10-Q 1 dte103115qfinal.htm FORM 10-Q Converted by EDGARwiz -

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended October 31, 2015

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from _________ to _________

 

Commission file number: 333-192135


 

DIAMOND TECHNOLOGY ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 




 

 

 

 

 

 

 

 

 

Delaware

 

46-2076629

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

37 West 47th Street, #1301

New York, New York 10036

(Address of principal executive offices) (zip code)

 

(212) 382-2104

(Registrants telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No ¨ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨  No x 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.

 



 

 

 

 

Large accelerated filer                                                   ¨

Accelerated filer                                                    ¨

Non-accelerated filer                                                     ¨

Smaller reporting company                                  x

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.

 

As of January 4, 2016, there were 68,815,000 shares of registrants common stock outstanding.




DIAMOND TECHNOLOGY ENTERPRISES, INC.

 

INDEX

  

 






PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

ITEM 1

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed balance sheets as of October 31, 2015 (unaudited) and July 31, 2015

1

 

 

 

 

 

 

 

 

Condensed statements of operations for the three months ended October 31, 2015 and 2014 (unaudited)

2

 

 

 

 

 

 

 

 

Condensed statements of cash flows for the three months ended October 31, 2015 and 2014 (unaudited)

3

 

 

 

 

 

 

 

 

Notes to condensed financial statements (unaudited)

4-8

 

 

 

 

 

 

 

ITEM 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

9-13

 

 

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

14

 

 

 

 

 

 

 

ITEM 4.

Controls and Procedures

14

 

 

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

15

 

 

ITEM 1A.

Risk Factors

15

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

15

 

 

ITEM 3.

Defaults Upon Senior Securities

15

 

 

ITEM 4.

Mine Safety Disclosures

15

 

 

ITEM 5.

Other Information

15

 

 

ITEM 6.

Exhibits

15

 

 

 

 

 

 

 

SIGNATURES

16

 







PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS


DIAMOND TECHNOLOGY ENTERPRISES, INC.

 CONDENSED BALANCE SHEETS



October 31,

July 31,


2015

2015


(unaudited)


ASSETS



Current assets:



Cash

 $                 1,925

 $     102,181

Inventory

                219,217

        106,560

Prepaid supplies and expenses

                    8,408

             2,319

  Total current assets

                229,550

        211,060




Property and equipment, net

                663,650

        710,627




Deposits

                  23,262

           23,262




Total assets

 $             916,462

 $     944,949




  LIABILITIES AND STOCKHOLDERS DEFICIT



Current liabilities:



Accounts payable and accrued expenses, $724,097 and $629,922 related party

 $             847,915

 $     740,109

Notes payable, short term portion

                  59,687

           58,187

Joint venture obligation (Note 3)

                250,000

        250,000

Advances, related party

                  29,174

           18,946

  Total current liabilities

             1,186,776

     1,067,242




Long term liabilities



Deferred rent, long term

                  12,400

           12,424

Notes payable, long term portion

                136,376

        136,376

Notes payable-related party, long term portion

                741,788

        692,947

  Total long term liabilities

                890,564

        841,747




Total liabilities

             2,077,340

     1,908,989




Stockholders deficit:



Preferred stock, $0.0001 par value; 10,000,000 shares authorized



Series A Convertible Preferred stock, 1,000,000 shares designated, 1,000,000 shares issued and outstanding as of October 31, 2015 and July 31, 2015

                        100

                100

Common stock, $0.0001 par value; 240,000,000 shares authorized, 69,575,000 shares issued and 68,815,000 shares outstanding as of October 31, 2015 and July 31, 2015

                    6,958

             6,958

Common stock subscription

                        400

                400

Additional paid in capital

             1,778,511

     1,778,511

Treasury stock (760,000 shares)

                        (76)

                (76)

Accumulated deficit

           (2,946,771)

   (2,749,933)

  Total stockholders deficit

           (1,160,878)

      (964,040)




Total liabilities and stockholders deficit

 $             916,462

 $     944,949




The accompanying notes are an integral part of these unaudited condensed financial statements

 


1






DIAMOND TECHNOLOGY ENTERPRISES, INC.

 CONDENSED STATEMENTS OF OPERATIONS

(unaudited)





Three months ended October 31,


2015

2014

REVENUE:



Sales

 $               119,500

 $                          -   

Cost of sales

                  125,818

                     51,725




  Gross loss

                      (6,318)

                   (51,725)




OPERATING EXPENSES:



Selling, general and administrative expenses

                  175,883

                  187,721

Depreciation

                      4,167

                       4,264




  Total operating expenses

                  180,050

                  191,985




Loss from Operations

                (186,368)

                (243,710)




Other expenses:



Interest expense

                  (10,469)

                     (6,005)




Loss before income taxes

                (196,838)

                (249,715)




Income taxes (benefit)

                             -   

                             -   




Net loss

 $             (196,838)

 $             (249,715)




Loss per common share, basic and diluted




 $                   (0.00)

 $                    (0.00)

Weighted average number of common shares outstanding, basic and diluted

            68,815,000

             68,684,565




The accompanying notes are an integral part of these unaudited condensed financial statements

 

 

2




DIAMOND TECHNOLOGY ENTERPRISES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)





Three months ended October 31,


2015

2014







CASH FLOWS FROM OPERATING ACTIVITIES:



Net loss

 $                (196,838)

 $              (249,715)

Adjustments to reconcile net loss to net cash used in operating activities:



Depreciation

                        46,977

                      46,989

Operating expenses incurred by related party on behalf of Company

                                10,228   

                        4,354

Changes in operating assets and liabilities:



Inventory

                   (112,657)

                               -   

Prepaid expenses and supplies

                        (6,089)

                           151

Accounts payable and accrued expenses

                     107,806

                      80,135

Deferred rent

                             (24)

                           303

  Net cash used in operating activities

                   (150,597)

                  (117,783)




CASH FLOWS FROM INVESTING ACTIVITIES:



Purchase of property and equipment

                                -   

                    (14,890)

  Net cash used in investing activities

                                -   

                    (14,890)




CASH FLOWS FROM FINANCING ACTIVITIES:



Proceeds from notes payable

                          1,500

                               -   

Proceeds from related party notes payable

                        48,841

                    103,400

  Net cash provided by financing activities

                        50,341

                    103,400




Net decrease in cash

                   (100,256)

                    (29,273)

Cash, beginning of period

                     102,181

                      38,777




Cash, end of period

 $                       1,925

 $                     9,504




SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION






Interest paid

 $                             -   

 $                           -   

Income taxes paid

 $                             -   

 $                           -   




Non-cash investing and financing activities:



Common stock issued for services rendered in prior year

 $                             -   

 $                200,000

Equipment acquired by related party on behalf of Company

 $                             -   

 $                   12,000




The accompanying notes are an integral part of these unaudited condensed financial statements



 

3


 

DIAMOND TECHNOLOGY ENTERPRISES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

OCTOBER 31, 2015

(unaudited)


NOTE 1 SIGNIFICANT ACCOUNTING POLICIES


A summary of the significant accounting policies applied in the presentation of the accompanying unaudited financial statements follows:

 

General

 

The following (a) balance sheets as of October 31, 2015 (unaudited) and July 31, 2015, which have been derived from audited financial statements, and (b) the unaudited interim statements of operations and cash flows of Diamond Technology Enterprises, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three  months ended October 31, 2015 are not necessarily indicative of results that may be expected for the year ending July 31, 2016. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended July 31, 2015 included in the Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on December 22, 2015.


Basis of presentation


The Company was incorporated on January 14, 2013 under the laws of the State of Delaware. The Company is headquartered in New York and was organized for the purpose of producing higher quality diamonds via the use of proprietary high pressure high temperature (HPHT) processes.


Liquidity and Going Concern


As the Company is devoting substantially all of its efforts to establishing a new business, and planned principal operations has just recently commenced. There has been minimal revenue generated from sales, license fees or royalties.

 

The Companys primary efforts are devoted to establishing operations and developing customer relationships. The Company has experienced net losses and negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future. In addition, the Company will require additional financing to fund future operations. The Company intends to raise additional capital to complete the development and commercialization of its current product through equity or debt financing; however the Company does not have any commitments or definitive or binding arrangements for such funds. There can be no assurance that such funds, if available at all, can be obtained on terms reasonable to the Company. If the Company is unsuccessful in raising additional capital it will need to reduce costs and operations substantially.


The above factors raise substantial doubt as to the Companys ability to continue as a going concern. The accompanying unaudited condensed financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty.


Use of estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the useful life of fixed assets and assumptions used in the fair value of stock-based compensation.




4


 


Cash and Cash Equivalents


The Company considers financial instruments with an original maturity date of three months or less to be cash equivalents.


Revenue Recognition


The Company will recognize revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (ASC 605-10) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on managements judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.


During the three months ended October 31, 2015, sales were comprised of higher quality diamonds processed through the Companys HPHT manufacturing process and rough white diamond stones.


Inventory


The Company maintains an inventory, which consists primarily of uncut lower grade raw diamonds to be used as raw materials in the production process and rough white stone diamonds.  The average cost method is utilized in valuing the inventory, and is stated at the lower of cost or market.  

 

As of October 31, 2015 and July 31, 2015, the Companys inventory, comprised of lower grade raw diamonds, was $219,217 and $106,560, respectively.

Cost of sales


Cost of sales is comprised of cost of raw materials sold, factory supplies, rent, other costs and manufacturing equipment depreciation.

 

Concentrations


The Company's revenues earned from sales of products for the three months ended October 31, 2015 included an aggregate of 100% of the Company's total revenues from one customer. The Company purchased 100% of its cost of goods sold from one vendor during the three months ended October 31, 2015.

 

Property, plant and equipment


Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Gains and losses from the retirement or disposition of property and equipment are included in operations in the period incurred. Maintenance and repairs are expensed as incurred.


Income taxes

 

Deferred income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss and credit carry-forwards and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured at the current enacted tax rates. The Company records an estimated valuation allowance on its deferred income tax assets if it is not more likely than not that these deferred income tax assets will be realized.

 

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. As of October 31, 2015 and July 31, 2015, the Company has not recorded any unrecognized tax benefits.




5


 

 


Stock Based Compensation

 

All stock-based payments to employees and to nonemployee directors for their services as directors, including any grants of restricted stock and stock options, are measured at fair value on the grant date and recognized in the statements of operations as compensation or other expense over the relevant service period. Stock-based payments to nonemployees are recognized as an expense over the period of performance. Such payments are measured at fair value at the earlier of the date a performance commitment is reached or the date performance is completed. In addition, for awards that vest immediately and are non-forfeitable the measurement date is the date the award is issued.


Net Income (loss) Per Common Share

 

The Company computes earnings (loss) per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (ASC 260-10). Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year.  Diluted net income (loss) per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period. As of October 31, 2015 and 2014, shares issuable upon conversion of preferred stock were excluded as common stock equivalents in the diluted loss per share because their effect is anti-dilutive.  


Fair Value of Financial Instruments

 

Accounting Standards Codification subtopic 825-10, Financial Instruments (ASC 825-10) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments.  All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.


Reclassifications


Certain accounts in the prior period consolidated financial statements have been reclassified for comparison purposes to conform to the presentation of the current period consolidated financial statements.  These reclassifications had no effect on the previously reported net loss.


Recent Accounting Pronouncements


There are various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Companys financial position, results of operations or cash flows.


NOTE 2- PROPERTY AND EQUIPMENT

Property, plant and equipment at October 31, 2015 and July 31, 2015 are as follows: 










 

October 31,

2015

 

 

July 31,

2015

 

Machinery and equipment

$

857,021

 

 

$

857,021

 

Office furniture

 

14,070

 

 

 

14,070

 

Office equipment

 

10,668

 

 

 

10,668

 

Computers

 

4,094

 

 

 

4,094

 

Leasehold improvements

 

60,067

 

 

 

60,067

 

 

 

945,920

 

 

 

945,920

 

Less: accumulated depreciation

 

(282,270

)

 

 

(235,293

 

$

663,650

 

 

$

710,627

 


During the three months ended October 31, 2015 and 2014, depreciation expense charged to operations was $46,977 and $46,989, respectively; of which $42,810 and $42,725 was included as part of cost of sales.

 

6


 


NOTE 3 JOINT VENTURE OBLIGATION

On March 12, 2015, the Company entered a Joint Venture agreement to provide working capital for the purchase of rough brown VS+ diamonds, cut and polishing services and related expenses in exchange for net 50% of the gross profit realized from the sale of the final product.  The minimum term of the agreement is for processing a minimum of 24,160 carats.  In connection with Joint Venture agreement, the Company received $250,000 in working capital through October 31, 2015 and is required to i) purchase or lease a portable diamond analyzer machine, ii) acquire rough or polished brown, VS+ diamond stones, iii) incur costs of cutting and polishing and iv) pay costs of insurance for stones while in transit.


The Joint Venture agreement provides for the investing partner to reinvest their pro rata share of the sales proceeds to acquire additional carats until at a minimum of 24,160 carats are processed and sold.


NOTE 4 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES


As of October 31, 2015 and July 31, 2015, accounts payable and accrued liabilities for the period ending are comprised primarily of accrued professional fees and accrued compensation.


 NOTE 5 NOTES PAYABLE, RELATED PARTY


From October 25, 2013 through October 28, 2015, the Company issued an aggregate of $636,788 unsecured notes payable to Eduard Musheyev, the Companys Chief Executive Officer for cash advances and purchases on the Companys behalf.  The notes bear 4% per annum interest, payable monthly in arrears and are due five years from the date of issuance.


From August 2014 through July 2015, the Company issued three unsecured notes payable to Alexander Musheyev, a family member of the Companys Chief Executive Officer for cash advances in aggregate of $105,000.  The notes bear 4% per annum interest, payable monthly in arrears and are due five years from the date of issuance.


The Company accrued and recorded as current period expenses $7,175 and $4,713 as related party interest for the three months ended October 31, 2015 and 2014, respectively.

 

NOTE 6 NOTES PAYABLE


From February 12, 2014 through July 29, 2014, the Company issued an aggregate of $136,376 unsecured notes payable.  The notes bear 4% per annum interest, payable monthly in arrears and are due five years from the date of issuance.


From December 29, 2014 through October 31, 2015, the Company issued an aggregate of $59,687 unsecured promissory notes payable.  The notes bear 4% per annum interest, payable monthly in arrears and are due June 1, 2016 through October 23, 2016.


The Company recorded $1,963 and $1,375 as interest expense for the three months ended October 31, 2015 and 2014, respectively.

 

NOTE 7 RELATED PARTY TRANSACTIONS


The Companys officers and shareholders have contributed capital to the Company for working capital purposes.  As of October 31, 2015 and July 31, 2015, advances from related party were $29,174 and $18,946; respectively.  These are interest free advances. 



7


 


At the formation of the Company agreed to issue to Nikitin Vadim Vladimirovich 34,500,000 shares of common stock upon the fulfillment of his obligations to the Company.  His obligations consist of facilitating the acquisition of the additional machines needed to increase production (up to 50 more machines) and to ensure the adaption of the machines for our purposes.  Based upon his removal from the Board of Directors, the Company believes that this obligation is terminated.  


As of October 31, 2015, an aggregate of $691,067 of accrued consulting fees due to officers for services.


NOTE 8  SUBSEQUENT EVENTS


On November 2, 2015, the Company issued four convertible debentures in aggregate of $110,109. The debentures accrue interest at 6% per annum with principal and interest due May 2, 2016.


At the note holders option, if the Company fails to pay any principal and/or accrued interest on May 2, 2016 (or after acceleration due to default), the note holder may choose to have all or any part of the outstanding principal and accrued interest repaid in shares of the Companys common stock at a conversion rate of 50% of the closing bid price on the day of conversion.


On December 22, 2015, the Company issued a $3,000 convertible promissory note due June 22, 2016 with interest at 4% per annum, due at maturity.


The promissory note is convertible, holders option, should the Company fail to pay any principal or interest when due on June 22, 2016 at a conversion rate of 50% of the closing bid price on the day of conversion.





 

8


 

DIAMOND TECHNOLOGY ENTERPRISES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

OCTOBER 31, 2015

(unaudited)


ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Managements Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Managements current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as may,will,expect,anticipate,believe,estimate and continue, or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.


Business Overview

 

Diamond Technology Enterprises, Inc. (DTE or the Company) was organized under the laws of the state of Delaware on January 14, 2013, and is headquartered in New York City.   It was formed for the purpose of producing higher quality diamonds through a specialized high pressure, high temperature (HPHT), manufacturing process utilizing HPHT machines (the Machines) which operate with any brown VS+ diamonds to permanently enhance their color to multicolored diamond stones, and thereafter reselling these stones to jewelry manufactures and wholesale or retail sources in the diamond industry. In addition, the company also sources and buys white (all colors including some brown) diamond stones for resales as both rough and polished stones.


The Company was founded by Eduard Musheyev, a diamond industry executive with more than 30 years of experience in the industry as a jewelry manufacturer, designer and operator of jewelry wholesale and retail operations.   Through his relationships in Russia, he collaborated with Mr. Vladirmirovich, an engineer and businessman, to acquire the initial Machines that had lain dormant for years due to the collapse of the Soviet Union.  The initial Machine installed in the U.S. has been modified and updated by these Company founders.  The Companys competitive edge comes from its ability to (a) complete the process in 2 minutes; and (b) utilize virtually any brown VS+ raw diamonds that are not usable by our competitors.  


DTE is a domestic manufacturing company that processes cut and polished brown VS+ diamond stones into an array of multicolored diamonds through HPHT machines owned by the company and sold to jewelry manufacturers and the resale market.  DTE purchase rough brown VS+ diamond stones from diamond mining regions throughout the world.  DTE representatives have traveled to Brazil, Angola and Russia to create the relationships directly with mine owners to secure the raw materials necessary for its production.  DTE has also traveled to Israel, Belgium and other locations to create relationships with intermediaries and market makers to ensure that adequate sourcing is available for its requirements.

                                     

DTE acquires these diamond stones as its first step.  The stones then have to be initially cut and polished by a third party with which DTE has negotiated a reasonable fee and then processed through DTEs HPHT machines producing stones from their brown state to permanent colors of white, yellow, pink, green, red, blue and orange. The stones are then subjected to a final cut and polish, and are then available for sale.  Brown stones which in their original condition have minimum value in the jewelry business, become stones of high demand and high cost in the diamond marketplace.



 

9




 

DTEs present focus is on producing Melee size diamonds for jewelry manufacturing.  Melee is used to identify diamonds weighing 0.55 carats or less (DTEs machinery can process stones up to 3 carats). The use of diamond melee stone in jewelry makes up a large portion of the worlds diamond consumption.


As a Result of DTEs buying trips for rough brown vs+ diamond stones DTE was presented with the opportunity to acquire rough white (generally all colors including some variety of brown colors) at advantageous price levels for sale as rough or polished stones in the jewelry industry.


These white stones (primarily Melee sizes) will not require HPHT processing.  DTE commenced the sale of these stones in August 2015 with positive results.


In May 2000, responding to a growing grassroots movement on blood diamonds, governments, including the Unites States and Brazil, and the diamond industry came together to combat the trade in diamonds from conflict zones.  The result of these negotiations was the Kimberly Process Certification Scheme setting up an internationally recognized certification system for rough diamonds and establishing national import/export standards.  The issuance of a Kimberly Certificate, under that process, certifies that the rough stones being acquired may be legally imported/exported.

 

The sales in August were a test for the sourcing and sale of the rough white diamond stones.  DTEs operating assumption is that it can establish a successful sales program for rough white diamond stones of 2,000 to 4000 carats per month.  One of the values of engaging in the buying and selling of rough white diamond stones is that they require no processing and are immediately available for sale by the company.  An option for the company is to cut and polish the white stones (which would sell at a higher profit margin) in which event the company would engage a third party that would cut and polish such stones.  The Company has a verbal arrangement for these services at what the company believes is at advantageous prices for this work.


Our first machine has been delivered to and is installed at 250 Port Street, Newark, New Jersey, however, it went off-line for repair in July 2015. Repairs are not yet complete due to the high costs and the machine may need to be returned to Russia for repairs to be done properly. The company fortunately was able to add to its production floor an additional 3 HPHT machines which have been tested and are presently available for full production.  We currently are in negotiations to either acquire or lease these 3 machines, however they are subject to their owner demanding their return. Management believes that its facility is ideal because it offers the security it believes is required and the Company may be able to utilize up to 10,000 square feet at this location, as the need arises. This location further meets the weight bearing requirements of the machines, thus allowing for the installation of up to 10 machines that will weigh in excess of 70 tons once fully acquired and installed.


Our principal executive offices are currently located at 37 West 47th Street, Suite1301, NY, NY, 10036 and our telephone number is (212) 382-2104.

 

Current Operating Trends


Acquire the Machines


The Company has 4 machines in its production facility as previously described.  It is attempting to arrange the purchase and/or lease purchase of up to an additional 6 Machines.  The Company anticipates that up to 10 Machines should be fully operational by July 2016.


Staffing


The executive staff is presently in place, it includes the companys Chairman and President, its Chief Financial Officer, an expert in rough diamond buying and selling, administrative staff and its strategic advisor. The production staff is expected to be in place at least 30 days prior to production for training and implementation of security protocols. The Companys initial staffing plans are based upon needing 3 personnel (consisting of an engineer mechanic and cylinder feeder) at a payroll cost of approximately $20,000 per month, for the initial machine.  The staffing requirements would then be scaled upwards as machines are brought on-line at the rate of:  3 engineers per 10 machines; 4 handlers per 10 machines; 4 cylinder feeders per 10 machines and 1 Senior engineer for supervision per 10 machines.  We anticipate interviewing, hiring and training to fill the necessary positions 30 days prior to initial production of machines.




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Acquire the raw materials


Raw materials may be purchased from a variety of mining sources or brokers. Raw materials will be competitively sourced for quality, price and terms.  The Company estimates that the monthly cost for raw materials for one (1) machine in production will average approximately $2 million depending on global market conditions at that time.  Working capital availability estimated in our Use of Proceeds and anticipated credit terms will be utilized to cover these costs.


Complete the HPHT Process


The HPHT process is a manufacturing operation with proprietary Machines that produces a Melee gemstone diamond, from any brown VS+ diamond, in less than 2 minutes that then requires post production polishing before being able to be sold to the jewelry industry.

 

Sell the Completed Diamonds


The company plans to sell the completed diamonds initially to its existing client base and thereafter auctions hosted by the Rapaport Company in New York, Hong Kong, Israel and Belgium.  The Company will also attend and sell its products at International Jewelry and Gem Fairs held frequently and at global locations. The sale of rough and polished stones will initially be made to the companys existing database of customers and thereafter in auctions and international jewelry and gem fairs.


The white diamond rough stones are being sold to the companys existing database of customers.  As this revenue line scales additional sales channels including auctions will be engaged.


Results of Operations


We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, such as the progress and timing of our business development plans and the timing and outcome financing. Due to these uncertainties, accurate predictions of future operations are difficult or impossible to make.

 

Three Months Ended October 31, 2015 Compared to Three Months Ended October 31, 2014

 

Revenues and Cost of Goods Sold. Revenue for the three months ended October 31, 2015 was $119,500 as compared with $-0- for the three months ended October 31, 2014.  Revenue for the current period were comprised of the sale of white diamond rough stones.


Cost of sales for the current period was $125,818, netting a gross loss of $6,318 (5.3%) as compared to a cost of sales of $51,725 with no offsetting revenue for the three months ended October 31, 2014.  Included in cost of sales was $42,810 and $42,725 non-cash depreciation expense of our manufacturing equipment.


General and Administrative Expenses. General and administrative expenses for the three months ended October 31, 2015 were $175,883, a decrease of $11,838, or 6%, from $187,721 incurred in the three months ended October 31, 2014. This decrease is primarily due to reduction in payroll-related expenses, accounting and auditing fees, legal professional fees, travel, meals and entertainment expenses and other general and administrative expenses.


Depreciation. Depreciation for the three months ended October 31, 2014 was $4,167, a decrease of $97 from $4,264 incurred in the three months ended October 31, 2014.




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Interest and Other Financing Costs. Interest expense for the three months ended October 31, 2015 totaled $10,469, as compared to $6,005 during the three months ended October 31, 2014.  Interest expense is related to our notes payable issued in the latter part of last fiscal year and the current period.

 

Net Loss. As a result of the foregoing, the net loss for the three months ended October 31, 2015 was $196,838, compared to a net loss of $249,715 for the three months ended October 31, 2014, a decrease of $52,877, or 21%.


Liquidity and Capital Resources 

 

As of October 31, 2015, we had a working capital deficit of $957,226, comprised primarily of cash of $1,925, inventory of $219,217 and prepaid expenses of $8,408, which was offset by $858,143 of accounts payable, short term notes payable of $59,687, joint venture obligation of $250,000 and $18,946 of advances from related parties.


For the three months ended October 31, 2015, we used $150,597 of cash in operating activities as compared to $117,783 for the same period last year. The increase is due to our administrative and other operating cost increases as compared to prior period.


For the three months ended October 31, 2015, proceeds from financing activities were from the issuance of promissory notes of $1,500, and from the issuance of promissory notes to related parties for $48,841. In the comparable 2014 period, $103,400 from the issuance of promissory notes to related parties.

 

Cash used in investing activities for the three months ended October 31, 2015 was $-0- as compared to $14,890 for the three months ended October 31, 2014 reflecting purchase of equipment.


At October 31, 2015, we had cash of $1,925 compared to $102,181 at July 31, 2015. Our cash is held in bank deposit accounts.


As the Company is devoting substantially all of its efforts to establishing a new business, and planned principal operations have just commenced, there has been minimal revenue generated from sales, license fees or royalties.

 

The Companys primary efforts are devoted to establishing operations and developing customer relationships. The Company has experienced net losses and negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future. In addition, the Company will require additional financing to fund future operations. The Company intends to raise additional capital to complete the development and commercialization of its current product through equity or debt financing; however the Company does not have any commitments or definitive or binding arrangements for such funds. There can be no assurance that such funds, if available at all, can be obtained on terms reasonable to the Company. If the Company is unsuccessful in raising additional capital it will need to reduce costs and operations substantially.


It is anticipated that the company will receive revenues from operations in the coming year, however, it is difficult to anticipate what those revenues might be, if any, and therefore, management has assumed that it may need to sell common stock, take loans or advances from officers, directors or shareholders or enter into debt financing agreements in order to meet our cash needs over the coming twelve months.     


The above factors raise substantial doubt as to the Companys ability to continue as a going concern. The accompanying unaudited condensed financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty. Please refer to the Companys risk factors described in the Companys Form S-1/A filed on May 23, 2014 with the Securities and Exchange Commission (the SEC).




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Transactions with Related Parties


The Companys officers and shareholders have contributed capital to the Company for working capital purposes.  As of October 31, 2015 and July 31, 2015, advances from related party was $29,174 and $18,946; respectively.  

From October 25, 2013 through October 28, 2015, the Company issued an aggregate of $636,788 unsecured notes payable to Eduard Musheyev, the Companys Chief Executive Officer for cash advances and purchases on the Companys behalf.  The notes bear 4% per annum interest, payable monthly in arrears and are due five years from the date of issuance.


From August 2014 through July 2015, the Company issued three unsecured notes payable to Alexander Musheyev, a family member of the Companys Chief Executive Officer for cash advances in aggregate of $105,000.  The notes bear 4% per annum interest, payable monthly in arrears and are due five years from the date of issuance.


The Company accrued and recorded as current period expenses $7,175 and $4,713 as related party interest for the three months ended October 31, 2015 and 2014, respectively.


Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.


We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.


Stock Based Compensation


All stock-based payments to employees and to nonemployee directors for their services as directors, including any grants of restricted stock and stock options, are measured at fair value on the grant date and recognized in the statements of operations as compensation or other expense over the relevant service period. Stock-based payments to nonemployees are recognized as an expense over the period of performance. Such payments are measured at fair value at the earlier of the date a performance commitment is reached or the date performance is completed. In addition, for awards that vest immediately and are non-forfeitable the measurement date is the date the award is issued.


Use of estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the useful life of fixed assets and assumptions used in the fair value of stock-based compensation.


Recently Issued Accounting Pronouncements

Management does not believe that any recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying unaudited condensed financial statements.


Off-Balance Sheet Arrangements


We do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.


Inflation


The effect of inflation on our revenue and operating results was not significant.


Climate Change


We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

 

 

 

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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required under Regulation S-K for smaller reporting companies.


ITEM 4 - CONTROLS AND PROCEDURES


Disclosure Controls and Procedures


We evaluated the design and operation of our disclosure controls and procedures to determine whether they are effective in ensuring that we disclose required information in a timely manner and in accordance with the Securities Exchange Act of 1934 (the Exchange Act) and the rules and regulations promulgated by the SEC.  The executives who serve as our President and Chief Financial Officer has participated in such evaluation.  Management concluded, based on such review, that our disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q.  The ineffectiveness of these disclosure controls is due to the matters described below in Internal Control over Financial Reporting.

 

Limitations on the Effectiveness of Controls

 

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.  Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives and our President and Chief Financial Officer has concluded that such controls and procedures are not effective at the reasonable assurance level.  The ineffectiveness of these disclosure controls is due to the matters described below in Internal Control over Financial Reporting.

 

Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Management assessed the effectiveness of the internal controls over financial reporting as of October 31, 2015, using the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, our management concluded that, as of October 31, 2015, the internal controls over financial reporting were not effective. The reportable conditions and material weakness relate to a limited segregation of duties at the Company. Segregation of duties within our company is limited due to the small number of employees that are assigned to positions that involve the processing of financial information.


Specifically, certain key financial accounting and reporting personnel had an expansive scope of duties that allowed for the creation, review, approval and processing of financial data without independent review and authorization for preparation of schedules and resulting financial statements and related disclosures. We did not maintain a sufficient depth of personnel with an appropriate level of accounting knowledge, experience and training in the selection and application of Generally Accepted Accounting Principles commensurate with financial reporting requirements. Accordingly, we place undue reliance on the finance team at corporate headquarters, specifically the executive who is our President and Chief Financial Officer along with outside accounting consulting. Accordingly, management has determined that this control deficiency constitutes a material weakness. This material weakness could result in material misstatements of significant accounts and disclosures that would result in a material misstatement to our interim or annual financial statements that would not be prevented or detected.

 

Going forward, management anticipates that additional staff will be necessary to mitigate these weaknesses, as well as to implement other planned improvements.  Additional staff will enable us to document and apply transactional and periodic controls procedures, permit a better review and approval process and improve quality of financial reporting.  However, the potential addition of new staff is contingent on obtaining additional financing, and there is no assurance that the Company will be able to do so.

  

Changes in Internal Control Over financial Reporting

 

During the three months ended October 31, 2015, there were no changes to our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are currently not a party to any material legal proceedings or claims.

 

Item 1A. Risk Factors

 

Not required under Regulation S-K for smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits


 

 

 

31.01

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.02

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.01

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101 INS

XBRL Instance Document

 

101 SCH

XBRL Taxonomy Extension Schema Document

 

 

101 CAL

XBRL Taxonomy Calculation Linkbase Document

 

 

101 LAB

XBRL Taxonomy Labels Linkbase Document

 

 

101 PRE

XBRL Taxonomy Presentation Linkbase Document

 

 

101 DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

15



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 




 

DIAMOND TECHNOLOGY ENTERPRISES, INC.

 

 

 

Date: January 8, 2016

By:

/s/ EDUARD MUSHEYER

 

 

Eduard Musheyer

 

 

Chairman of the Board, President, Secretary, Treasurer and Director (Principal Executive

 

 

Officer)

 

 

 

Date: January 8, 2016

By:

/s/ JORDAN FRIEDBERG

 

 

Jordan Friedberg

 

 

Chief Financial Officer (Principal Financial Officer

 

 

and Principal Accounting Officer)




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