Notes
to Audited Financial Statements
July
31, 2016 and 2015
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Description of Business
Precious
Investments, Inc. (Formerly FIGO Ventures, Inc.) (‘The Company’) was incorporated under the laws of the State of Nevada
on May 26, 2004. The Company was an Exploration Stage Company with the principle business being the acquisition and exploration
of resource properties.
The
Company had allowed its charter with the state of Nevada to be revoked by the Secretary of State for failure to file the required
annual lists and pay the required annual fees. Its last known officers and directors reflected in the records of the Secretary
of State were unresponsive or stated they were no longer involved with the Company. The purported replacement officers and directors
were unresponsive.
On
September 14, 2012, NPNC Management, LLC filed a petition in the Eighth Judicial District Court in Clark County, Nevada and was
appointed custodian of the Company on October 15, 2012.
In
order to obtain basic operating capital to pay for the reinstatement of the Company’s good standing with the Nevada Secretary
of State, to bring the Company’s account current with creditors essential for the reorganization of the Company, such as
the transfer agent, and for basic general corporate purposes, on October 24, 2012, the interim board authorized the sale of 55,000,000
(2,200,000 split adjusted) shares of common stock for $6,000 to NPNC Management, LLC, in a private placement transaction exempt
from the Securities Act of 1933, as amended, pursuant to section 4(2) thereof and the rules and regulations promulgated there
under.
On
October 24, 2012, NPNC Management, LLC appointed Bryan Clark as director of the Company, to hold office until such time as the
shareholders elected a board. The interim board, consisting of Mr. Clark, further acted to appoint Mr. Clark as president, treasurer,
and secretary of the Company, to act on behalf of the Company, and to hold such offices until removed by any subsequent board
elected by the shareholders.
On
November 13, 2013, Bryan Clark tendered his resignation from all positions as an Officer and Director of the Company and the Board
appointed Anna Wlodarkiewicz as a Director, President, Secretary and Treasurer of the Company.
On
October 9, 2014, Ania Wlodarkiewicz tendered her resignation from all positions as an Officer and Director of the Company and
the Board appointed Nataliya Hearn as a Director, President, Secretary and Treasurer of the Company.
On
March 28, 2016, Nataliya Hearn resigned as the Company’s Chief Executive Officer and Director. Mr. Kashif Khan is the Company’s
sole officer and director.
The
Company has completed an asset purchase agreement dated August 10, 2015 where the Company acquired from Kashif Khan, its sole
officer and director, colored diamonds with a wholesale value of US$4 Million, which he was in control of, in exchange for issuing
three secured demand convertible promissory notes totaling US$4 Million.
The
Company is in the business of purchasing and selling colored diamonds.
Precious
Investments, Inc.
Notes
to Audited Financial Statements
July
31, 2016 and 2015
Basis
of Presentation
Our
financial statements are presented in conformity with accounting principles generally accepted in the United States of America,
as reported on our fiscal years ending on July 31, 2016 and 2015. We have summarized our most significant accounting policies.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date the financial statements and the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Derivative
Financial Instruments
The
Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.
The
Company reviews the terms of convertible loans, equity instruments and other financing arrangements to determine whether there
are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for
separately as a derivative financial instrument. Also, in connection with the issuance of financing instruments, the Company may
issue freestanding options or warrants to employees and non-employees in connection with consulting or other services. These options
or warrants may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.
Derivative
financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for
as liabilities, the derivative instrument is initially recorded at fair value and then re-valued at each reporting date, with
changes in the fair value reported as charges or credits to income. To the extent that the initial fair values of the freestanding
and/or bifurcated derivative instrument liabilities exceed the total proceeds received an immediate charge to income is recognized
in order to initially record the derivative instrument liabilities at their fair value.
The
discount from the face value of the convertible debt instruments resulting from allocating some or all of the proceeds to the
derivative instruments, together with the stated rate of interest on the instrument, is amortized over the life of the instrument
through periodic charges to income, using the effective interest method.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument,
as of the determination date, is reclassified. Any previous charges or credits to income for changes in the fair value of the
derivative instrument are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current
based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance
sheet date.
Precious
Investments, Inc.
Notes
to Audited Financial Statements
July
31, 2016 and 2015
Fair
value of financial instruments
The
Company’s financial instruments consist of its liabilities. The carrying amount of payables and the loan payable –
related party approximate fair value because of the short-term nature of these items. The promissory notes, and convertible notes
payables are measured at amortized cost using the effective interest method, which approximates fair value due to the relationship
between the interest rate on long-term debt and the Company’s incremental risk adjusted borrowing rate.
Inventories
Inventory
consist of loose colored diamond acquired during the period (See Note 7) and is stated at the lower of cost or net realizable
value. The Company writes-down inventory once it has been determined that conditions exist that may not allow the inventory to
be sold for its intended purpose or the inventory is determined to be excess or obsolete based on our forecasted future sales.
The charge related to inventory write-downs is recorded as a cost of revenue.
Long-lived
assets
Long-lived
assets, including investments to be held and used or disposed of other than by sale, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be recoverable. When required, impairment losses on assets
to be held and used or disposed of other than by sale are recognized based on the fair value of the asset. Long-lived assets to
be disposed of by sale are reported at the lower of the asset’s carrying amount or fair value less cost to sell.
Income
Taxes
The
Company accounts for income taxes pursuant to FASB ASC 740—Income Taxes, which requires recognition of deferred income tax
liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements
or tax returns. The Company provides for deferred taxes on temporary differences between the financial statements and tax basis
of assets using the enacted tax rates that are expected to apply to taxable income when the temporary differences are expected
to reverse.
FASB
ASC 740 establishes a more-likely-than-not threshold for recognizing the benefits of tax return positions in the financial statements.
Also, the statement implements a process for measuring those tax positions that meet the recognition threshold of being ultimately
sustained upon examination by the taxing authorities. There are no uncertain tax positions taken by the Company on its tax returns.
The Company files tax returns in the U.S. and states in which it has operations and is subject to taxation. Tax years subsequent
to 2008 remain open to examination by U.S. federal and state tax jurisdictions.
Net
Loss per Common Share
Basic
earnings per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average
number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS
gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants,
using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to
be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted
method.
Precious
Investments, Inc.
Notes
to Audited Financial Statements
July
31, 2016 and 2015
Recently
Issued Accounting Pronouncements
Management
has considered all recent accounting pronouncements issued since the last audit of its financial statements. The Company's management
believes that these recent pronouncements will not have a material effect on the Company's financial statements.
NOTE
2 – GOING CONCERN
These
condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles
applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments
in the normal course of business. As of July, 31, 2016, the Company has an accumulated deficit of $67,359,015. The Company’s
ability to continue as a going concern is contingent upon the successful completion of additional financing arrangements and our
ability to achieve and maintain profitable operations. While we are expanding our best efforts to achieve the above plans, there
is no assurance that any such activity will generate funds that will be available for operations. These conditions raise substantial
doubt about our ability to continue as a going concern. These condensed consolidated interim financial statements do not include
any adjustments that might arise from this uncertainty.
NOTE
3 – BITGEMS ASSETS MANAGEMENT LTD
On
March 24, 2016, the Company entered into an Agreement for Transfer of Ownership with Gulf Peal Ltd. and goNumerical Ltd.(the Consulting
Firms) (the “Transfer Agreement”). Under the Transfer Agreement, the Company agreed to transfer all intellectual property
rights as part of the cryptocurrency diamond market and PinkCoin projects to Gulf Pearl Ltd. and GoNumerical Ltd. (the “Consulting
Firms”). In addition, the Company agreed to transfer ownership and management of its subsidiary, Bitgems Assets Management
Ltd., to the Consulting Firms. In exchange, the Consulting Firms agreed to return their collective 1,000,000 shares in the Company
acquired under the previously entered Memorandum of Understanding dated October 1, 2015 and Amended Memorandum of Understanding
dated October 12, 2015.
On the date of the sale, Bitgems Assets
Management had no assets or liabilities and as such the Company recorded the value of the 1,000,000 shares received of $2,400,000
as a gain on the sale of subsidiary recorded to additional paid in capital. Additionally, the Company recorded the amortization
of a previously recorded prepaid expense of $2,092,500 (See note 4) associated with the MOU to the sale price of the subsidiary
and netted it against the gain.
During
the year ended July 31, 2016, the Company recorded the net gain on the sale of its subsidiary of $307,500.
NOTE
4 – PREPAID EXPENSES
On
October 1, 2015, we entered into a Memorandum of Understanding (“MOU”) with Gulf Peal Ltd. and goNumerical Ltd. (the
“Consulting Firms”) in which each of the Consulting Firms shall receive 500,000 shares of common stock upon meeting
certain milestones, with 250,000 shares of common stock being earned upon execution of the MOU. During the period ended April
30, 2016, we issued a total of 1,000,000 shares of common stock valued $2,790,000 to the consultants related to the agreement.
The
Company included the value of the 750,000 unearned shares amounting to $2,092,500 as a prepaid expense until such time the milestones
are met and the shares are earned.
As
of July 31, 2016, no additional milestones were met and as a result of the Transfer agreement (See Note 3) and the return of the
previously issued shares, the Company has amortized the balance of the outstanding prepaid of $2,092,500 to the selling price
of the subsidiary. As of July 31, 2016 and 2015, the balance of the prepaid expenses is $0.
Precious
Investments, Inc.
Notes
to Audited Financial Statements
July
31, 2016 and 2015
NOTE
5 – PROMISSORY NOTES
Promissory
notes payable as of July 31, 2016 and 2015 consisted of the following:
Description
|
|
July
31, 2016
|
|
|
July
31,
2015
|
|
Note payable
dated January 15, 2014, matured January 15, 2015 bearing interest at 12% per annum.
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
Note payable dated
February 14, 2014 matured February 14, 2015, bearing interest at 12% per annum.
|
|
|
3,750
|
|
|
|
3,750
|
|
Note payable dated
April 1, 2014 matured April 1, 2015, bearing interest at 12% per annum.
|
|
|
4,700
|
|
|
|
4,700
|
|
Note payable dated
January 30, 2014, matured January 30, 2015, bearing interest at 12% per annum.
|
|
|
5,000
|
|
|
|
5,000
|
|
Total
|
|
$
|
16,450
|
|
|
$
|
16,450
|
|
These notes have matured as of July
31, 2016, however they have not been paid. Accordingly, they are due on demand and recorded as current liabilities. Interest expense
related to the notes for the six months ended July 31, 2016 and 2015 was $1,979 and $3,246 respectively.
NOTE
6- CONVERTIBLE DEBT
Convertible
debt as of July 31, 2016 and July 31, 2015 consisted of the following:
Description
|
|
July
31,
2016
|
|
|
July
31,
2015
|
|
Convertible
note agreement dated January 11, 2007, of up to $1,000,000 bearing interest at 10% per annum, originally scheduled to mature
on January 11, 2009. Convertible by Lender at its sole option into units in the capital stock such that for each $0.40 of
principal outstanding at the time of conversion may be converted into one unit consisting of one common share and one non-transferable
share purchase warrant exercisable for a period of up to two years from the date of conversion. Each warrant shall entitle
the Lender to purchase an additional common share of the Company at $0.60 during the term of the warrants. The remaining balance
of the beneficial feature conversion applicable to this note at July 31, 2016 and 2015 was zero.
|
|
$
|
-
|
|
|
$
|
289,140
|
|
Convertible
note agreements (3) dated November 1, 2013, totaling $45,000. Maturing on November 30, 2015 bearing interest at 12% per annum.
Principal and accrued interest is convertible at $.00225 per share. The beneficial conversion feature was recorded as a discount
to the debt and is being amortized over the term of the notes.
|
|
|
23,679
|
|
|
|
27,056
|
|
Convertible
note agreements (3) dated August 10, 2015, totaling $4,000,000. Maturing on August 9, 2018 or a) within 20 business days of
a receipt of written demand from the holder for payment of all of the Notes, provided that i) we have not raised $5 million
in debt or equity financing before written demand was tendered or any portion bearing interest at 6% per annum. Principal
and accrued interest is convertible at $.247 per share. The beneficial conversion feature was recorded as a discount to the
debt and is being amortized over the term of the notes. (See note 9)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Less:
unamortized discount
|
|
|
(978
|
)
|
|
|
(3,910
|
)
|
Convertible notes,
net of discount
|
|
|
22,701
|
|
|
|
312,285
|
|
Precious
Investments, Inc.
Notes
to Audited Financial Statements
July
31, 2016 and 2015
The
Company does not have a copy of the Convertible note agreement dated January 11, 2007. Neither the Note nor the name of the lender
are found in our public filings. The Company has taken significant efforts to locate a copy of the Note to no avail. The Company
contacted the prior auditor, Dale Matheson Carr-Hilton Labonte LLP, which audited our July 31, 2008 and 2007 financial statements
found in our 10KSB for the year ended July 31, 2008. After conducting a search, Dale Matheson informed us that they do not have
a copy of the Note. Despite not having a copy of the Note, the material terms of the note were contained in our prior financial
statements for the year ended July 31, 2008, and those terms are sufficient for all material purposes to accurately present our
current financial statements. The Note matured on January 11, 2009 and the statute of limitations ran on January 11, 2015 and
the Company has not received any demand for the payment of the note from the holder. As such, the Company has concluded that it
no longer has a legal obligation for the payment of the note and has thus decided to remove the note. During the year ended July
31, 2016, the Company has recorded an gain on the cancellation of the debt in the amount of $316.507.
On
July 15, 2016, the holder of the note dated August15, 2015 demanded payment on the Notes. We have not raised $5 million in debt
or equity financing and no portion of the Notes have been converted. As such, on July 25, 2016, we elected to return the Assets
to Khan in lieu of payment. The interest accrued on the notes through July 25, 2016 amounting to $230,137 was forgiven by Khan
and therefore recorded as a gain on settlement of notes payable as of July 31, 2016.
During
the year ended July 31, 2016 and 2015, the Company recognized $4,002,933 and $8,800 of debt discount accretion expense on the
above notes, respectively. Interest expense related to these notes for the years ended July 31, 2016 and 2015 was $232,986
and $2,552, respectively.
NOTE
7 – RELATED PARTY TRANSACTIONS
A
shareholder of the Company has paid certain expenses of the Company. These amounts are reflected as a loan payable to related
party. The shareholder advanced $113,768 and $42,910 during the years ended July 31, 2016 and 2015. As of the July 31, 2016 and
2015, there were $159,717 and $45,949 due to related parties, respectively.
NOTE
8 – KARRAH, INC
On
March 28, 2016, the Company signed a letter of intent (the “LOI”) with Karrah Inc., an Ontario corporation (“Karrah”),
and the sole shareholder of Karrah, Farrah Khan (“Khan”). Khan is the wife of the Company’s officer and director,
Kashif Khan. Pursuant to the LOI, the parties set forth their understandings in contemplation of an acquisition from Khan of all
of the issued and outstanding shares of stock in Karrah, resulting in a parent subsidiary relationship. In consideration for the
acquisition of Karrah, the Company plans to issue to Khan a three year promissory note (the “Note”) for $1,500,000,
with interest at 6% per annum. Interest will be payable at maturity or from time to time at the Company’s sole discretion.
The Company has the right to prepay the Note. The Note will be secured by the assets of Karrah.
The
agreement never closed as it was not possible to obtain an audit of Karrah that the Company was required to file with the SEC
in connection with the acquisition as a result of the nature of the company’s jewelry inventory. (See note 13)
Precious
Investments, Inc.
Notes
to Audited Financial Statements
July
31, 2016 and 2015
NOTE
9 – DIAMOND PURCHASE AGREEMENTS
On August 10, 2015, we entered into
a Diamond Purchase Agreement (the “Agreement”) with Kashif Khan (“Khan”), an arm’s length party,
who subsequently became the sole office and director. Pursuant to the Agreement, we acquired from Khan colored diamonds (the “Assets”)
for three demand secured convertible promissory notes (the “Notes”) in the aggregate principal amount of $4,000,000.
The Notes have the following features:
Note
A
Note
A is in the principal amount of $1.7 million, accrues interest at 6% per annum and matures: a) within 20 business days of a receipt
of written demand from the holder for payment of all of the Notes, provided that i) we have not raised $5 million in debt or equity
financing before written demand was tendered or any portion of Note was converted into shares of our common stock; or b) in all
other cases, thirty-six months from the issuance of Note A.
Upon
written demand for payment, the Company may either pay all principal and accrued interest on the Notes or return the Assets to
the holder to fulfill all obligations.
The holder may convert the principal
and accrued interest into shares of our common stock at $0.247386975 per share up to a maximum conversion allowance of 6,871,825
shares. If we raise $5 million in debt or equity financing or if the holder converts any portion of Note A, then the Note will
automatically convert at maturity into a total of 6,871,825 shares of our common stock. If we prepay Notes B and C, however, then
the conversion price will adjust to $0.105139464 per share for a total conversion allowance of 16,169,000 shares.
The
Company may not prepay Note A and it is secured by $1,700,000 worth of the Assets.
Note
B
Note
B is in the principal amount of $1.15 million, accrues interest at 6% per annum and matures: a) within 20 business days of a receipt
of written demand from the holder for payment of all of the Notes, provided that i) we have not raised $5 million in debt or equity
financing before written demand was tendered or any portion of Note was converted into shares of our common stock; or b) in all
other cases, thirty-six months from the issuance of Note B.
Upon
written demand for payment, the Company may either pay all principal and accrued interest on the Notes or return the Assets to
the holder to fulfill all obligations.
The
holder may convert the principal and accrued interest into shares of our common stock at $0.247386975 per share up to a maximum
conversion allowance of 4,648,588 shares. If we raise $5 million in debt or equity financing or if the holder converts any portion
of Note B, then the Note will automatically convert at maturity into a total of 4,648,588 shares of our common stock.
The
Company may prepay all of the outstanding principal and accrued interest under Note B, provided that we also prepays all of the
outstanding principal and accrued interest of Note C. Note B is secured by $1,150,000 worth of the Assets.
Note
C
Note
C is in the principal amount of $1.15 million, accrues interest at 6% per annum and matures: a) within 20 business days of a receipt
of written demand from the holder for payment of all of the Notes, provided that i) we have not raised $5 million in debt or equity
financing before written demand was tendered or any portion of Note was converted into shares of our common stock; or b) in all
other cases, thirty-six months from the issuance of Note C.
Precious
Investments, Inc.
Notes
to Audited Financial Statements
July
31, 2016 and 2015
Upon
written demand for payment, the Company may either pay all principal and accrued interest on the Notes or return the Assets to
the holder to fulfill all obligations.
The holder may convert the principal
and accrued interest into shares of our common stock at $0.247386975 per share up to a maximum conversion allowance of 4,648,588.
If we raise $5 million in debt or equity financing or if the holder converts any portion of Note B, then the Note will automatically
convert at maturity into a total of 4,648,588 shares of our common stock.
The
Company may prepay all of the outstanding principal and accrued interest under Note C, provided that we also prepay all of the
outstanding principal and accrued interest of Note B. Note C is secured by $1,150,000 worth of the Assets.
Also,
as provided in the Agreement, our former officer and director, Natalya Hearn, agreed to transfer her 250,000 shares of Series
A Preferred Stock to Khan. Under the Agreement, these shares of Series A Preferred Stock will cancel and return to our treasury
upon Khan converting the Notes into 51% of the Company issued and outstanding common stock. Also, if Kahn demands payment of the
Notes, then the shares of Series A Preferred Stock will cancel and return to our treasury.
The
Company also agreed to appoint two nominees of Khan to our board of directors and to register 7,500,000 shares of common stock
converted from existing notes along with remaining shares of common stock underlying convertible notes. The Notes in favor of
Khan do not have registration rights.
The
Company has determined that the asset acquired did not meet the definition of a business as defined in ASC 805 and as such the
transaction was treated as an asset acquisition and the diamonds are shown on the Company’s condensed consolidated interim
balance sheet as inventory.
In
measuring the Notes, it was determined that they contained a beneficial conversion feature, which upon measurement resulted in
the full amount of the proceeds being allocated entirely to the beneficial conversion feature.
On
July 15, 2016, Khan demanded payment on the Notes. Since, the Company has not raised $5 million in debt or equity financing and
no portion of the Notes have been converted, on July 25, 2016, we elected to return the Assets to Khan in lieu of payment. The
interest accrued on the notes through July 25, 2016 amounting to $230,137 was forgiven by Khan and therefore recorded as a gain
on settlement of notes payable as of July 31, 2016.
During
the year ended July 31, 2016, the Company entered into and closed various additional Diamond Purchase Agreements to purchase diamond
assets consisting of various colored diamonds with stated values of $11,447,653 for 4,880,215 shares of common stock.
Precious
Investments, Inc.
Notes
to Audited Financial Statements
July
31, 2016 and 2015
NOTE
10 – STOCK OPTIONS
On
July 29, 2016, the Company issued options to purchase 10,000,000 shares of common stock at an exercise price of $0.10 per share
to a Mr. Kashif Khan for employment services. The options were valued at $29,799,644 using the Black Scholes option pricing model
based upon the following assumptions: term of 5 years, risk free interest rate of 1.03%, a dividend yield of 0% and volatility
rate of 793.31%. The warrants were fully earned and vested on July 31, 2016.
The
following is a summary of stock warrants activity during the year ended July 31, 2016 and 2015.
|
|
Number
of Shares
|
|
|
|
Weighted
Average Exercise Price
|
|
Balance,
July 31, 2015
|
|
—
|
|
|
$
|
0.00
|
|
Warrants
granted and assumed
|
|
10,000,000
|
|
|
$
|
0.10
|
|
Warrants
expired
|
|
—
|
|
|
|
—
|
|
Warrants
canceled
|
|
—
|
|
|
|
—
|
|
Warrants
exercised
|
|
10,000,000
|
|
|
$
|
0.10
|
|
Balance,
July 31, 2016
|
|
—
|
|
|
|
—
|
|
NOTE
11 – STOCKHOLDERS’ EQUITY
As of July 31, 2016 and 2015, the Company
had 200,000 shares of common stock held in treasury valued at $45,000 that were acquired as part of Stock Repurchase Agreement
dated November 13, 2013.
During
the year ended July 31, 2016, the Company issued 4,980,215 shares of common stock valued at $12,097,653 related to various Diamond
Purchase Agreements.
During
the year ended July 31, 2016, the Company issued 1,000 units consisting of one share and one warrant of stock for $2,000 cash.
During
the year ended July 31, 2016, the Company issued 335,860 shares of common stock for $33,586 cash.
During
the year ended July 31, 2016, the Company issued 1,390,000 shares valued at $3,129 for the conversion of a convertible note payable
dated November 1, 2013.
During
the year ended July 31, 2016, the Company issued 1,000,000 shares valued at $2,790,000 for services. The shares were returned
during the year.
During
the year ended July 31, 2016, the Company issued 8,100,000 shares valued at $23,919,000 for services.
During
the year ended July 31, 2016, the Company issued 9,666,555 shares valued at $29,799,644 for the non-cash exercise of stock options.
Precious
Investments, Inc.
Notes
to Audited Financial Statements
July
31, 2016 and 2015
NOTE
12 – COMMITMENTS AND CONTINGENCIES
Employment
agreement
On
July 29, 2016, we entered into an employment agreement with Kashif Khan (“Khan”) to be the Chief Executive Officer.
Khan’s initial annual Base Salary is $100,000. Khan will also be eligible to earn a Performance Bonus for each complete
fiscal year, which will be equal to fifty percent (50%) of his Base Salary for such fiscal year. Kahn was also granted 6,500,000
shares of common stock and 10,000,000 options.
Litigations,
Claims and Assessments
The
Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise that may harm its business.
The Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the
aggregate, a material adverse effect on its business, financial condition or operating results.
NOTE 13
– INCOME TAXES
For
the year ended July 31, 2016, the cumulative net operating loss carry-forward from continuing operations is approximately $3,728,083
at July 31, 2016, and will expire beginning in the year 2030.
The
cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows as
of June 30, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Deferred tax asset
attributable to:
|
|
|
|
|
|
|
|
|
Net operating
loss carryover
|
|
$
|
1,267,548
|
|
|
$
|
76,607
|
|
Valuation allowance
|
|
|
(1,267,548
|
)
|
|
|
(76,607
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
Due
to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards of approximately $3,728,083
for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating
loss carry forwards may be limited as to use in future years.
NOTE 14
– SUBSEQUENT EVENTS
On
October 26, 2016, the Company learned that it was not possible to obtain an audit of Karrah that we were required to file with
the SEC in connection with the acquisition as a result of the nature of the company’s jewelry inventory. Because the Company
was unable to obtain an audit of Karrah, on October 28, 2016, the Company has restructured the entire transaction by entering
into a Termination and Restructure Agreement. First, the Company and Khan have mutually agreed to cancel the Agreement to acquire
the issue and outstanding shares of stock in Karrah. Second, the Company agreed to purchase from Karrah its customer list in exchange
for a revised promissory note (the “New Note”). The New Note will be in favor of Karrah (and not Khan), valued at
$1,500,000 with interest at 6% per annum, and will not be secured by the assets of Karrah. The customer list has been invaluable
in establishing our current colored diamond inventory. Third, we have acquired some of the inventory from Karrah, and the value
of the New Note reflects that consideration as well. Finally, the Company will not be acquiring the accounts receivable of Karrah
so the AR Note will be terminated.
On
December 5, 2016, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Cornerstone
United Capital, LLC (“Cornerstone”). Pursuant to the Purchase Agreement, the Company acquired from Cornerstone colored
diamonds with a wholesale value of $105,000,000 (the “Assets”). We did not assume any of Cornerstone’s liabilities
in the transaction.
In
consideration for the Assets, we issued to Cornerstone and its nominees a total of 214,000,000 shares of common stock. In addition,
Kashif Khan, our officer and director, agreed to transfer his 16,000,000 shares of common stock as part of the Purchase Agreement
in exchange for 9,457,931 shares of our Series B Preferred Stock.
December 21, 2016, the Company was informed that Cornerstone
could not fulfill its obligations under the Purchase Agreement. On February 14, 2017, Conerstone and its nominees returned the
214,000,000 shares of common stock issued under the Purchase Agreement to the Company’s treasury.
On December 6, 2016, the Company entered
into a one year Consulting Agreement with Karrah, Inc. and Kashif Khan for the team to act as a non-exclusive advisor and sales
agent in assisting us in the marketing and sales of our colored diamond inventory on an international basis and domestically.
In exchange for the consulting services,
the Company agreed to allow the consultant to retain up to the first $1,500,000 in revenues generated, which shall be used exclusively
to pay off that certain promissory note we issued to Karrah, Inc. dated October 28, 2016 in the principal amount of $1,500,000.
Following such payment, we have agreed to a revenue share, with our company allotted 95% and the consultant allotted 5% of all
gross revenues received solely from the efforts of the consultant in the sale of our diamond inventory. Sales conducted by us will
not be subject to a revenue share.
On March 1, 2017, the Company entered
into a joint venture agreement (the “JVA”) with Eddeb Management (“Eddeb”). The purpose of the joint venture
is to build a fund for the purpose of trading in precious gems, notably, colored diamonds.
The material terms of the JVA for this
joint venture are as follows:
§
the parties will be owners in an already formed
Ontario corporation, known as Flawless Funds GP Inc. (the “Joint Venture”), with the Company owning 75% of the Joint
Venture and Eddeb owning 25% of the Joint Venture;
§
the Company and Eddeb will contribute relationships
and resources to the Joint Venture;
§
the Company will primarily be responsible for
marketing and managing the fund;
§
Eddeb will be primarily responsible for fundraising
activities;
§
the Company’s CEO, Kashif Khan, and Abdurrahman
Eddeb of Eddeb will manage the day-to-day operations of the Joint Venture as directors; and
§
the parties agreed that officers may be appointed
to delegate the responsibilities of the directors.
In order to acquire a 75% interest in
the Joint Venture, the Company agreed to provide two founding partners to the Joint Venture a total of 16 million shares of the
Company’s common stock in lieu of a percentage of the Joint Venture. These shares have not yet been issued.