Item
1. Financial Statements
Our
financial statements included in this Form 10-Q are as follows:
F-1
|
Condensed
Consolidated Interim Balance Sheets as of April 30, 2017 (unaudited) and July 31, 2016;
|
F-2
|
Condensed
Consolidated Interim Statements of Operations and Comprehensive Loss for the three and nine months ended April 30, 2017 and
2016 (unaudited);
|
F-3
|
Condensed
Consolidated Interim Statements of Cash Flows for the three and nine months ended April 30, 2017 and 2016 (unaudited); and
|
F-4
|
Notes
to Condensed Consolidated Interim Financial Statements.
|
These
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the interim period ended April 30, 2017 are not necessarily
indicative of the results that can be expected for the full year.
PRECIOUS
INVESTMENTS, INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
|
April
30, 2017
|
|
July
31, 2016
|
ASSETS
|
|
|
|
Inventory
|
$847,980
|
|
$1,314,976
|
Accounts receivable
|
116,117
|
|
-
|
|
Total current assets
|
964,097
|
|
1,314,976
|
Total assets
|
$964,097
|
|
$1,314,976
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
$260,072
|
|
$102,037
|
|
Promissory notes
|
16,450
|
|
16,450
|
|
Convertible notes payable
|
9,448
|
|
22,701
|
|
Related party payables
|
421,857
|
|
159,717
|
|
|
Total current liabilities
|
707,827
|
|
300,905
|
|
|
|
|
|
|
|
Promissory notes - related party
|
583,634
|
|
-
|
|
|
|
|
|
|
Total liabilities
|
1,291,461
|
|
300,905
|
|
|
|
|
|
|
Stockholders' (deficit) equity
|
|
|
|
|
Preferred stock, par value $.001;
10,000,000 shares authorized; 250,000 and 250,000 issued and outstanding as of April 30, 2017 and July 31, 2016,
respectively.
|
250
|
|
250
|
|
Common stock; $0.001 par value;
250,000,000 shares authorized; 50,373,114 and 26,750,924 outstanding as of April 30, 2017 and July 31,2016, respectively
|
50,373
|
|
26,751
|
|
Additional paid-in capital
|
80,755,052
|
|
68,391,085
|
|
Treasury stock
|
(45,000)
|
|
(45,000)
|
|
Accumulated deficit
|
(81,108,880)
|
|
(67,359,015)
|
|
Noncontrolling interest
|
20,841
|
|
-
|
|
|
Total stockholders' (deficit) equity
|
(327,364)
|
|
1,014,071
|
|
|
|
|
|
|
Total liabilities and stockholders'
(deficit) equity
|
$964,097
|
|
$1,314,976
|
The
accompanying notes are an integral part of these unaudited financial statements
PRECIOUS
INVESTMENTS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For
The Three Months Ended
|
|
For
The Nine Months Ended
|
|
|
April
30, 2017
|
|
April
30, 2016
|
|
April
30, 2017
|
|
April
30, 2016
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
178,940
|
|
|
$
|
—
|
|
|
$
|
1,022,866
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
54,000
|
|
|
|
—
|
|
|
|
4,040,355
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
124,940
|
|
|
|
—
|
|
|
|
(3,017,489
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
compensation
|
|
|
25,000
|
|
|
|
—
|
|
|
|
75,000
|
|
|
|
—
|
General
and administrative expenses
|
|
|
9
|
|
|
|
5,154
|
|
|
|
62,722
|
|
|
|
18,380
|
Professional
fees
|
|
|
128,800
|
|
|
|
1,506,555
|
|
|
|
243,526
|
|
|
|
2,235,052
|
Total
operating expenses
|
|
|
153,809
|
|
|
|
1,511,709
|
|
|
|
381,248
|
|
|
|
2,253,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(28,869
|
)
|
|
|
(1,511,709
|
)
|
|
|
(3,398,737
|
)
|
|
|
(2,253,432)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(4,438
|
)
|
|
|
(389,203
|
)
|
|
|
(30,287
|
)
|
|
|
(1,151,371)
|
Loss
on asset purchase
|
|
|
—
|
|
|
|
307,500
|
|
|
|
(1,500,000
|
)
|
|
|
307,500
|
Loss
on acquisiton of Flawless Fund
|
|
|
(8,800,000
|
)
|
|
|
—
|
|
|
|
(8,800,000
|
)
|
|
|
—
|
Total
other expense
|
|
|
(8,804,438
|
)
|
|
|
(81,703
|
)
|
|
|
(10,330,287
|
)
|
|
|
(843,871)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(8,833,307
|
)
|
|
|
(1,593,412
|
)
|
|
|
(13,729,024
|
)
|
|
|
(3,097,303)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to noncontrolling interest
|
|
|
20,841
|
|
|
|
—
|
|
|
|
20,841
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss Attributable to Company
|
|
$
|
(8,854,148
|
)
|
|
$
|
(1,593,412
|
)
|
|
$
|
(13,749,865
|
)
|
|
$
|
(3,097,303)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share: basic and diluted
|
|
$
|
(0.24
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.70)
|
Basic
and diluted weighted average common shares outstanding
|
|
|
36,350,642
|
|
|
|
5,111,376
|
|
|
|
34,893,713
|
|
|
|
4,404,038
|
The
accompanying notes are an integral part of these unaudited financial statements
PRECIOUS
INVESTMENTS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For
The Nine Months Ended
|
|
|
April
30, 2017
|
|
April
30, 2016
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(13,749,865
|
)
|
|
$
|
(3,097,303)
|
Net
loss attributable to noncontrolling interest
|
|
|
20,841
|
|
|
|
—
|
Net
loss attributable to the Company
|
|
|
(13,729,024
|
)
|
|
|
(3,097,303)
|
|
|
|
|
|
|
|
|
Adjustments to reconcile
net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Amortization
of debt discount
|
|
|
978
|
|
|
|
967,317
|
Loss
on asset purchase
|
|
|
1,500,000
|
|
|
|
—
|
Shares
issued for service
|
|
|
8,800,000
|
|
|
|
2,187,500
|
Gain
on the sale of subsidiary
|
|
|
|
|
|
|
(307,500)
|
Changes in assets and
liabilities
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(116,117
|
)
|
|
|
—
|
Accounts
payable and accrued expenses
|
|
|
158,035
|
|
|
|
196,250
|
Inventory
|
|
|
4,040,354
|
|
|
|
—
|
Net
cash from operating activities
|
|
|
654,226
|
|
|
|
(53,736)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities
|
|
|
|
|
|
|
|
Proceeds
from the sale of common stock
|
|
|
—
|
|
|
|
35,336
|
Advances
from related parties
|
|
|
262,140
|
|
|
|
18,400
|
Payments
on Loans Payable
|
|
|
(916,366
|
)
|
|
|
—
|
Net
cash from financing activities
|
|
|
(654,226
|
)
|
|
|
53,736
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Cash, beginning
of period
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Non-Cash investing
and financing transactions
|
|
|
|
|
|
|
|
Issuance
of note payables for inventory
|
|
$
|
—
|
|
|
$
|
4,000,250
|
Issuance
of common stock for inventory
|
|
$
|
3,573,359
|
|
|
|
|
Issuance
of note payable for intangible assets
|
|
$
|
1,500,000
|
|
|
|
|
Shares
issued to settle convertible debt
|
|
$
|
14,231
|
|
|
$
|
1,800
|
Issuance
of common stock for prepaid expenses
|
|
$
|
—
|
|
|
$
|
—
|
Decrease
in discount on convertible notes due to conversion
|
|
$
|
—
|
|
|
$
|
195
|
The
accompanying notes are an integral part of these unaudited financial statements
Precious
Investments, Inc.
Notes
to Condensed Interim Financial Statements
(unaudited)
April
30, 2017
NOTE
1 – ORGNIZATION 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.
Basis
of Presentation
The
condensed consolidated interim financial statements are presented in conformity with accounting principles generally accepted
in the United States of America, as reported on our fiscal period ended on April 30, 2017. We have summarized our most significant
accounting policies.
Precious
Investments, Inc.
Notes
to Condensed Interim Financial Statements
(unaudited)
April
30, 2017
NOTE
1 – ORGNIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Unaudited
Condensed Consolidated Interim Financial Statements
These
unaudited condensed consolidated interim financial statements have been prepared on the same basis as the annual financial statement
and should be read in conjunction with those annual financial statements filed on Form 10-K for the year ended July 31, 2016.
In the opinion of management, these unaudited condensed consolidated interim financial statements reflect adjustments, necessary
to present fairly the Company’s financial position, results of operations and cash flows for the periods shown. The results
of operations for such periods are not necessarily indicative of the results for a full year or for any future period.
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.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Precious Investments, Inc. and its consolidated joint venture,
Flawless Funds GP Inc. (collectively, the "Company").
Flawless
Funds GP Inc. is a joint venture formed to build a fund for the purpose of trading in precious gems, notably, colored diamonds.
The joint venture agreement, as amended, provides the Company the majority interest (75%) in any profits and losses, and assets
and liabilities. The majority interest also provides the Company control of the joint venture.
Accordingly,
management has made the determination that the joint venture accounts of Flawless Fund GP, Inc should be consolidated with the
Company's financial statements based on the Company’s majority interest.
All
material intercompany balances and transactions have been eliminated.
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.
Precious
Investments, Inc.
Notes
to Condensed Interim Financial Statements
(unaudited)
April
30, 2017
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.
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 precious stones 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.
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 April 30, 2017, the Company has an accumulated deficit of $81,108,880. 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 – PROMISSORY NOTES
Promissory
notes payable as of April 30, 2017 and July 31, 2016 consisted of the following:
Description
|
|
April
30, 2017
|
|
|
July
31, 2016
|
*
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 April 30, 2016; however, they have not been paid.
Interest
expense related to the notes for the nine months ended April 30, 2017 and 2016 was $1,496 and $1,482 and respectively.
Precious
Investments, Inc.
Notes
to Condensed Interim Financial Statements
(unaudited)
April
30, 2017
NOTE
4- CONVERTIBLE DEBT
Convertible
debt as of April 30, 2017 and July 31, 2016 consisted of the following:
Description
|
|
April
30,
2017
|
|
|
July
31,
2016
|
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.
|
|
|
9,448
|
|
|
|
23,679
|
Convertible
note agreements (3) dated August 10, 2015, totaling $4,000,000. Maturing on August 9, 2018 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 6)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Less:
unamortized discount
|
|
|
-
|
|
|
|
(978)
|
Convertible
notes, net of discount
|
|
|
9,448
|
|
|
|
22,701
|
During
the nine months ended April 30, 2017 and 2016, the Company recognized $978 and $967,317 of accretion expense on the above notes,
respectively. Interest expense related to these notes for the nine months ended April 30, 2017 and 2016 was $1,641 and $184,054,
respectively.
NOTE
5 – 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 $262,140 and $18,400 during the nine months ended April 30, 2017 and 2016, respectively. As of
April 30, 2017 and July 31, 2016, there were $421,857 and $159,717 due to related parties, respectively.
ASSET
PURCHASE AGREEMENT
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 planned to issue to Khan a three year promissory note (the “Note”) for $1,500,000,
with interest at 6% per annum. Interest would have been payable at maturity or from time to time at the Company’s sole discretion.
The Company had the right to prepay the Note and it would have been secured by the assets of Karrah.
On
October 26, 2016, the Company learned that it was not possible to obtain an audit of Karrah. As such on October 28, 2016, the
Company restructured the entire transaction by entering into a Termination and Restructure Agreement.
As
part of the Termination and Restructure Agreement, the Company and Khan 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 will be in favor of Karrah, valued at $1,500,000 with interest at 6% per annum, and
will not be secured by the assets of Karrah. During the nine months ending April 30, 2017, the Company recognized of $26,192 of
interest expense and had a balance of $583,634 as of April 30, 2017.
Because
the entities were under common control at the time of the acquisition the customer list was transferred to the Company at the
transferors historical basis of $0. The excess of the consideration paid and the carryover basis was recorded as a loss on asset
purchase for the nine months ended April 30, 2017.
Precious
Investments, Inc.
Notes
to Condensed Interim Financial Statements
(unaudited)
April
30, 2017
CONSULTING
AGREEMENT
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 the Company in the marketing and sales of the Company’s 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, The Company has agreed to a revenue share, with 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 the Company will not be subject to a revenue share.
During
the nine months ended April 30, 2017, the Consultant retained $916,366 in Company sales in payment of the above mentioned note
payable.
NOTE
6 – FLAWLESS FUND GP
On
March 1, 2017, the Company entered into a joint venture agreement 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.
The
Company has determined that the entity does not meet the requirements to be considered a joint venture due to lack of joint control
because of the Company’s majority interest and as such the results of the entity have consolidated. Additionally, since
the entity had no operation or assets at the time of the transaction the Company impaired the entire $8,800,000 fair value of
the investment as a loss on acquisition.
NOTE
7 – STOCKHOLDERS’ EQUITY
During
the nine months ended April 30, 2017, the Company issued 1,277,191 shares of common stock valued at $3,573,358 related to various
Diamond Purchase Agreements.
During
the nine months ended April 30, 2017, the Company issued 6,244,999 shares valued at $14,231 for the conversion of a convertible
note payable dated November 1, 2013.
During
the nine months ended April 30, 2017, the Company issued 16,000,000 shares valued at $8,800,000 for services.
NOTE
8 – COMMITMENTS AND CONTINGENCIES
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.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking
Statements
Certain
statements, other than purely historical information, including estimates, projections, statements relating to our business plans,
objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking
statements.” These forward-looking statements generally are identified by the words “believes,” “project,”
“expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,”
“may,” “will,” “would,” “will be,” “will continue,” “will likely
result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are
subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our
ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have
a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes
in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted
accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements.
Company
Overview
We
are in the business of purchasing and selling colored diamonds and other valuables. We plan to manage a portfolio of rare colored
diamonds that are selected for price potential. Our officer and director, Kashif Khan, has established a worldwide reputation
as a purveyor of exquisite, extraordinary fine quality colored diamonds that are sold at competitively reasonable prices. Through
Mr. Khan’s reputation and long standing close business ties to the diamond wholesale market, we plan to have direct access
to acquiring an unsurpassed collection of the highest investment grade colored diamonds that are released on a wholesale basis
to auction houses, investors and jewelry wholesalers and retailers throughout Toronto and Vancouver, Canada. We also intend to
move our business into the United States, and thereafter internationally as funds permit and if our growth sustains the effort.
We
recently 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 fund is called
Flawless Funds GP Inc., an Ontario corporation (the “Joint Venture”), and we own 75% of the Joint Venture and Eddeb
owns the remaining 25% of the Joint Venture. We entered into the JVA with Eddeb to provide us a valued partner in order to expand
our business and funds available for trading in colored diamonds.
Our
fiscal year end is July 31. Our principal offices are located at 3425 Laird, Unit 2 Mississauga, Ontario L5L 5R8. Our phone number
is 416-919-9509.
Results
of Operation for Three and Nine Months Ended April 30, 2017 and 2016
Revenues
We
generated of $178,940 for the three months ended April 30, 2017, as compared with no revenues for same period ended 2016. We generated
of $1,022,866 for the nine months ended April 30, 2017, as compared with no revenues for same period ended 2016. All of our revenues
were generated from the sale of our colored diamond inventory. We expect sales to increase in 2017 as we continue to sell our
colored diamond inventory.
Our
cost of revenues was $54,000 for the three months ended April 30, 2017. Our cost of revenues was $4,040,355 for the nine months
ended April 30, 2017. The high cost of revenues for the nine months ended April 30, 2017 is attributable to the fair market value
of the shares of common stock that we sold to acquire our colored diamonds. We expect that the cost of revenues will decrease
in 2017, as we find better deals for our inventory of colored diamonds.
Operating
Expenses
Operating
expenses decreased to $153,809 for the three months ended April 30, 2017 from $1,511,709 for the three months ended April 30,
2016. Our operating expenses for the three months ended April 30, 2017 consisted of professional fees of $128,000, general and
administrative expenses of $9 and executive compensation of $25,000. Our operating expenses for the three months ended April 30,
2016 consisted mainly of $1,506,555 in professional fees, largely a result of 500,000 shares of commons stock valued at $1,490,000
that we issued to our prior officer and director, Nataliya Hearn, under her employment agreement, along with general and administrative
expenses of $5,154.
Operating
expenses decreased to $381,248 for the nine months ended April 30, 2017 from $2,253,432 for the nine months ended April 30, 2016.
Our operating expenses for the nine months ended April 30, 2017 consisted of professional fees of $243,526, general and administrative
expenses of $62,722 and executive compensation of $75,000. Our operating expenses for the nine months ended April 30, 2016 consisted
mainly of $2,235,052 in professional fees, consisting largely of Dr. Hearn’s shares, as stated above, and shares issued
under a Memorandum of Understanding dated October 1, 2015 that were returned, along with general and administrative expenses of
$18,380.
We
expect that our operating expenses will likely increase in future quarters as we ramp up operations in the purchase and sale of
colored diamonds.
Other
Expenses
We
had other expenses of $8,804,438 for the three months ended April 30, 2017, compared with other expenses of $81,703 for the three
months ended April 30, 2016. Other expenses for the three months ended April 30, 2017 consisted mainly of our loss on the acquisition
of Flawless Fund, while in 2016 other expenses consisted of interest expense of $389,203, offset by a gain on the sale of subsidiary
of $307,500.
We
had other expenses of $10,330,287 for the nine months ended April 30, 2017, compared with other expenses of $843,871 for the nine
months ended April 30, 2016. Other expenses for the nine months ended April 30, 2017 consisted of our loss on the acquisition
of Flawless Fund of $8,800,000 and the loss on the purchase of assets of $1,500,000 along with interest expense of $30,287. In
comparison, our other expenses for the nine months ended April 30, 2016 consisted of interest expense of $1,151,371 offset by
a gain of the sale of subsidiary of $307,500.
Net
Loss
Net
loss for the three months ended April 30, 2017 was $8,833,307 compared to net loss of $1,593,412 for the three months ended April
30, 2016. Net loss for the nine months ended April 30, 2017 was $13,729,024 compared to net loss of $3,097,303 for the nine months
ended April 30, 2016.
Liquidity
and Capital Resources
As
of April 30, 2017, we had current assets of $964,097 consisting of our colored diamond inventory and accounts receivable. Our
total current liabilities as of April 30, 2017 were $707,827. We therefore had working capital of $256,270 as of April 30, 2017.
Operating
activities provided $654,226 in cash for the nine months ended April 30, 2017, as compared with cash used of $53,736 for the same
period ended 2016. Our positive operating cash flow for the nine month ended April 30, 2017 was mainly the result of shares issued
for services, an increase in inventory and the loss on assets we purchased, offset mainly by our net loss for the quarter. Our
negative operating cash flow for the nine months ended April 30, 2016 was mainly the result of our net loss for the quarter and
a gain on the sale of a subsidiary, offset mainly by shares issued for services, amortization of debt discount, and an increase
in accounts payable and accrued expenses.
Financing
activities used $654,226 for the nine months ended April 30, 2017, as compared with cash provided of $53,736 for the same period
ended 2016. Our negative financing cash flow for the nine months ended April 30, 2017 was mainly the result of payments on loans
payable, offset up advances from related parties. Our positive financing cash flow for the nine months ended April 30, 2016 was
the result of advances from related parties and proceeds from the sale of our common stock.
We
intend to fund operations through sales and debt and/or equity financing arrangements, which may be insufficient to fund expenditures
or other cash requirements. We plan to seek additional financing in a private equity offering to secure funding for operations.
There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding,
the implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available
to us on acceptable terms or at all.
Off
Balance Sheet Arrangements
As
of April 30, 2017, there were no off balance sheet arrangements.
Critical
Accounting Policies
In
December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management
Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the
portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Our
accounting policies are discussed in detail in the footnotes to our financial statements included in our Annual Report on Form
10-K for the year ended July 31, 2016, however we consider our critical accounting policies to be those related to inventory,
fair value of financial instruments, derivative financial instruments and long-lived assets.
Going
Concern
As
of April 30, 2017, we had an accumulated deficit of $81,108,880. Our 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.
Recently
Issued Accounting Pronouncements
We
do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operation,
financial position or cash flow
Item
4. Controls and Procedures
Disclosure
Controls and Procedures
We
conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, as of April 30, 2017, to ensure that information required to be disclosed
by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required
to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that as of April 30, 2017, our disclosure controls and procedures were not effective at the reasonable
assurance level due to the material weaknesses identified and described below.
Our
principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud.
Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and
our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control
system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of
the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company
have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual
a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions.
Remediation
Plan to Address the Material Weaknesses in Internal Control over Financial Reporting
A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis. Management identified the following three material weaknesses that have caused management to conclude
that, as of April 30, 2017, our disclosure controls and procedures, and our internal control over financial reporting, were not
effective at the reasonable assurance level:
1.
We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls
over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the period ending April 30, 2017. Management
evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of
our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2.
We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size
and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to
the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed
by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our
disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
3.
Effective controls over the control environment were not maintained. Specifically, a formally adopted written code of business
conduct and ethics that governs our employees, officers, and directors was not in place. Additionally, management has not developed
and effectively communicated to employees its accounting policies and procedures. This has resulted in inconsistent practices.
Further, our Board of Directors does not currently have any independent members and no director qualifies as an audit committee
financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect
across the organization, management has determined that these circumstances constitute a material weakness.
To
address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial
statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows
for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all
material respects, our financial condition, results of operations and cash flows for the periods presented.
To
remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party
firm to assist us in remedying this material weakness once resources become available.
We
intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order
to segregate duties in a manner that establishes effective internal controls once resources become available.
Changes
in Internal Control over Financial Reporting
No
change in our system of internal control over financial reporting occurred during the period covered by this report, the period
ended April 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.