young company in a new market with the assets of a company that has failed in the past. These risks include the following:
our need to fund and manage our rapidly developing and changing operations;
our need to expand our sales and marketing activities;
our need to quickly hire and integrate new personnel, including various levels of senior management who have been hired relatively recently;
our ability to develop additional applications and markets for our lab-grown diamond gemstones and diamond materials;
our ability to produce lab-grown diamonds sufficient to meet anticipated demand in the gemstone marketplace;
acceptance of our lab-grown diamonds in the gemstone marketplace; and
the need to further refine and improve our technology with respect to lab-grown diamond development, growing, and commercialization, including the need to make the diamond growing process commercially viable, acceptable (by our own and third-party measures), and economical, and our intellectual property and product offerings, and the need to respond to changing technologies and consumer preferences.
The lab-grown diamond gemstone and diamond materials market is a rapidly growing segment of the overall diamond market. Our business is subject to the risks inherent in the transition of this market segment from early commercial production to mainstream alternative to mined diamonds.
Our failure to complete and integrate commercial development of our diamonds and to distribute them in sufficient quantities to meet market demand would have a material adverse effect on our business, results of operations, financial condition, and prospects. Accordingly, our prospects must be considered in light of the risks, expenses, and difficulties frequently encountered by companies in their early stage of development, particularly technology-based companies operating with developing and unproven manufacturing processes.
To address these risks, we must, among other things, respond to competitive developments, attract and motivate qualified personnel, develop market acceptance for our diamonds and diamond materials, establish effective distribution channels, effectively manage any growth that may occur, and continue to upgrade and successfully commercialize our Diamond Technology and our products incorporating such technology.
We will require additional funding to support our current and future expanded operations.
We currently have limited cash and working capital to support our operations. Our future continuing operations will require additional funding, and we may not be able to obtain such funding on acceptable terms or at all. We likely will require additional capital to be able to fund continued development and improvement of the process for growing diamonds and to fund our expansion of manufacturing capacity to meet projected growth of the market for our diamonds. There can be no assurance that such efforts for raising capital will not involve substantial dilution with respect to our existing or future stockholders.
Our future capital requirements will depend on many factors, including the speed at which our production process can be scaled-up for high-yield production, market acceptance of and demand for our diamonds, and the timing of our expansion into new diamond markets. Our future capital requirements depend upon many factors, including, but not limited to:
the rate at which we increase our production capacity;
the rate at which we expand our sales and marketing operations;
the rate at which we attract consumers, distributors, and strategic relationships;
the extent to which we can develop and upgrade our technology and infrastructure; and
the response of competitors to our product offerings.
We expect significant additional financing to be required to meet these challenges and there can be no assurance that additional equity or debt financing, if required, will be available on acceptable terms or at all. If we raise additional funds by selling stock, the percentage ownership of our then current stockholders will be reduced, and we may raise these funds with securities that have rights, preferences, or privileges equal or superior to the rights of investors owning our common stock. If we cannot raise adequate funds to satisfy our capital requirements, we may have to limit our operations significantly, or we could terminate operations entirely, resulting in a complete loss of investment for our stockholders. Our inability to obtain financing on acceptable terms when needed would have a material adverse effect on our business, results of operations, financial condition, and prospects.
Our predecessors have attempted to commercialize our technology and have, for various reasons, failed, and our current business model has only recently been implemented.
We produce lab-grown diamonds for retail gemstone consumption and diamond materials for specific industrial applications. Our predecessors have attempted to commercialize our technology and have for various reasons (including lack of funding), failed. Although other companies are selling lab-grown diamond gemstones, we believe that the market for such lab-grown diamonds has not been fully developed. Accordingly, our business model may not be successful, and we may need to make substantial changes thereto. Our ability to generate significant revenue will depend, in large part, on our ability to successfully market our product to consumers, distributors, and commercial customers. We intend to continue to develop our business model as the market for our products evolves.
We are wholly dependent on our Diamond Technology, which has not been commercially proven.
Our diamond supply depends entirely on our ability to manufacture diamonds using our Diamond Technology. Although we have been able to produce limited quantities of high-quality lab-grown diamond gemstones, we have yet to prove that we can transfer such success into a mass production process that will yield high-quality gemstones and material suitable for retail gemstone distribution and commercial/industrial applications. The inability or difficulty to transfer our Diamond Technology into a high-yield production facility would have a material adverse effect on our business, results of operations, financial condition, and prospects. Our inability to produce high-quality lab-grown diamonds would have a significant material adverse effect on our business, results of operations, financial condition, and prospects that would likely result in our insolvency and the loss of your entire investment.
Our business is exposed to the risk of facility and equipment failures.
Like any manufacturing process, our business relies upon properly and efficiently run equipment and facilities. Over time, our facilities and equipment may depreciate and degrade. Although we have a preventative maintenance program, we attempt to maintain our facilities and equipment in proper working order and according to our equipment manufacturers standards, and we attempt to mitigate risks through redundancies where possible, there is still a risk of a potential failure in our facilities or equipment. Potential failures may also arise from outside sources such as utility companies from whom we receive electricity, natural gas and water, all of which are essential to our manufacturing processes. Such a failure could interrupt our production and have a significant material adverse effect on our business, results of operations, financial condition, and prospects.
Our future revenue is unpredictable, and we expect the results of operations to fluctuate from period to period.
Our lack of long-term operating history and the emerging nature of the markets in which we expect to compete make it difficult for us to accurately forecast revenue in any given period. As such, revenue could fall short of our expectations if we experience production delays or difficulties. Likewise, revenue could fall short of expectations should our product not be met with the demand we anticipate from the marketplace. We have limited experience in manufacturing diamonds and in financial planning for our business on which to base our planned operating expenses.
Our results of operations are likely to fluctuate substantially from period to period because of a number of factors, many of which are beyond our control. These factors include, but are not limited to, the following:
our ability to manufacture diamonds at all or that meet customer specifications or expectations;
outside market influences beyond our control, including extended periods of decreased demand for diamonds;
our ability to enter successful strategic relationships;
our ability to attract purchasers and/or distributors;
the amount and timing of operating costs and capital expenditures relating to expansion of production operations;
the rate at which individuals and organizations accept our diamonds;
an announcement or introduction of new or enhanced diamonds or services by our competitors;
our ability to attract and retain qualified personnel; and
pricing policies instituted by our current and possible future competitors.
We have generated minimal revenue to date, and consequently, our operations are subject to all risks inherent in the establishment of a new business enterprise. We are currently generating minimal revenue and expect to begin generating revenue in the future, but there can be no assurances that we will ever generate sufficient revenue to achieve profitability. If we do achieve profitability, there can be no assurances that we can sustain or increase profitability.
We may not be able to establish effective distribution channels.
We initially intend to sell our diamonds in selected markets in the United States and internationally. We expect that we will be required to enter into formal distribution agreements with, and will be dependent upon, several third parties for distribution and sales of our diamonds. We have only begun to sell our diamonds directly to customers and have not yet entered into any formal distribution agreements. Our initial sales for the twelve months ended September 30, 2023, have been primarily to a few customers. There can be no assurance that we will be able to broaden our customer base and enter into distribution agreements with distributors or that our distribution strategy will prove to be successful. Additionally, there can be no assurance that distributors will devote the efforts needed for successful distribution of our diamonds. Our inability to enter into favorable arrangements with distributors or to achieve the desired distribution of our diamonds would have a material adverse effect on our business, results of operations, financial condition, and prospects.
Sales of diamonds for industrial applications are dependent upon our ability to enter profitable relationships with businesses best able to utilize the unique characteristics of diamonds. There is no assurance that we will be able to initiate and maintain these relationships.
Our Diamond Technology may be vulnerable to failure due to potential interruptions in the manufacturing process.
Our success depends, in part, on the performance, reliability, and availability of our Diamond Technology and the diamonds we ultimately produce. Our Diamond Technology and the diamonds produced thereby may be vulnerable to failure or interruption. The failure of our Diamond Technology or the diamonds produced thereby could adversely affect our business. The process for manufacturing diamonds using our Diamond Technology is vulnerable to disruptions due to a variety of factors, including availability of stable power, availability of lab-grade purity gases, availability of diamond seeds, availability of proprietary diamond growing machine parts that wear out over time, and failure of factory systems like cooling, which may lead to interruptions, delays, and losses of opportunities or to consistently market and sell our lab-grown diamonds. The occurrence of any of the foregoing could have a material effect on our business, results of operations, financial condition, and prospects.
We may need to effectively manage the rapid growth of our operations.
Our ability to successfully offer diamonds and to implement our business plan in new markets requires an effective planning and management process. We are in the process of increasing our operations and anticipate having to increase our headcount as well. Increasing our operations and potentially experiencing rapid growth would place a significant strain on our management systems, infrastructure, and resources. We will need to continue to improve our financial and managerial controls and reporting systems and procedures, and will need to continue to expand, train, and manage our workforce.
Furthermore, we may be required to manage an increasing number of relationships with various diamond industry companies, customers, and other third parties. Any failure to expand any of the foregoing areas efficiently and effectively could cause our business to suffer. We could experience a period of rapid and significant growth, which could continue over several years. We believe rapid growth would place a significant strain on our resources. Our ability to manage growth effectively will require us to implement and improve operational and financial systems and to expand, train, and manage our employee base. We also may be required to manage multiple relationships with various suppliers, customers, and other third parties. Our future results of operations will also depend on our ability to expand sales and marketing, research and development, and administrative support organizations. If we were unable to manage growth effectively, our business, financial condition, results of operations, and prospects would be materially adversely affected.
We may not be successful in hiring additional personnel because of the competitive market for qualified people.
Our future success depends on our ability to identify, attract, hire, train, retain, and motivate highly skilled and qualified executives, technical, managerial, sales and marketing, and business development personnel. We intend to hire a number of executives, technical, sales and marketing, business development, and administrative personnel during the next one or two years. Competition for qualified personnel may prove intense. If we fail to successfully attract, assimilate, and retain a sufficient number of qualified executives, technical, sales and marketing, business development and administrative personnel, our business could suffer.
Our future success also depends on our ability to identify, attract, hire, train, retain, and motivate highly skilled and qualified personnel to develop and manufacture our products. Competition for such personnel may be intense. There can be no assurance that we will be successful in attracting and retaining the specific personnel we will require to conduct and expand our operations successfully or to differentiate us from our competitors. The results of operations and growth prospects could be materially adversely affected if we were unable to identify, attract, hire, retain, and motivate such qualified personnel.
Our success depends upon achieving a critical mass of customers and strategic relationships.
Our success is largely dependent upon achieving significant market acceptance for our diamonds. The market for our diamonds is at an early stage of development. Lab-grown diamonds as a category is just beginning to be accepted at a mass market level in jewelry. We need to build market awareness and acceptance for our diamonds in that segment. In the industrial segment, we need to also build awareness and acceptance for our particular products in various applications. Although we believe that our diamonds will ultimately achieve broad market acceptance, our existing and potential competitors may offer diamonds that could negatively affect the market acceptance of our product and damage our business prospects.
Our success is also dependent upon attracting significant numbers of distributors and forming strategic relationships to market our diamonds. Our ability to enter into beneficial distribution partnerships will depend in large part upon our success in convincing diamond gemstone consumers that our lab- grown diamond gemstones are of a desired quality. Failure to achieve and maintain a critical mass of market acceptance will seriously harm our business in the diamond gemstone industry.
Our insurance policies may not cover all potential losses.
We maintain insurance coverage for general liability, property, directors and officers liability coverage, and other risks with respect to business operations. While we have comprehensive property and liability insurance policies with coverage features and insured limits that we believe are customary, market forces beyond our control may limit the scope of the insurance coverage we can obtain or our ability to obtain coverage at reasonable rates. The cost of our insurance may increase, and our coverage levels may decrease, which may affect our ability to maintain customary insurance coverage and deductibles at acceptable costs. There is a limit as well as various sub-limits on the amount of insurance proceeds we will receive in excess of applicable deductibles. If an insurable event occurs that affects more than one of our properties, the claims from each affected property may be considered together to determine whether the per occurrence limit, annual aggregate limit, or sub-limits, depending on the type of claim, have been reached. If the limits or sub-limits are exceeded, each affected property may only receive a proportional share of the amount of insurance proceeds provided for under the policy. Further, certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, war, terrorist acts, such as biological or chemical terrorism, political risks, some environmental hazards, and/or natural or manmade , may be outside the general coverage limits of our policy, subject to large deductibles, deemed uninsurable, or too cost-prohibitive to justify insuring . In addition, in the event of a substantial , the insurance coverage we carry may not be sufficient to pay the full market value or replacement cost of the affected property or in some cases may not provide a recovery for any part of a . As a result, we could some or all the capital we have invested in a property.
We are currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing invasion of Ukraine by Russia.
U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and Russias launch of a full-scale military invasion of Ukraine in February 2022. Although the length and impact of the ongoing military conflict is highly unpredictable, the war in Ukraine has led to market disruptions, including significant volatility in commodity prices, credit, and capital markets. Additionally, Russias prior annexation of Crimea, recent recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine, and subsequent military invasion in Ukraine have led to sanctions and other penalties being levied by the United States, the European Union, and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk Peoples Republic, and the so-called Luhansk Peoples Republic, including the agreement by the U.S. and the EU to remove certain Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system. Additional potential sanctions and penalties have also been proposed and/or . Russian military actions and the resulting sanctions could affect the global economy and financial markets and lead to and of liquidity in capital markets, potentially making it more for us to obtain additional equity or debt funding. Any of the abovementioned factors could affect our business, prospects, financial condition, and operating results. The extent and duration of the war, sanctions, and resulting market are to predict, but could be substantial. Any such may also magnify the impact of other risks described herein.
In addition, as a result of the ongoing conflict between Russia and Ukraine, we may experience other risks, difficulties and challenges in the way we conduct our business and operations generally. For example, there may be an increased risk of cybersecurity attacks due to the current conflict between Russia and Ukraine, including cybersecurity attacks perpetrated by Russia or others at its direction in response to economic sanctions and other actions taken against Russia as a result of its invasion of Ukraine. Any increase in such attacks on us or our third-party providers or other systems could adversely affect our network systems or other operations. At this time, to the best of our knowledge, we do not believe we have experienced any cyberattacks that are related to the conflict between Russia and Ukraine. Although we have taken steps to enhance our protections against such attacks, including removing internet connectivity from our diamond growing machines and laser machines and using fully encrypted file share facilities, we may not be to address these cybersecurity or implement adequate preventative measures and there can be no assurance that we will promptly detect and address any such or security , if at all.
A protracted conflict between Ukraine and Russia, any escalation of that conflict, and the financial and economic sanctions and import and/or export controls imposed on Russia by the United States, the UK, the EU, Canada and others, and the above-mentioned adverse effect on our operations (both in this region and generally) and on the wider global economy and market conditions could, in turn, have a material adverse impact on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares to decline.
The current and future state of the global economy may curtail our operations and our anticipated revenue.
Our business may be adversely affected by changes in domestic and international economic conditions, including inflation, changes in consumer preferences and changes in consumer spending rates, personal bankruptcy, and the ability to collect our accounts receivable. Changes in global economic conditions may adversely affect the demand for our products and make it more difficult to collect accounts receivable, thereby negatively affecting our business, results of operations, financial condition, and prospects. The recent disruptions in credit and other financial markets and deterioration of national and global economic conditions could, among other things, impair the financial condition of some of our customers and suppliers, thereby increasing customer bad debts, decreasing customers ability to spend disposable income on luxury items such as jewelry, or non-performance by suppliers. Additionally, consumers may significantly prefer mined diamonds over our lab-grown diamonds, which would significantly diminish anticipated sales.
Acts of war, terrorism, or other unknown and unexpected events could disrupt our business and we could be required to cease our operations.
Involvement in a war or other military action or acts of terrorism may cause significant disruption to commerce throughout the world. To the extent that such disruptions result in (i) delays or cancellations of customer orders, (ii) a general decrease in consumer spending, (iii) our inability to effectively market and distribute our products, or (iv) our inability to access capital markets, our business, results of operations, financial condition, and prospects could be materially and adversely affected. We are unable to predict whether the involvement in a war or other military action will result in any long-term commercial disruptions or if such involvement or responses will have any long-term material adverse effect on our business, results of operations, financial condition, or prospects.
Changes to accounting rules or regulations may adversely affect our reported financial condition and results of operations.
New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. A change in accounting rules or regulations may require retrospective application and affect our reporting of transactions completed before the change is effective, and future changes to accounting rules or regulations may adversely affect our reported financial condition and results of operations.
We may incur impairment charges related to the fair value of our assets.
Changes to estimates or projections used to assess the fair value of our assets or results of operations that are lower than our current estimates may cause us to incur impairment losses and require us to write-off all or a portion of the remaining value of our goodwill or other tangible and intangible assets.
Our total assets include goodwill and other intangible assets. As of September 30, 2023, of our total assets, approximately 44.6% is goodwill and other intangible assets. We evaluate our goodwill and other intangible assets for impairment on an annual basis or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value is below the carrying value. We may be required to record a significant non-cash impairment charge in our financial statements during the period in which any impairment of our goodwill, other intangible assets or other assets is determined, negatively impacting our results of operations and stockholders equity.
Use of social media and influencers may materially and adversely affect our reputation or subject us to fines or other penalties.
We plan to expand our use of third-party social media platforms as marketing tools for our diamond gemstones. For example, we plan to further establish and maintain Instagram, Snapchat, Facebook, Twitter, TikTok, and Pinterest accounts, as well as our channel on YouTube and Spotify. We also plan to establish and maintain relationships with social media influencers. As existing e-commerce and social media platforms continue to rapidly evolve and new platforms develop, we must continue to maintain a presence on these platforms and establish presences on new or emerging popular social media platforms. If we are unable to cost-effectively use social media platforms as marketing tools or if the social media platforms, we use do not evolve quickly enough for us to fully optimize such platforms, our ability to acquire new consumers and our financial condition may suffer. Furthermore, as laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, our network of social media influencers, our sponsors, or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices or otherwise could subject us to regulatory investigations, class action lawsuits, liability, fines, or other and have a material effect on our business, financial condition, results of operations, and prospects.
In addition, an increase in the use of social media for marketing may cause an increase in the burden on us to monitor compliance of such materials and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations. For example, in some cases, the United States Federal Trade Commission, or the FTC, has sought enforcement action where an endorsement has failed to clearly and conspicuously disclose a material relationship between an influencer and an advertiser. While we will ask influencers to comply with the FTC regulations, we may not be able to regularly monitor what our influencers post, and if we were held responsible for the content of their posts, we could be forced to alter our practices, which could have material adverse effect on our business, financial condition, results of operations, and prospects.
We are subject to risks related to corporate social responsibility.
Many factors influence our reputation and the value of our brand, including the perception held by our stakeholders and the industries in which we do business. Our business faces increasing scrutiny related to environmental, social, and governance activities and risk of damage to our reputation and the value of our brands if we fail to act responsibly or comply with regulatory requirements in several areas, such as safety and security, environmental stewardship and sustainability, supply chain management, climate change, diversity, human rights, philanthropy, and support for local communities.
The costs of being a public company could result in us being unable to continue as a going concern.
As a public company, we will be required to comply with numerous financial reporting and legal requirements, including those pertaining to audits and internal control. The costs of maintaining all public company reporting requirements could be significant and may preclude us from seeking financing or equity investment on terms acceptable to us and our stockholders. If our revenue is insufficient or non-existent, and/or we cannot satisfy many of these costs through the issuance of shares or debt, we may be unable to satisfy these costs in the normal course of business. This would certainly result in our being unable to continue as a going concern.
We may not have or ever have the resources or ability to implement and manage our growth strategy.
Although we expect to experience growth based on the ability to implement and execute our business strategy, significant operations may never occur because the business plan may never be fully implemented because of the lack of funds to do so. If our growth strategy is implemented, of which no assurances can be provided, a significant strain on management, operating systems, or financial resources may be imposed. Failure by our management to manage this expected growth, if it occurs, or unexpected difficulties encountered during this growth, could have a material adverse impact on the results of operations or financial condition.
Our ability to operate profitable revenue generating products (if we are able to establish any product lines at all) will depend upon a number of factors, including (i) identifying appropriate and satisfactory sales channels; (ii) generating sufficient funds from our then-existing operations or obtaining third-party financing or additional capital to develop new product lines; (iii) our management team and our financial and accounting controls; and (iv) staffing, training, and retention of skilled personnel, if any at all. These factors most likely will be beyond our control and may be adversely affected by the economy or actions taken by competing businesses. There can be no assurance that we will be able to execute and manage a growth strategy effectively or at all.
Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. As defined in Rule 13a-15(f) of the Exchange Act, internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, or GAAP, and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and/or directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Our internal controls may be inadequate or ineffective, which could cause financial reporting to be unreliable and lead to misinformation being disseminated to the public. Investors relying upon this misinformation may make an uninformed investment decision.
Failure to achieve and maintain an effective internal control environment could cause us to face regulatory action and also cause investors to lose confidence in our reported financial information, either of which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Regulatory Risks
Our business is extensively regulated, and any failure to comply with applicable laws could materially adversely affect our business.
Certain federal and state laws and regulations govern the testing, creation, and sale of the types of diamonds we intend to produce. The FTC and other comparable regulatory authorities in the United States and in foreign countries may extensively and rigorously regulate our lab-grown diamonds, product development activities, manufacturing processes, advertising, and sales. In the United States, the FTC regulates the introduction and labeling of gemstone diamonds. We may be required to:
obtain clearance before we can market and sell our lab-grown diamond gemstones;
describe our products consistent with the FTC guidelines in marketing and sales material;
satisfy content requirements applicable to our labeling, sales, and promotional materials;
comply with manufacturing and reporting requirements; and
undergo rigorous inspections.
Further, we may be subject to regulatory requirements in the future. Government authorities can withdraw marketing clearance due to our failure to comply with regulatory standards or due to the occurrence of unforeseen problems following initial clearance. Ongoing regulatory requirements are wide- ranging and govern, among other things:
product manufacturing;
annual inspections related to International Organization for Standardization, or ISO, certification of our quality system;
supplier substitution;
product changes;
process modifications;
the process of assuring origin of mine and/or production of diamonds;
lab-grown diamond gemstone reporting and disclosure; and
product sales and distribution.
Various government agencies may inspect our facilities from time to time to determine whether we comply with applicable laws and regulations. Additionally, if we fail to comply or maintain compliance with laws and regulations pertaining to diamond gemstones, regulatory authorities may fine us and bar us from selling our lab-grown diamond gemstones. If a regulatory agency believes we are not in compliance with such laws or regulations, it may be able to:
seize our lab-grown diamond gemstones;
require a recall;
withdraw previously granted market clearances;
implement procedures to stop future violations; and/or
seek civil and criminal penalties against us.
The former stockholders of Scio have brought a suit against the former directors of Scio and current management of Adamas.
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 contends that the court lacks subject matter jurisdiction. The case was re-assigned to Hon. Cristina D. Silva. Judge Silvas on July 5, 2023. After a long period of delay, on June 14, 2024, the court ordered additional briefing on the argument based on the Companys motion to dismiss for lack of subject matter jurisdiction, signaling we believe the court was inclined to dismiss the entire case for lack of subject matter jurisdiction. The briefing was to commence on June 28, 2024. Largely, as a result of the courts inclination to , on June 28, 2024, the stipulated to the the Company, Mr. Grdina, and Scios management and filed a voluntary of all of the .
Future litigation against us, which may arise in the ordinary course of our business, could be costly and time- consuming to defend.
We are subject to claims that arise in the ordinary course of business, such as claims brought in connection with commercial disputes, employment claims made by our current or former employees, or claims brought by third parties for product liability. Third parties may in the future assert intellectual property rights to technologies that are important to our business and demand back royalties or demand that we license their technology. Litigation may result in substantial costs and may divert managements attention and resources, which may seriously harm our business, overall financial condition, and operating results. Insurance may not cover such claims, may not be sufficient for one or more of such claims, and may not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or could result in costs, affecting our business, results of operations, financial condition, and prospects.
Risks Related to our Common Stock
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful stockholder claims against us and may reduce the amount of money available to us.
As permitted by Section 78.7502 of Chapter 78 of the Nevada Revised Statutes, or the NRS, our amended and restated articles of incorporation limit the liability of our directors to the fullest extent permitted by law. In addition, as permitted by Section 78.7502 of the NRS, our amended and restated articles of incorporation and amended and restated bylaws provide that we shall indemnify, to the fullest extent authorized by the NRS, any person who is involved in any litigation or other proceeding because such person is or was a director or officer of ours or is or was serving as an officer or director of another entity at our request, against all expense, loss, or liability reasonably incurred or suffered in connection therewith. Our amended and restated articles of incorporation provide that indemnification includes the right to be paid expenses incurred in defending any proceeding in advance of its final disposition; provided, however, that such advance payment will only be made upon delivery to us of an undertaking, by or on behalf of the director or officer, to repay all amounts so advanced if it is ultimately determined that such director is not entitled to indemnification. Section 78.7502 of the NRS permits a corporation to indemnify any person who was or is a party or is to be made a party to any , pending, or completed action, suit, or proceeding, whether civil, , administrative, or investigative, except an action by or in the right of us, by reason of the fact that the person is or was a director, officer, employee, or agent of ours, or is or was serving at our request as a director, officer, employee, or agent of another company, partnership, joint venture, trust, or other enterprise, expenses, including attorneys fees, judgment, , and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit, or proceeding if the person is not liable under Section 78.138 of the NRS, or acted in faith and in a manner which he or she reasonably believed to be in or not to the interests of the corporation, and, with respect to any action or proceeding, had no reasonable cause to believe the conduct was .
The above limitations on liability and our indemnification obligations limit the personal liability of our directors and officers for monetary damages for breach of their fiduciary duty as directors by shifting the burden of such losses and expenses to us. Certain liabilities or expenses covered by our indemnification obligations may not be covered by our directors and officers insurance policy or the coverage limitation amounts may be exceeded. As a result, we may need to use a significant amount of our funds to satisfy our indemnification obligations, which could severely harm our business and financial condition and limit the funds available to stockholders who may choose to bring a claim against us.
We may be unable to maintain our listing, and an active trading market may not be sustained.
Our common stock began trading on the Nasdaq Capital Market on December 9, 2022. There can be no assurance that we will meet the listing requirements in the future or maintain an active public trading market for our common stock. In the absence maintaining our Nasdaq listing or an active trading market:
investors may have difficulty buying and selling or obtaining market quotations;
market visibility for shares of our common stock may be limited; and
a lack of visibility for shares of our common stock may have a depressive effect on any market price for our shares of common stock that might develop.
We currently trade our common stock on the Nasdaq Capital Market. There can be no assurance that we will be able to maintain the listing of our shares on the Nasdaq Capital Market.
The lack of an active market would impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares of our common stock and may impair our ability to acquire additional intellectual property assets by using our shares of common stock as consideration.
Our stock price may be volatile, and you may not be able to sell shares of our common stock at or above the price you paid.
The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Such factors include the following:
actual or anticipated fluctuations in our results of operations;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations, or capital commitments;
failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;
issuance of new or updated research or reports by securities analysts or changed recommendations for our stock;
our focus on long-term goals over short-term results;
the timing of our investments in the growth of our business;
actual or anticipated changes in regulatory oversight of our business;
additions or departures of key management or other personnel;
disputes or other developments related to our intellectual property or other proprietary rights, including litigation; and
general economic and market conditions.
In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular companys securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our managements attention and resources.
If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our common stock price and trading volume could decline.
Our stock price and trading volume will be heavily influenced by the way analysts and investors interpret our financial information and other disclosures. If securities or industry analysts do not publish research or reports about our business, delay publishing reports about our business, or publish negative reports about our business, regardless of accuracy, our common stock price and trading volume could decline.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. We expect that only a limited number of analysts will cover our company following our initial public offering. If the number of analysts that cover us declines, demand for our common stock could decrease and our common stock price and trading volume may decline.
Even if our common stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. Over-reliance by analysts or investors on any particular metric to forecast our future results may result in forecasts that differ significantly from our own.
Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline.
We will continue to incur significantly increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.
As a public company, we incur significant legal, accounting, insurance, and other expenses that we did not incur as a private company. For example, we incur increased legal and accounting costs as a result of being subject to the information and reporting requirements of the Exchange Act and other federal securities laws. The costs of preparing and filing periodic and other reports, proxy statements, and other information with the SEC and furnishing audited reports to stockholders will cause a significant increase in our expenses than if we remained privately held. The cost of being a public company will divert continue resources that might otherwise have been used to develop our business, which could have a material adverse effect on our company.
As a public company, we are required to comply with certain corporate governance and financial reporting practices and policies required of a public reporting company. We are required to file with the SEC annual and quarterly information and other reports pursuant to the Exchange Act. We are also required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. In addition, we will be subject to other reporting and corporate governance requirements, including the requirements of the Nasdaq exchange on which our common stock is listed., and certain provisions of the Sarbanes-Oxley Act and the regulations promulgated thereunder, which will impose significant compliance obligations upon us. As a public company, we, among other things, were required to do the following:
prepare and distribute periodic public reports and other stockholder communications;
comply with our obligations under the federal securities laws and applicable listing rules;
create or expand the roles and duties of our board of directors and committees of the board of directors;
institute more comprehensive financial reporting and disclosure compliance functions;
enhance our investor relations function;
establish new internal policies, including those relating to disclosure controls and procedures; and
involve and retain to a greater degree outside counsel and accountants in the activities listed above.
We may not be successful in complying with these obligations, and the significant commitment of resources required for complying with them could have a material adverse effect on our business, results of operations, financial condition, and prospects. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified people to serve on our board of directors, on the committees of our board of directors, or as our executive officers.
In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our results of operations on a timely and accurate basis could be impaired and we could suffer adverse regulatory consequences or violate applicable listing standards. There could also be a negative reaction to our stock price due to a loss of investor confidence in us and the reliability of our financial statements, which could have a material adverse effect on our business, results of operations, financial condition, and prospects.
These changes require a significant commitment of resources and management supervision that has increased and may continue to increase our costs and might place a strain on our management, systems, and resources. As a result, our managements attention might be diverted from other business concerns. If we fail to maintain an effective internal control environment or to comply with the numerous legal and regulatory requirements imposed on public companies, we could make material errors in, and be required to restate, our financial statements. Any such restatement could result in a loss of public confidence in the reliability of our financial statements and sanctions imposed on us by the SEC. We cannot predict or estimate the amount of additional costs we may incur in the future or the timing of such costs. If we are unable to satisfy our obligations as a public company, we could be subject to of our common stock, , sanctions, and other regulatory action and potentially civil .
Provisions in our corporate charter documents and under Nevada law could make acquiring us more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated articles of incorporation and amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby reducing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions include the following:
our Board of Directors has the right to elect directors to fill a vacancy created by the expansion of our Board of Directors or the resignation, death, or removal of a director, which will prevent stockholders from being able to fill vacancies on our Board of Directors;
our amended and restated articles of incorporation prohibit cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; and
our Board of Directors can issue, without stockholder approval, shares of undesignated preferred stock, which makes it possible for our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.
These provisions may also frustrate or prevent any attempts by our stockholders to replace or remove our current management or members of our Board of Directors.
In addition, we are subject to Nevadas statute on combinations with interested stockholders (Sections 78.411—78.444 of the NRS), which prohibits us from entering into a combination with an interested stockholder for up to four years, unless certain conditions are met (such as, in some circumstances, approval by our Board of Directors before such person became an interested stockholder, or by both our Board of Directors and a supermajority of the disinterested stockholders). Under the statute, an interested stockholder is a person who beneficially owns (or, if one of our affiliates or associates did, within the prior two years, beneficially own) stock with 10% or more of the corporations voting power. The inability of an interested stockholder to pursue the types of combinations restricted by the statute could discourage, delay or prevent a merger, acquisition or other change in control of our company.
Finally, a person acquiring a significant proportion of our voting stock could be precluded from voting all or a portion of such shares under Nevadas control share statute (Sections 78.378—78.3793 of the NRS), which prohibits an acquirer of stock, under certain circumstances, from voting its control shares of stock acquired up to 90 days prior to crossing certain ownership threshold percentages, unless the acquirer obtains approval of the disinterested stockholders or unless the issuing corporation amends its articles of incorporation or bylaws within 10 days of the acquisition to provide that the control share statute does not apply to the corporation or the types of existing or future stockholders. If the voting rights are not approved, the statute would allow us to call all of such control shares for redemption at the average price paid for such shares.
We do not expect to pay cash dividends in the foreseeable future.
We have never paid cash dividends on our common stock. We do not expect to pay cash dividends on our common stock at any time in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements, and other factors that our Board of Directors will consider. Accordingly, your only opportunity to achieve a return on your investment in our company may be if the market price of our common stock appreciates and you sell your shares at a profit. The market price for our common stock may never exceed, and may fall below, the price that you pay for such common stock.
We may require additional capital in the future and such additional capital may not be available to us, or only available to us on unfavorable terms.
To the extent that the funds generated by our ongoing operations and capital remaining at our company are insufficient to fund future operating requirements, we may need to raise additional funds through financings or curtail our growth. We cannot be sure that we will be able to raise equity or debt financing on terms favorable to us and our stockholders in the amounts that we require, or at all. If we cannot obtain adequate capital, our business, financial condition, results of operations and prospects could be materially and adversely affected.
In addition, the terms of a capital raising transaction could require us to agree to stringent financial and operating covenants and to grant security interests on our assets to lenders or holders of our debt securities that could limit our flexibility in operating our business or our ability to pay dividends on our common stock and could make it more difficult for us to obtain capital in the future.
Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause the price of our common stock to decline.
We may issue additional securities. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell common stock, convertible securities, and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences, and privileges senior to those of holders of our common stock.
The concentration of ownership of our common stock among our executive officers and directors will prevent new investors from influencing significant corporate decisions.
Based on our common stock outstanding as of September 30, 2023, our executive officers and directors will, in the aggregate, beneficially own approximately 27.5% of our outstanding common stock. Mr. Grdina, our President, Chief Executive Officer, and Chairman of the Board, beneficially owns approximately 21.76% of our outstanding common stock is able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of Mr. Grdina may not coincide with the interests of other stockholders, and he may vote in a way with which you disagree and that may be adverse to your interests.
In addition, Mr. Grdinas concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our common stock to decline or prevent our other stockholders from realizing a premium over the market price for their common stock. In addition, because our principal stockholders acquired their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a longer period, they may want us to pursue strategies that deviate from the interests of other stockholders. Moreover, while Mr. Grdina has committed to devote his full time and attention to our business for a minimum of 40 hours per week, his employment agreement does not expressly require him to do so. Due to the lack of restrictions in his employment agreement and because he has other investments, he may pursue other employment or business opportunities, including acquisitions, which may be directly or indirectly competitive with our business. Investors should consider that the interests of Mr. Grdina may differ from their interests in material respects.
We are both an emerging growth company and a smaller reporting company, and our compliance with the reduced reporting and disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and we have elected to take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These provisions include being permitted to have only two years of audited financial statements and managements discussion and analysis of financial condition and results of operations disclosures in this 10K; being exempt from compliance with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; being exempt from any rules that could be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditors report on financial statements; being subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and not being required to hold nonbinding advisory votes on executive compensation or on any golden parachute payments not previously approved.
We may remain an emerging growth company until as late as September 30, 2026, the fiscal year-end following the fifth anniversary of the completion of this offering, though we may cease to be an emerging growth company earlier under certain circumstances, including if (i) we have more than $1.235 billion in annual revenues in any fiscal year, (ii) we become a large accelerated filer, with at least $700.0 million of equity securities held by non-affiliates as of the end of the second quarter of that fiscal year, or (iii) we issue more than $1.0 billion of non-convertible debt securities over a three-year period. If some investors find our common stock less attractive as a result of us utilizing some or all of these exemptions or forms of relief, there may be a less active trading market for our common stock, and our stock price may decline or become more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to take advantage of the extended transition period to comply with new or revised accounting standards. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult.
We are also a smaller reporting company, meaning that the market value of our stock held by non-affiliates is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may remain to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250.0 million, or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. This also may cause investors to find our common stock less attractive, there may be a less active trading market for our common stock, and our stock price may decline or become more volatile.
The provision of our amended and restated articles of incorporation requiring exclusive forum in the Eighth Judicial District Court of Clark County, Nevada for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.
Our amended and restated articles of incorporation, as they will be in effect upon the completion of this offering, will require that (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty; (iii) any action arising pursuant to any provision of Nevada law regarding corporations, mergers, conversion or domestications, or our amended and restated articles of incorporation or amended and restated bylaws (as either may be amended from time to time); (iv) any action to interpret, apply, enforce or determine the validity of our amended and restated articles of incorporation or our amended and restated bylaws; or (v) any action asserting a claim against us that is governed by the internal affairs doctrine, will have to be brought only in the Eighth Judicial District Court of Clark County, Nevada. Our amended and restated articles of incorporation will provide that the foregoing Nevada exclusive forum provisions do not apply to any action asserting claims under the Securities Act or the Exchange Act. Although we believe this provision benefits us by providing increased consistency in the application of Nevada law in the types of lawsuits to which it applies, the provision may have the effect of lawsuits our directors and officers.
The interests of stockholders may be hurt because we can issue shares to individuals or entities that support existing management with such issuances serving to enhance existing managements ability to maintain control of our company.
Our Board of Directors has the authority, without action or vote of the stockholders, to issue all or part of the authorized but unissued common shares. Such issuances may be issued to parties or entities committed to supporting existing management and the interests of existing management which may not be the same as the interests of other stockholders. Our ability to issue shares without stockholder approval serves to enhance existing managements ability to maintain control of our company.
In addition, our common stock is unlikely to be followed by any financial analysts, and there may be few institutions acting as market makers for our common stock. Either of these factors could adversely affect the liquidity and trading price of our common stock. Until our common stock is fully distributed and an orderly market develops in our common stock, if ever, the price at which it trades is likely to fluctuate significantly. Prices for our common stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for shares of our common stock, developments affecting our business, including the impact of the factors referred to elsewhere in these Risk Factors, investor perception of our Company and general economic and market conditions. No assurances can be provided that an orderly or liquid market will ever develop for our common stock.
Risks Related to Technology, Privacy, and Intellectual Property Rights
We expect to have limited protection of our intellectual property and proprietary rights.
We regard the patents, trade secrets, and similar intellectual property acquired via the Scio asset acquisition as critical to our success. We must rely on patent law, trade secret protection, and confidentiality agreements with our employees, customers, strategic partners, advisors, and others to protect those proprietary rights. Such measures, however, afford only limited protection, and we may not be able to maintain the proprietary nature and/or confidentiality of our Diamond Technology. Despite these precautions, unauthorized third parties might use information that we regard as proprietary to compete or help others to compete against us. There is no assurance that any of the future patent applications, if made, will be granted, or, if granted, will not be invalidated, or circumvented, or that the rights granted thereunder will provide us with a competitive advantage. Any misappropriation of our proprietary information by third parties could materially adversely affect our business. There can be no assurance that any other patents issued will provide us any significant commercial protection, that we will have sufficient resources to our patents, or that any patents will be upheld by a court should we seek to enforce our rights an infringer.
There can be no assurances that:
any pending patent application or future patent application will result in issuances of patents;
the scope of any patent protection will be effective to exclude competitors or provide competitive advantages to us;
we will be able to commercially exploit any issued patents before they expire;
any of our patents will be held valid if subsequently challenged;
others will not claim rights in or ownership of our patents and other proprietary rights;
our diamonds will not infringe, or be alleged to infringe, the proprietary rights of others; or
we will be able to protect meaningful rights in proprietary technology over which we do not hold patents.
Furthermore, there can be no assurances that others have not developed or will not develop diamonds which may duplicate any of the diamonds produced using our Diamond Technology or our expected manufacturing processes, or that others will not design around any of our patents. The existence of valid patents does not provide absolute prevention from other companies independently developing competing technologies. Existing producers of lab-grown diamonds may refine existing processes for growing diamonds or develop new technologies for growing diamonds in a manner that does not infringe any of our intellectual property rights.
Other parties may independently develop or otherwise acquire substantially equivalent techniques, gain access to our acquired proprietary technology, or disclose such technology to competitors. In addition, whether we obtain additional patents, others may hold or receive patents covering components of our technology that we independently develop in the future. There can be no assurances that third parties will not claim infringement by us, and seek substantial damages, with respect to current or future diamond-related activities. If we were to become involved in a dispute regarding intellectual property, whether ours or that of another company, we may become involved in material legal proceedings. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause production and/or product shipment delays, and require us to:
cease manufacturing and selling the product in question, which could seriously harm us;
enter into royalty or licensing agreements; or
design commercially acceptable non-infringing alternative diamonds.
There can be no assurance that we would be able to obtain royalty or licensing agreements, if required, on terms acceptable to us or at all, or that we would be able to develop commercially acceptable non-infringing alternative diamonds. The failure to do so could have a material adverse effect upon our business, results of operations, financial condition, and prospects. We cannot be absolutely certain that our Diamond Technology does not infringe on issued patents or other intellectual property rights of others. In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, applications by third parties may have been filed that relate to our Diamond Technology of which we are presently unaware.
There can be no assurance that our business and ability to produce diamonds will not be impaired by claims that we are infringing upon the intellectual property of others. We may be subject to future legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties. Intellectual property litigation is expensive and time- consuming and could divert our managements attention from diamond production and operating our business. As a result of the foregoing, the limited protection of our acquired intellectual property rights and proprietary information could have a material adverse effect on our business, results of operations, financial condition, and prospects.
Our intellectual property rights, and the intellectual property rights of our vendors, are valuable, and the failure to protect those rights could adversely affect our business.
Our intellectual property rights, including existing and future trademarks, trade secrets, and copyrights, are and will continue to be valuable and important assets of our business. We believe that our proprietary technology, as well as our other technologies and business practices, are competitive advantages and that any duplication by competitors would harm our business. The measures we have taken to protect our intellectual property may not be sufficient or effective. Additionally, intellectual property laws and contractual restrictions may not prevent misappropriation of our intellectual property. Finally, even if we can successfully protect our intellectual property, others may develop technologies that are similar or superior to our technology.
