Item 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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General
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Financial Statements and accompanying notes and the other financial information appearing elsewhere in this report. This report contains numerous forward-looking statements relating to our business. Such forward-looking statements are identified by the use of words such as believes, intends, expects, hopes, may, should, plan, projected, contemplates, anticipates or similar words. Actual operating schedules, results of operations, ore grades and mineral deposit estimates and other projections and estimates could differ materially from those projected in the forward-looking statements. The functional and reporting currency of the Company is the Australian Dollar. These interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Overview
Consolidated Gems, Inc. (“Consolidated Gems” or the “Company”), formerly Electrum International, Inc. is a Delaware corporation originally incorporated in Florida as We Sell For U Corp. (“We Sell For U”). Consolidated Gems was originally established with the intention to develop and provide service offerings to facilitate auctions on eBay for individuals and companies who lack the eBay expertise and/or time to list/sell and ship items they wish to sell. In December 2008, Power Developments Pty Ltd, an Australian corporation ("Power") acquired approximately a 96% interest in Consolidated Gems from Edward T. Farmer and certain other stockholders. Mr. Farmer resigned as Sole Director and Officer of Consolidated Gems, Joseph Gutnick was appointed President, Chief Executive Officer and a Director and Peter Lee was appointed Chief Financial Officer and Secretary. On September 30, 2015, Joseph Gutnick resigned as President, Chief Executive Officer and a Director and Mordechai Gutnick was appointed as President, Chief Executive Officer and a Director.
On August 12, 2009, the Company re-incorporated in the state of Delaware (the “Reincorporation”) through a merger involving We Sell for U Corp. and Consolidated Gems, a Delaware Corporation that was a wholly owned subsidiary of We Sell for U. The Reincorporation was effected by merging We Sell for U with Consolidated Gems, with Consolidated Gems being the surviving entity. For purposes of the Company’s reporting status with the Securities and Exchange Commission, Consolidated Gems is deemed a successor to We Sell for U.
We have incurred net losses since our inception and may continue to incur substantial and increasing losses for the next several years. Since inception we have incurred accumulated losses of A$3,059,849 which was funded primarily by the sale of equity securities and loans from affiliates.
Description of Current Business Plans and Activities
The following is a description of the Company’s current business plans and activities.
In order to take advantage of management’s substantial experience in the location and development of mineral exploration properties, the Company planned to look for opportunities in the resources industry.
As a result of management’s decision to refocus its efforts from energy opportunities to explore opportunities in the resources industry, effective March 31, 2013, the Company ceased reporting as a development stage company. Since April 1, 2013, the Company had been evaluating potential gem related projects and had been granted an exploration tenement in New South Wales, Australia. Accordingly, from April 1, 2013 the Company had been classified as an exploration stage company. In March 2015, following a review of the results of exploration on the gem tenement, the Company decided to relinquish the exploration license.
On March 8, 2016, the Company announced that it had entered into a term sheet with Noam Levavi and Eran Galil for the acquisition of all of the issued shares of Byondata (“Byondata”), a company incorporated under the laws of Israel. The Company had a 90 day period to conduct due diligence and negotiate a formal share sale agreement. Byondata had developed a unique platform as a service to create content-rich, immersive Virtual Reality (VR) experiences. In July 2016, the Company announced that the proposed acquisition of the all the shares in Byondata had been terminated.
In January 2017, the Company announced it was looking for gold opportunities in Myanmar.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2016 vs. Three Months Ended June 30, 2015
Costs and expenses are incurred in both Australian and US dollars. Costs incurred in US dollars are converted to Australian dollars. The Australian dollar has fallen by approximately 3% against the US dollar over the past 12 months and therefore the comparison of amounts for the three month period ended June 30, 2016 versus the three month period ended June 30, 2015 does not provide a true comparison of the movement as it may have been heavily influenced by the movement in the exchange rate depending on whether the cost or expenses was initially incurred in US dollars or Australian dollars.
Costs and expenses increased from A$17,025 in the three months ended June 30, 2015 to A$145,230 in the three months ended June 30, 2016.
The increase in costs and expenses is a net result of:
a)
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a decrease in legal, accounting and professional expense from A$16,255 for the three months ended June 30, 2015 to A$12,993 for the three months ended June 30, 2016. Included within legal, accounting and professional expense for the three months ended June 30, 2016 is A$2,596 (2015: A$257) for costs associated with the Company’s SEC compliance obligations; A$396 (2015: A$3,292) which relates to stock agent transfer fees; and accounting fees for the three months ended June 30, 2016 of A$10,000 (2015: A$12,706).
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b)
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an increase in administrative expense from A$770 for the three months ended June 30, 2015 to A$15,291 for the three months ended June 30, 2016, primarily as a result of an increase in the cost of services provided by AXIS in accordance with the service agreement. Included within the administrative expenses of A$15,291 (2015: A$770) is an amount of A$12,419 billed to us by AXIS (2015: A$12,043 credited to us by AXIS).
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c)
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An increase in acquisition related costs from A$nil in the three months ended June 30, 2015 to A$116,946 in the three months ended June 30, 2016. As noted earlier, in March 2016 the Company entered into a term sheet with Noam Levavi and Eran Galil (the “Vendors”) for the acquisition of all of the issued shares of Byondata (“Byondata”), a company incorporated under the laws of Israel. The Company had a 90 day period to conduct due diligence and negotiate a formal share sale agreement. Included within the acquisition related costs are the initial payments made to Byondata for working capital purposes (which were non-refundable), costs of travel and consultants time in undertaking the due diligence. Following initial due diligence and by mutual agreement, the proposed acquisition was terminated.
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As a result of the foregoing, the loss from operations increased from A$17,025 for the three months ended June 30, 2015 to a loss from operations of A$145,230 for the three months ended June 30, 2016.
A foreign currency exchange loss of A$10,653 for the three months ended June 30, 2015 compared to a foreign currency exchange loss of A$1,302 for the three months ended June 30, 2016 was recorded as a result of the movement in the US dollar versus the Australian dollar.
The net loss was A$27,678 for the three months ended June 30, 2015 compared to a net loss of A$146,532 for the three months ended June 30, 2016.
Six Months Ended June 30, 2016 vs. Six Months Ended June 30, 2015
Costs and expenses are incurred in both Australian and US dollars. Costs incurred in US dollars are converted to Australian dollars. The Australian dollar has fallen by approximately 3% against the US dollar over the past 12 months and therefore the comparison of amounts for the six month period ended June 30, 2016 versus the six month period ended June 30, 2015 does not provide a true comparison of the movement as it may have been heavily influenced by the movement in the exchange rate depending on whether the cost or expenses was initially incurred in US dollars or Australian dollars.
Costs and expenses increased from A$29,139 in the six months ended June 30, 2015 to A$223,101 in the six months ended June 30, 2016.
The increase in costs and expenses is a net result of:
a)
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A decrease in legal, accounting and professional expense from A$26,442 for the six months ended June 30, 2015 to A$26,115 for the six months ended June 30, 2016. Included within legal, accounting and professional expense for the six months ended June 30, 2016 is A$3,402 (2015: A$257) for costs associated with the Company’s SEC compliance; accounting fee costs for the six months ended June 30, 2016 of A$19,917 (2015: A$21,159); and A$2,796 (2015: A$5,026) which relates to stock agent transfer fees.
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b)
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An increase in administrative expense from A$2,697 for the six months ended June 30, 2015 to A$80,040 for the six months ended June 30, 2016. Included within administrative expenses for the six months ended June 30, 2016 are A$2,991 (2015: A$3,038) for costs associated with the Company’s SEC compliance obligations; A$706 (2015: A$360) for bank charges; insurance costs of A$nil (2015: A$8,984); A$1,111 (2015: A$530) for storage costs; consultants fees A$19,190 (2015: A$11,000): travel and accommodation costs of $10,866 (2015: A$nil); public relations costs of $17,500 (2015: A$nil); franchise tax of $871 (2015: A$nil); and A$24,761 charged to us by AXIS (2015: A$21,271 credit) for wages and salaries expenditure. Included within the administrative expenses of A$80,040 (2015: A$2,697) is an amount of A$32,857 charged to us by AXIS (2015: A$10,048 credited to us by AXIS).
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c)
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An increase in acquisition related costs from A$nil in the six months ended June 30, 2015 to A$116,946 in the three months ended June 30, 2016. As noted earlier, in March 2016 the Company entered into a term sheet with Noam Levavi and Eran Galil (the “Vendors”) for the acquisition of all of the issued shares of Byondata (“Byondata”), a company incorporated under the laws of Israel. The Company had a 90 day period to conduct due diligence and negotiate a formal share sale agreement. Included within the acquisition related costs are the initial payments made to Byondata for working capital purposes (which were non-refundable), costs of travel and consultants time in undertaking the due diligence. Following initial due diligence and by mutual agreement, the proposed acquisition was terminated.
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As a result of the foregoing, the loss from operations increased from A$29,139 for the six months ended June 30, 2015 to a loss from operations of A$223,101 for the six months ended June 30, 2016.
A foreign currency exchange loss of A$801 for the six months ended June 30, 2016 compared to a foreign currency exchange loss of A$10,762 for the six months ended June 30, 2015 was recorded as a result of the movement in the US dollar versus the Australian dollar.
The net loss was A$39,901 for the six months ended June 30, 2015 compared to a net loss of A$223,902 for the six months ended June 30, 2016.
Liquidity and Capital Resources
For the six months ended June 30, 2016, net cash used in operating activities was A$170,009 consisting of the net loss of A$223,902 offset by a non-cash charge for foreign currency exchange loss of A$801, an increase in accounts payable and accrued expenses of A$53,592 and an increase in receivables of A$500. For the six months ended June 30, 2016, net cash provided by financing activities was A$170,501 consisting of a repayment of an advance from affiliate of A$816,151 and proceeds from the issuance of shares of A$986,652.
As of June 30, 2016, the Company had short-term obligations of A$211,135 comprising accounts payable and accrued expenses
The Company has funded operations since inception through advances from affiliated entities. The Company’s ability to continue operations through 2016 is dependent upon future funding from affiliated entities, capital raisings, or its ability to commence revenue producing operations and positive cash flows, of which there can be no assurance. AXIS has advised it does not currently intend to require repayment of these advances prior to June 30, 2016, accordingly the Company has decided to classify the amounts payable as non-current in the accompanying balance sheets.
The Company continues to search for additional sources of capital, as and when needed; however, there can be no assurance funding will be successfully obtained. Even if it is obtained, there is no assurance that it will not be secured on terms that are not highly dilutive to existing shareholders.
In order to take advantage of management’s substantial experience in the location and development of mineral exploration properties, the Company planned to look for opportunities in the resources industry.
In January 2017, the Company announced it was looking for gold opportunities in Myanmar.
The accompanying financial statements have been prepared in conformity with US GAAP, which contemplates continuation of Consolidated Gems as a going concern. However, Consolidated Gems. has limited assets, negative working capital, a stockholders’ (deficit) has not yet commenced revenue producing operations and has sustained recurring losses since inception.
Our budget for general and administration and for professional expenses for the remainder of fiscal 2016 is A$0.05 million. Once we have identified a specific exploration or mining project we will also need to prepare a budget for these activities. We are currently investigating capital raising opportunities which may be in the form of either equity or debt, to provide funding for working capital purposes. There can be no assurance that such a capital raising will be successful, or that even if an offer of financing is received by the Company, it is on terms acceptable to the Company.
Information Concerning Forward-Looking Statements
This report and other reports, as well as other written and oral statements made or released by us, may contain forward-looking statements. Forward-looking statements are statements that describe, or that are based on, our current expectations, estimates, projections and beliefs. Forward-looking statements are based on assumptions made by us, and on information currently available to us. Forward-looking statements describe our expectations today of what we believe is most likely to occur or may be reasonably achievable in the future, but such statements do not predict or assure any future occurrence and may turn out to be wrong. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. The words "believe", "anticipate", "intend", "expect", "estimate", "project", "predict", "hope", "should", "may", and "will", other words and expressions that have similar meanings, and variations of such words and expressions, among others, usually are intended to help identify forward-looking statements.
Forward-looking statements are subject to both known and unknown risks and uncertainties and can be affected by inaccurate assumptions we might make. Risks, uncertainties and inaccurate assumptions could cause actual results to differ materially from historical results or those currently anticipated. Consequently, no forward-looking statement can be guaranteed. The potential risks and uncertainties that could affect forward looking statements include, but are not limited to:
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The risk factors set forth in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015,
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The possibility that we do not find gems or other minerals or that the gems or other minerals we find are not commercially economical to mine,
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The risks and hazards inherent in the mineral exploration and development business (including environmental hazards, industrial accidents, weather or geologically related conditions),
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Changes in the market price of minerals or gems,
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The effects of environmental and other governmental regulations,
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The uncertainties inherent in our exploratory activities, including risks relating to permitting and regulatory delays,
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Estimates of proven and probable reserves are subject to considerable uncertainty,
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Movements in foreign exchange rates,
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Increased competition, governmental regulation,
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Performance of information systems,
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Ability of the Company to hire, train and retain qualified employees,
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In addition, other risks, uncertainties, assumptions, and factors that could affect the Company's results and prospects are described in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, including under the heading “Risk Factors” and elsewhere herein and therein and may further be described in the Company's prior and future filings with the Securities and Exchange Commission and other written and oral statements made or released by the Company.
We caution you not to place undue reliance on any forward-looking statements, which speak only as of the date of this document. The information contained in this report is current only as of its date, and we assume no obligation to update any forward-looking statements.