UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

 X . ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended July 31, 2015

or

[  ] TRANSITION REPORT PURSUANT OT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

For the transition period from _________ to __________

 

Commission File Number 333-192135

 

DIAMOND TECHNOLOGY ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:  None  

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes      . No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes      . No [X]

 

[X] 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.

 

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 (§ 229.405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

 

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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 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]

 

The aggregate market value of the voting common equity held by non-affiliates as of January 31, 2015, based on the estimated market price of the Common Stock was $2,571,500. The Common stock is not actively quoted on any exchange. For purposes of this computation, all officers, directors, and 5 percent beneficial owners of the registrant are deemed to be affiliates.  Such determination should not be deemed an admission that such directors, officers, or 5 percent beneficial owners are, in fact, affiliates of the registrant.

As of December 17, 2015, there were 68,815,000 shares of registrant’s common stock outstanding.

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TABLE OF CONTENTS

 

PART I		4
ITEM 1 - BUSINESS		4
ITEM 1A - RISK FACTORS		11
ITEM 1B – UNRESOLVED STAFF COMMENTS		11
ITEM 2 – PROPERTIES		11
ITEM 3 - LEGAL PROCEEDINGS		11
ITEM 4 – MINE SAFETY DISCLOSURES		12
PART II		12
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		12
ITEM 6 – SELECTED FINANCIAL DATA		12
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		12
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		18
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		18
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES		19
ITEM 9A – CONTROLS AND PROCEDURES		19
ITEM 9B – OTHER INFORMATION		20
PART III		20
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		20
ITEM 11 - EXECUTIVE COMPENSATION		22
ITEM 12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		23
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		24
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES		25
PART IV		25
ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		25
SIGNATURES		26

 

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PART I

ITEM 1 - BUSINESS

This Annual Report on Form 10-K (including the section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K.  Additionally, statements concerning future matters are forward-looking statements.

 

Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our Management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risks Factors” below, as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the Securities and Exchange Commission (“SEC”). You can read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549.  You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

General

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’s business plan calls for the Company to acquire brown VS + diamonds, from numerous sources, which will then be processed into an array of colors, utilizing the Machines, in a process that is significantly faster than any competitor.  

The Company commenced operations with 1 HPHT Machine it has added 3 additional HPHT machines to its production floor. Its plan is to add additional machines as funds, demand and availability of machines permit.

The HPHT revenue is predicated on the number of HPHT machines available for production.  Presently the Company has one machine it owns in full production and has an additional 3 machines in its production facility that it does not own but is negotiating for a favorable lease term or outright purchase.  There is no assurance that these goals can be reached. If no agreement can be reached, and the machines are removed, DTE is seeking to determine if additional machines are available for sale or whether HPHT machines can be built in the United States at no greater cost than the purchase price of the existing machines.

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On October 27, 2014, the Company entered into an Equipment Financing Agreement with Quick Solutions Worldwide, LP, (QSW) for the purchase of 30 Machines, subsequently reduced to 10 machine of the same type and from the same source as the Company is original machines, however, the Company was unable to make the initial deposit of $3,000,000 and the Agreement has not been funded. Notwithstanding this, QSW shipped to the Company the 3 additional HPHT machines which are presently on its production floor and in production at the Company’s facility. Neither a purchase agreement or lease agreement has been executed. The parties continue their negotiations. If no agreement is consummated QSW may reclaim and remove these machines from DTE premises. If the company is able to successfully complete its negotiations with QSW then the Company believes that it will be able to reinstitute the same, or similar agreement, when funding is available, and would thereafter seek to acquire an additional 6 machines as availability and financing permit. The 1 machine that the company owns is currently undergoing a material repair and will be offline for at least a 3 to 6-month period. During this time, the company has the 3 machines at this facility in full production capability and continues building supply and sales lines, and exploring the purchase and resale of white diamond stones as a separate business line. DTE is also exploring with United States equipment manufactures the building of HPHT machines. This is an ongoing initiative the resolution of which is to be determined.

The Company intends to acquire brown and white stones from brokers or directly from leading diamond mines of the world.  Although these mines spread over many continents are active producers of gem quality diamonds, there is no assurance that these mines will continue to produce rough stones in sufficient quantity and at a price structure that permits uninterrupted processing by DTE.  Competition by other companies for this production exists, that can affect the price to acquire the rough stones required for DTE’s processing.

DTE’s program of acquiring rough white stones for resale is a highly competitive area and there is no assurance that the stones acquired by DTE will sell at the prices anticipated by DTE.

DTE’s competitive advantage lies in its HPHT process.  This process allows DTE to utilize any brown vs+ diamond stone, which is extracted in quantity by the diamond mines.  DTE’s competitors are restricted to using Type IIa diamond stones which account for less than 3% of diamond mine production.  Brown vs+ stones cost substantially less than a type IIa stone. In addition, DTE’s HPHT processing time is approximately 2 minutes while our competitors’ is significantly greater.  

The HPHT cycle-time of approximately two (2) minutes is defined by the Company as the High Pressure High Temperature part of the process in which the rough stone is subjected to the pressure and temperature that enhances the color of the stone.

In addition, the Company present focus is on producing Melee size diamonds for jewelry manufacturing.  Melee is used to identify diamonds weighing 0.55 carats or less (DTE’s machinery can process stones up to 3 carats). The use of diamond melee stone in jewelry makes up a large portion of the world’s diamond consumption. DTE’s competitors focus on larger stones.

DTE’s present intention is to sell its production through established auctions that are scheduled at locations in New York, Hong Kong, Israel, Belgium and other sites throughout the year.  Auction selling is highly competitive and there is no assurance that the prices desired by DTE will be realized.  DTE also plans to attend International Jewelry and Gem fairs held frequently on a Global basis.  These fairs are heavily attended and highly competitive.  There is no assurance that the Company’s efforts at these fairs will be successful.  Sales will be made directly to jewelry manufacturers and large department stores and franchised retail jewelry stores that require melee diamonds to complete their retail product. Such sales are highly competitive with other diamond dealers and there is no assurance that DTE will have the success in these sales channels it anticipates.

As discussed above, 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. As previously noted, 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. 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.

 

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Management of the Company anticipates the first machine will be fully repaired by year end and that its 3 available machines are fully operational.

Management intends to operate its machines initially in one shift; adding a second shift as needed. Each shift requires one engineer, one handler, 2 cylinder loaders, 2 diamond extractors and one maintenance worker.  Management does not anticipate difficulty in finding, recruiting and training qualified personal.  

 Once the Company has begun to source and acquire the diamond stones it will commence the training of personnel, and the start of operations of additional machines. Management intends to begin its sales, marketing and advertising programs at that time. The Company’s senior executives believe they have developed strong, industry specific relationships over their prior years of experience and intend to utilize those relationships to begin the Company’s product sales.

After the diamonds are processed by the HPHT machines and the final cut and polish operations are completed, they will be sold through the company’s existing data base of customers, through auction sales, international jewelry fairs, over the Internet and through the use of wholesale and retail jewelry store outlets and channels.  

The Company’s long-term business plan is to acquire the remaining 6 Machines over time and operate in a secured facility where the additional machines will operate under 24-hour security. The Company’s long term plan, assuming it scales to 10 HPHT machines and employs a full array of automated robotic support equipment (such as sorting machines, cut and polish automated robotic equipment, etc.) it would seek an independent facility as its production home.  Until then the present facility is entirely satisfactory. Because of upgrades to these machines it is the Company`s intention to own and operate them exclusively and to not offer them for sale to competitors, thereby reinforcing its competitive advantage and strengthening the technological barriers to entry.

Mission

It is the mission of Diamond Technology Enterprises, Inc. to become a leader in the HPHT diamond market by creating high quality diamonds from brown VS+ diamonds.  

Company Overview

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 Company’s 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 High Pressure High Temperature (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 DTE’s 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.

 

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

As a Result of DTE’s 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.  DTE’s 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.

Products and Services

 

The Company has 2 revenue business lines. Its original (and current) business plan calls for the commencement of full operation with the 4 Machines presently in the Company’s possession, and building up to a total of 10 Machines over the next 3 years.  The business plan calls for the Company to process rough brown diamonds from numerous sources.  Purchasing maybe made directly by the Company, through joint ventures with others or through consignment arrangement with the Company’s customers.

The volume and method of acquiring the rough, brown diamonds for HPHT processing is a primary factor driving the Company’s projected profitability, as are the sales channels it anticipates utilizing to sell its HPHT-processed diamonds.

Additionally, the Company is developing a second business line and revenue source, through the purchase and resale of white (which includes other colored diamonds) stones. Management reports that, through its efforts to source brown diamond stones, that it has developed sources for white diamond stones at advantageous prices. The Company has determined to explore this second line of business, acquiring white stones to be sold as rough stones, or to be cut and polished and sold as polished stones.

On March 12, 2015, the Company entered into a joint venture agreement with an investor who has funded the JV with $250,000 enabling the Company to buy rough brown and white diamond stones.  The Company has completed the purchase of a few parcels of white stones, some of which were sold in the Company’s first quarter ending October 31, 2015. Concurrently, the Company is actively seeking to source and build an inventory of rough brown stones for HPHT processing.

Through its proprietary technology and what the founders believe is sophisticated High Pressure High Temperature (HPHT) Machinery, the Company anticipates providing to jewelry manufacturers an array of HPHT processed diamonds. These Machines, through the use of HPHT technology can complete nature’s own process to produce stones of color of white, yellow, pink, green, red, blue and orange. The color enhancement is permeant.

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Brown stones which in their original condition have minimum value in the jewelry business, become stones subject to greater high demand and higher cost in the diamond marketplace.

While “Melee” is used to classify small diamonds weighing 0.55 carats or less, the use of diamond melee in jewelry makes up a large portion of the world’s diamond consumption.   This marketplace continues to remain stable.  The Rapaport Melee Diamond Index reported an increase of 4% in the fourth quarter of 2013, with prices showing a consistent and steady increase.

According to Global Diamond Industry Lifting the Veil of Mystery issued by Bain & Company in 2011, demand for Melee diamonds continues to rise. It is management’s belief that brown stones will continue to be extracted as part of the mining process, and continue to have a minimal value for the mining operator, thus remaining in plentiful supply.  The Company is attempting to enter this expanding market at an opportune time, and intends to capitalize on this market by supplying jewelry manufacturers with Company Melee Diamonds available in a wide variety of sizes and colors and present them at a significant discount to market.

We believe we are the only company using HPHT Machinery that is specially designed to process Melee-classified stones, thus streamlining cost and efficiencies for both the Company and its worldwide customer base. Through the relationships that have been developed by our founder, Mr. Musheyev, we intend to acquire product from the world’s most active diamond mines in Canada, Australia, Botswana, Brazil, Angola, the Democratic Republic of Congo, Russia and South Africa.  The rough diamonds will be either (i) rough stones (which need to be cut and polished), or (ii) already cut and polished, and delivered to the Company’s production facilities.

 

The Company also expects to design and manufacture jewelry products for sale in the global marketplace to large department stores and jewelry retail franchise organizations. In addition, the Company may consider devoting certain of its Machines to process diamonds supplied by others for a manufacturing service fee.  The Company has the ability to add additional shifts to its manufacturing operation, if needed.

Keys to Success

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 company’s 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 Company’s 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.

Obtain insurance

The Company will need to put into place, full coverage insurance to include E&O, D&O, and Executive umbrella insurance.  The Company is receiving bids for this coverage and analyzing the cost on an annual basis. The company is currently shopping for insurance to cover its perceived risks.

 

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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 company’s existing database of customers and thereafter in auctions and international jewelry and gem fairs.

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

Business Model

Our business model is to sell a substantial portion of our production for our own account at auction and at international jewelry and gem fairs.   The Company also expects to design and manufacture jewelry products for sale in the global marketplace to large department stores and jewelry retail franchise organizations. In addition, the Company may consider devoting certain of its Machines to process diamonds supplied by others for a manufacturing service fee.  The Company has the ability to add additional shifts to its manufacturing operation, if needed.

Competition

The Company intends to acquire brown VS + diamonds from brokers or directly from the leading diamond mines of the world located in Canada, Australia, Botswana, Brazil, Angola, Russia, Democratic Republic of Congo and South Africa.  Although these mines spread over five continents, are active producers of gem-quality diamonds, there is no assurance that these mines will continue to produce rough stones in sufficient quantity and at a price structure that permits uninterrupted processing by the Company.  Competition by other companies for this production exists, that can affect the price to acquire the rough stones and the volume of rough stones required for the Company’s processing.

The Company has recently embarked on a program of acquiring rough white stones for resale as rough or polished goods as a business line. This is highly competitive area and there is no assurance that the stones can be acquired by the Company at the price levels anticipated by the company and will sell at the prices projected by the Company or that the Company will continue with this line of business going forward.

Once the HPHT diamonds stones are processed by the Company and polished, the stones will be available for sale to manufactures and wholesale and retail buyers. The finished stones size category is known as Melee, a term used by diamond dealers to classify small diamonds.  The use of diamond melee in jewelry is the largest portion of the world’s diamond consumption.   The Company’s present intention is to sell its production through established auctions that are scheduled at locations in New York, Hong Kong, Israel, Belgium and other sites throughout the year.  Auction selling is highly competitive and there is no assurance that the prices desired by the Company will be realized. The Company also plans to attend International Jewelry and Gem fairs held frequently on a Global basis.

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These Fairs are heavily attended and highly competitive.  There is no assurance that the Company’s efforts at these Fairs will be successful. Sales will also be made directly to jewelry manufactures, and large department stores and franchised retail jewelry stores that require melee diamonds to complete their retail product.  Such sales are highly competitive with other diamond dealers and there is no assurance that the Company will have the success in this sales channel it anticipates.

An additional sales initiative is to provide a portion of the Company’s processing capability to process for a service fee or other arrangement rough stones of its customer.  Although this initiative would produce a lower profit margin it would ensure that the total manufacturing capability of the Company was fully engaged, to the point of potentially increasing the number of shifts per Machine.  The Company anticipates the least competitive pressure on this sale, but a more limited sales opportunity.

Global Sales Trends

The diamond market’s skyrocketing growth in the key developing markets of China and India moderated in 2013 amid a wider economic slowdown. Although Europe’s sales suffered because of continuing economic uncertainty, diamond sales in the US and Japan, the largest and third-largest diamond markets in the world, respectively, rose on the strength of accelerating GDP growth and seem poised for continued growth in 2013 and in the opinion of the Company will continue continued growth through the next decade. Market players in both countries report strong demand for diamonds in the first half of the year.

The 2013 outlook for market participants along the value chain is fairly positive, and many diamantaires seemed to emerge from the Las Vegas jewelry show in the beginning of June 2013 with renewed optimism. The company is of the opinion that a fairly positive outlook for market participants will continue through the next decade.

Demand Forecasts for Key Regions

This information is sourced from The Global Diamond Report 2014 issued by Bain & Company, Inc. China, India, and the US will account for the majority of growth in diamond jewelry consumption in the next ten years.

US

In the short term, diamond consumption in the US is expected to continue its current rebound trend of the past few years, before gradually converging with its historical long-term growth rate in line with GDP and disposable income growth. We anticipate no major shifts in cultural norms regarding engagement and wedding jewelry. Personal disposable income growth through 2024 is forecasted at about 2.6 %; the population is expected to grow moderately at about 0.7 % per year through 2024.

China

In China, the diamond jewelry market is expected to sustain strong growth, owing to continued expansion of the middle class, a rising urban population, and increases in personal wealth. Diamond demand is projected to more than double by 2024, thanks to continued robust GDP growth, which further supports middle-class growth. The number of middle-class Chinese households is expected to increase by 2.5 times in the next ten years. Middle-class households claim a relatively small percentage of total households (about 26 %), but the latest analysis suggests that that percentage could reach up to 56 % in 2024.

In China, GDP and personal disposable income (PDI) growth will determine middle-class growth. PDI is projected to see a CAGR of 6-7 % through 2024. Meanwhile, urban population growth is expected to grow at a compound annual rate of about 2 % over the same period.

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India

India’s story is similar to China’s. Following the stabilization of the currency situation in India, the diamond jewelry market there is expected to revert to high-single-digit growth. Economic growth is expected to pick up again, and India’s middle class is expected to grow 2.8 times by 2024, driving demand for diamond jewelry. Middle-class households constitute only about 15 % of total households, as they have over the last three years. But our analysis suggests that the number could rise to 35 % in 2024.

In India, middle-class growth will follow workforce growth and increased labor-force participation as the nation switches from a natural to an organized economy and more of the population joins the labor force. The Indian luxury-goods market has not yet achieved its full potential, presenting significant upside for growth in diamond demand powered by GDP growth and improvement in consumer welfare. The penetration rate of diamond jewelry is expected to increase as well—relative to gold products—owing to increased interest in the giving of diamond rings as an engagement ritual.

Marketing Strategy

Throughout the 2015 calendar year and through scaling up to 4 machines, the Company anticipates minimum marketing and advertising efforts will be needed.  As production increases our marketing and advertising efforts will begin to scale as well.    Initially, the Company believes that the client base developed by the Company’s founders will be sufficient to satisfy the Company’s selling requirements.  We do anticipate that Company representatives will attend international jewelry fairs to market and advertise the Company and its products as we scale to having a full complement of 10 machines in production.  Management believes that the budgeted amounts as set forth in the Use of Proceeds will be sufficient for these purposes.

Employees

As of November 30, 2015, we have 5 full time employees, including management.  We consider our relations with our employees to be good.

ITEM 1A - RISK FACTORS

                Not applicable

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

ITEM 2 – PROPERTIES

We have leased space for our administrative functions at 37 West 47^th Street, Suite 1301, New York, New York.  We are sharing space with Ed & Serge Gold & Diamond Corp, on a joint and several basis and guaranteed by the Company’s principal, Eduard Musheyev.  The initial term is for five (5) years ending February 28, 2019.  Rent commenced May 2014 at the rate of $5,322 per month through February 28, 2015, increasing incrementally thereafter, and it is currently $5,481.66 per month.  In addition to the base rent, the Company must pay an initial base utility fee of $517.42 per month.    We have also increased our production space to 3,000 square feet located at 250 Port Street, Newark, New Jersey as an initial location to house our first four machines.  The term is presently month to month and the monthly rent obligation is $3,000.  The Landlord has represented that additional space may be available for the full complement of up to twenty-two (22) machines as needed.    

ITEM 3 - LEGAL PROCEEDINGS

From time to time, we 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 from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

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ITEM 4 – MINE SAFETY DISCLOSURES

                Not applicable.

PART II

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is not currently traded on any exchange or quoted on the OTC Markets.    We cannot assure that any market for the shares will develop or be sustained.

As of November 30, 2015, the Company has one hundred thirty four (134) shareholders who hold 100% of its issued and outstanding common stock.

Dividend Policy

We have not paid any dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future.  We intend to retain any earnings to finance the growth of our business.  We cannot assure you that we will ever pay cash dividends. Whether we pay cash dividends in the future will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, capital requirements and any other factors that the Board of Directors decides are relevant.  See Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Recent Sales of Unregistered Securities

None

ITEM 6 – SELECTED FINANCIAL DATA

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

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's 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 its 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 us 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 its assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of the Company.  No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions.  Factors that could cause differences include, but are not limited to, expected market demand for the Company’s services, fluctuations in pricing for materials, and competition.

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Business Overview

 

The Company was organized under the laws of the state of Delaware on January 14, 2013. We formed our Company for the purpose of producing higher quality diamonds from any virtually brown VS+ diamonds and reselling them in the open market.  The Company presently owns 1 high pressure, high temperature (HPHT) Machine (“Machine”), and utilizes 3 others which it is in the process of acquiring.

The Company’s founding principals have been involved in the wholesale diamond industry for more than 30 years in New York City and have extensive experience in the field.  The Machines are being imported from Russia where they were developed prior to the fall of the Soviet Union for Super Hard and Novel Carbon Materials.  The Company has revamped and modified the Machine, replacing old parts and upgrading the several components that are proprietary to our Company.  The Machine utilizes the HPHT process that takes any raw, brown diamond, and transforms them into a brilliant, multicolored range of diamonds (white, yellow, pink, green, red, blue and orange) in a process that takes under two minutes to complete its cycle per diamond.

While other processes exist that convert Type IIa brown diamonds into natural “HPHT” diamonds, the Company’s Machines are capable of doing so utilizing any brown VS+ diamonds in 2 minutes, many times faster than any known competitor. These competitors are further limited by using only Type IIa brown diamonds in their process.  Those diamonds represent a limited supply, generally less than 3% of brown stones are Type IIa. The Company believes that the ability to utilize any brown stone and an edge in production time, will allow it to produce more than its competitors, at a substantially reduced cost.

The Company is a start-up enterprise that has a multi-tiered business plan, projected to permit the Company to commence limited operations with the initial Machine already owned and to expand the operations by acquiring the six (6) additional Machines that are available to purchase as finances allow.  

The Company has a business plan for the next 36 months, and generally thereafter, that calls for the introduction of additional machines into operations as funding allows, with the increase in operations and related activities.  The Company has outlined operational milestones that it projects will be necessary in order to facilitate that plan.  These milestones are, of course, subject to funding and other operational matters as they may arise.   The Company initially entered into an Equipment Financing Agreement for the acquisition of 30 machines, which has since been reduced to 10 machines which DTE believe remain available from the seller. The Company is currently evaluating and working to finalize terms on the acquisition of 3 of those Machines, which would bring to 4 the total number of Machines that the Company owns, although DTE is currently operating these additional 3 Machines.

Additionally, the Company in 2015 is developing a second business line and potential revenue source through the purchase and resale of white (which includes other colored) stones.

The Company’s business plan calls for the following operational milestones:

Repair and upgrade the first machine.  The first machine began limited operations in the first quarter of 2015. It is currently located at the Company’s production facility at 250 Port Street, Newark, New Jersey 07114.  In July 2015, the Company took this Machine out of operation for repair and upgrades. It has commissioned, but not yet received, the engineering report on the scope and cost of that repair and upgrade, and expects that report will be produced in November, 2015, upon which the Company will determine the optimal plan for Machine #1.

Install 3 additional machines during the second half of calendar year 2015.  The Company received Machines 2-4 in July 2015 for testing and they are on the floor of the DTE Newark facility. DTE’s preliminary engineering assessment of these 3 Machines is that they will meet or exceed the Machine performance specifications and metrics achieved in the April, 2015 Bruderer Report on the performance of the Company’s initial HPHT Machine, Machines 2-4 meet the Company’s inspection criteria and can be used in full production mode at this time. The cost of acquiring these 3 Machines is currently being negotiated. These machines are presently available for production.

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Acquiring and installing the remaining Machines and getting them into production in the United States.  Assuming the Company is successful in acquiring the 3 Machines, it anticipates that it will then need $10 million to acquire, ship, modify, install (including labor and related working capital) to get the remaining 6 Machines into production. DTE anticipates that these machines would become fully operational in calendar years 2016 and 2017. Ultimately, the Company’s business plan envisions ramping up production on 4 Machines to generate sufficient cash flow and fund the incremental acquisition and installation of the additional 6 Machines. The company has also begun discussions with U.S. equipment manufactures to determine their ability to build HPHT machines in the U.S. These discussions are presently on going.  

As Machines are being acquired and put into production, the Company will also be focusing on the other aspects of its business plan such as:

Developing and nurturing supply lines and financing for raw materials.  Initially, the Company may enter into arrangements for the consignment of diamonds and/or into joint venture agreements to process raw materials with others.  As the Company becomes better capitalized, and sales revenue and cash flow increases, the Company intends to process an increasingly higher percentage of its own diamonds, thus increasing its gross profit per stone. When the Company purchases its own raw materials (primarily rough brown diamonds), they will be sourced for quality, competitive pricing and terms.  To maximize production and operational efficiencies, we estimate that the full monthly cost for raw materials for one machine in full production will average up to approximately $1.2 million depending on market conditions at that time. Depending on market conditions and the sales channels DTE utilizes, substantial gross profits are predicted, however the length of time required to sell those newly processed HPHT diamonds and to generate positive cash flow will likely require financing the interim negative cash flow.   Working capital funding (the company has not identified a source for this funding) as well as the ability to access credit (such as Purchase Order financing) are being pursued to cover these anticipated cash flow needs.

Developing after markets for the HPHT stones once the process is complete.  Our principal, Eduard Musheyev, is currently involved in the diamond industry and has established connections that the Company intends to utilize to sell the HPHT stones once processing is complete.  We will add sales channels including auctions, international jewelry fairs, global wholesale and retail jewelry stores, outlets and internet sales as we add production capacity.  We do anticipate this growth will exceed DTE’s current after-market relationships in 2015.  As operations ramp up, we will revise our budget for this growth, to increase sales and marketing, based upon the Company’s production and cash flow.

As part of the Company’s long-range goals, it also intends to pursue the following; however, these are long range goals that the Company intends to pursue if and when operations permit:

1)

Create a line of jewelry utilizing its own HPHT diamonds within its first 3 years of operations.  It intends to utilize its Melee diamonds to design and manufacture its own line of jewelry products for large domestic retail organizations such as Costco, BJ’s, JC Penny and Macy’s among others as well as similar entities in the global marketplace.  In establishing this line of business, DTE is prepared to offer attractive, flexible and creative marketing concepts to induce these customers to purchase and sell these products.

2)

Attend International Jewelry Fairs that allow the Company to interact primarily with Jewelry manufacturers, designers, large franchise jewelry stores and large department stores.

3)

Sell its Melee Diamonds at auction to introduce itself primarily to the Jewelry dealers.  These auctions hosted by the Rapaport group attract this segment of the market at its scheduled auction sites in New York, Las Vegas, Hong Kong, Israel, Belgium, Brazil and Dubai.  

4)

Develop and maintain an internet magazine for internet sales of its jewelry products.  Currently the Company has a basic web presence, which it does not anticipate needing to expand at this time.  However, should the Company desire to begin sales over the internet, it anticipates that it would need to develop a more active web presence and would devote the necessary time and expenses needed to do so.  Those costs are not predicable at this time, due to the unknown nature of when or if such a web presence would be needed.

14

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Developing markets for the purchase and sale of white (and other colored) stones.  The Company is developing active markets for the purchase and resale of rough or polish white (and other colored) stones.

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

The Company's primary efforts are devoted to establishing operations, developing relationships to source diamond purchases and developing customer relationships. The Company has experienced net losses and negative cash flows from operations since inception. 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 and services through equity or debt financing.

The Company’s senior executives believe they have developed strong, industry specific relationships over their prior years of experience and intend to utilize those relationships to begin the Company product sales.

Our principal executive offices are currently located at 37 West 47th Street, Suite 1301, NY, NY, 10036 and our telephone number is (212) 382-2104.

 

Current Operating Trends

Our business plan was designed to create a viable, sustainable business. Our operations to date have been devoted primarily to acquiring the Machines, upgrading and testing the Machines, arranging for transportation to the United States and locating a secure US facility in which to operate.  The first of these Machines has arrived in the United States and is located at 250 Port Street, Newark, New Jersey 07114. On July 31, 2013, we secured an initial lease originally for 100 and now increased to 3000 square feet of commercial space located at 250 Port Street, Newark, New Jersey 07114 in order to install and house the first machine.  The lease is on a month to month basis and the current monthly rent obligation is $3,000, inclusive of all utilities. On February 19, 2014, we secured an initial office lease for our administrative offices for five years, which has current monthly payments of $5,481.66, escalating to approximately $5,990 in the fifth year.

In order to generate revenues, we must successfully address the following areas:

1.

Additional Machines must be delivered and installed in their US location which has been identified and for which lease negotiations have commenced;

2.

The Company must obtain the necessary personnel to operate the Machines;

3.

The Company must locate and secure suitable raw diamonds for processing;

4.

The Machines must operate in such a manner as to effectively and quickly transform brown diamonds into quality diamonds that have the projected market value;

5.

The Company must implement a marketing and advertising plan to promote and sell the finished diamonds. The Company anticipates minimum marketing and advertising efforts will be needed.  As the Company adds manufacturing and production increases, our marketing and advertising efforts will begin to scale as well; and

6.

It is critical as the Company increases the number of machines on-line, that we develop and maintain strong client relationships by marketing and advertising our diamonds and then delivering them on a consistent basis.

 

15

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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.

 

Year Ended July 31, 2015 Compared to Year Ended July 31, 2014

 

 Revenues and Cost of Goods Sold. We had no revenues or cost of goods sold during the years ended July 31, 2015 and 2014

General and Administrative Expenses. General and administrative expenses for the year ended July 31, 2015 were $980,347, an increase of $298,283, or 44%, from $682,064 incurred during the year ended July 31, 2014. This increase is primarily due to increases in payroll-related expenses, accounting and auditing fees, legal professional fees, travel, meals and entertainment expenses and other general and administrative expenses.

Loss on disposal of equipment. During the year ended July 31, 2014, the Company recorded a loss on deposal of equipment of $759,724 previously acquired for 760,000 shares of the Company’s common stock and recorded at fair value of $760,000.  In July of 2014, the Company removed Mr. Vladimirovich (the seller) from the Company’s Board of Directors and has relinquished all rights to the second machine located in Russia, in exchange for retaining the 760,000 shares, which are in the Company’s possession. There is no written agreement to this effect.  As a result, the Company recorded a loss on disposal of equipment of $759,924 during the year ended July 31, 2014 comprised of the recorded fair value of the equipment less common stock retained at par value.

 Depreciation. Depreciation for the year ended July 31, 2015 was $188,359, an increase of $141,425 from $46,934 incurred for the year ended July 31, 2014. During the late part of last year, we acquired equipment and furniture and placed machinery into service.

Interest and Other Financing Costs. Interest expense for the year ended July 31, 2015 totaled $28,493, as compared to $5,624 during the year ended July 31, 2014.  Interest expense is related to our notes payable issued in the current and past years.

 

Net Loss. As a result of the foregoing, the net loss for the year ended July 31, 2015 was $1,197,199, compared to a net loss of $1,494,546 for the year ended July 31, 2014, a decrease of $297,347, or 20%.

Liquidity and Capital Resources 

 

As of July 31, 2015, we had a working capital deficit of $856,182, comprised primarily of cash of $102,181, inventory of $106,560 and prepaid expenses of $2,319, which was offset by $740,109 of accounts payable, $58,187 of notes payable, related party advances of $18,946 and $250,000 joint venture obligations.

For the year ended July 31, 2015, proceeds from financing activities were from issuance of promissory notes of $58,187, from related party advances of $18,946, and from the issuance of promissory notes to related parties for $309,262. In the comparable 2014 period, $5,000 was raised through the sale of shares of common stock, $51,566 from related party advances, $136,376 from issuance of promissory notes and $134,750 from issuance of related party promissory notes.  At July 31, 2015, we had cash of $102,181 compared to $38,777 at July 31, 2014. Our cash is held in bank deposit accounts.

 

Cash used in investing activities for the year ended July 31, 2015 was $19,111 reflecting purchase and installation of equipment as compared to $89,459 for purchase and installation of equipment and $23,262 paid on long term lease for the year ended July 31, 2014.

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Transactions with Related Parties

The Company’s officers and shareholders have contributed capital to the Company for working capital purposes.  As of July 31, 2015 and July 31, 2014, advances from related party were $18,946 and $51,566, respectively.  

From October 25, 2013 through July 28, 2015, the Company issued an aggregate of $587,947 unsecured notes payable to Eduard Musheyev, the Company’s Chief Executive Officer for cash advances and purchases on the Company’s 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 Company’s 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 year expenses $21,698 and $4,157 as related party interest for the years ended July 31, 2015 and 2014, respectively.

Lease Commitments

On February 19, 2014, we entered into a five-year lease for office space in New York City, with monthly payments escalating from approximately $5,322 in the first year to approximately $5,990 in the fifth year. Current rent payable is $5,474 per month. The Company has posted a security deposit of approximately $23,300 for the benefit of the landlord.

 

On June 26, 2014, the Company entered into a one year lease for office space in New York City, with monthly payments $1,000. As of September 30, 2015, the lease had expired and was not renewed.

On March 1, 2015, the Company entered into an agreement for industrial space at a monthly rate of $3,000, cancelable upon 30 day notice.

Future minimum lease payments under the operating lease are as follows: 

Year Ending July 31,
2016	$		66,602
2017			68,600
2018			70,658
2019			41,930
		$	247,790

Critical Accounting Policies and Estimates

 

Please see Note 2 – SIGNIFICANT ACCOUNTING POLICIES – below.

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.

 

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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

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, “Interest -Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 amends the existing guidance to require that debt issuance costs be presented in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. ASU 2015-03 is effective on a retrospective basis for annual and interim reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its condensed consolidated financial statements.

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

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.

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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DIAMOND TECHNOLOGY ENTERPRISES, INC.

INDEX TO FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm	F-2
Balance sheets as of July 31, 2015 and 2014	F-3
Statements of operations for the years ended July 31, 2015 and 2014	F-4
Statements of changes in stockholders’ equity for the two years ended July 31, 2015	F-5
Statements of cash flows for the years ended July 31, 2015 and 2014	F-6
Notes to financial statements	F-7 – F-15

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Diamond Technology Enterprises, Inc.

We have audited the accompanying balance sheets of Diamond Technology Enterprises, Inc. (the “Company”), as of July 31, 2015 and 2014 and the related statements of operations, equity and cash flows for the years ended July 31, 2015 and 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to the above present fairly, in all material respects, the financial position of Diamond Technology Enterprises, Inc. as of July 31, 2015 and 2014, and the results of operations, equity and cash flows for the years ended July 31, 2015 and 2014 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the accompanying financial statements, the Company has not commenced its planned principal operations, is incapable of generating sufficient cash flow to sustain its operations without securing additional financing, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/RBSM LLP

New York, New York

December 21, 2015

F-2

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DIAMOND TECHNOLOGY ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
	Year Ended July 31,
	2015	2014
OPERATING EXPENSES:
Selling, general and administrative expenses	$    980,347	$            682,064
Loss on disposal of equipment	-	759,924
Depreciation	188,359	46,934
Total operating expenses	1,168,706	1,488,922
Loss from Operations	(1,168,706)	(1,488,922)
Other expenses:
Interest expense	(28,493)	(5,624)
Loss before income taxes	(1,197,199)	(1,494,546)
Income taxes (benefit)	-	-
Net loss	$  (1,197,199)	$      (1,494,546)
Loss per common share, basic and diluted
	$            (0.02)	$                (0.03)
Weighted average number of common shares outstanding, basic and diluted	68,782,123	48,992,888
The accompanying notes are an integral part of these financial statements     F-4

 

F-5

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DIAMOND TECHNOLOGY ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
	Year Ended July 31,
	2015	2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$             (1,197,199)	$           (1,494,546)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	188,359	46,934
Preferred and common stock issued to founders	-	360
Common stock to be issued for services	-	66,100
Loss on disposal of equipment	-	759,924
Operating expenses incurred by related party on behalf of Company	4,354	45,000
Changes in operating assets and liabilities:
Inventory	(106,560)	-
Prepaid expenses and supplies	2,880	(5,199)
Accounts payable and accrued expenses	553,416	183,093
Stock based payable	-	200,000
Joint venture obligation	250,000	-
Deferred rent	870	11,554
Net cash used in operating activities	(303,880)	(186,780)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of long term deposit	-	(23,262)
Purchase of property and equipment	(19,111)	(89,459)
Net cash used in investing activities	(19,111)	(112,721)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock	-	5,000
Proceeds from related party advances	18,946	51,566
Proceeds from notes payable	58,187	136,376
Proceeds from related party notes payable	309,262	134,750
Net cash provided by financing activities	386,395	327,692
Net increase in cash	63,404	28,191
Cash, beginning of period	38,777	10,586
Cash, end of period	$                    102,181	$                   38,777
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	$                           -
Note payable, related party issued to acquire prepaid supplies and expenses	$                             -	$                136,015
The accompanying notes are an integral part of these financial statements

 

F-6

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NOTE 1 –BUSINESS

Diamond Technology Enterprises, Inc. (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) heat pressure processes.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation:

 

As the Company is devoting substantially all of its efforts to establishing a new business, and planned principal operations have not yet commenced. There has been no revenue generated from sales, license fees or royalties.

 

The Company's 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 Company's ability to continue as a going concern. The accompanying 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.

Research and Development costs

 

The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”).  Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred.  Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred.  The Company did not incur research and development expenses for the years ended July 31, 2015 and 2014.

Cash and Cash Equivalents

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

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.  The average cost method is utilized in valuing the inventory, and is stated at the lower of cost or market.  

 

As of July 31, 2015 and 2014, the Company’s inventory, comprised of lower grade raw diamonds, was $106,560 and $-0-, respectively.

F-7

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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 July 31, 2015 and 2014, the Company has not recorded any unrecognized tax benefits.

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.

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.

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 management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.

Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments will be provided for in the same period the related sales are recorded.

F-8

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The Company will account for Multiple-Element Arrangements under ASC 605-10 which incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arrangements (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.

 

Concentrations of Credit Risk

 

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments with credit quality institutions. At times, such amounts may be in excess of the FDIC insurance limit. The Company periodically reviews its trade receivables in determining its allowance for doubtful accounts. The Company does not have accounts receivable and allowance for doubtful accounts at July 31, 2015 and 2014.

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 July 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.  

Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, “Interest -Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 amends the existing guidance to require that debt issuance costs be presented in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. ASU 2015-03 is effective on a retrospective basis for annual and interim reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its financial statements.

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

 

Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.  Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements, except as disclosed below.

NOTE 3 – GOING CONCERN MATTERS

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements during the year ended July 31, 2015, the Company incurred net losses attributable to common stockholders of $1,197,199 and used $303,880 in cash for operating activities for the year ended July 31, 2015. In addition, the Company has yet commercialized its planned business and has not generated any revenues since inception. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

 

F-9

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The Company's existence is dependent upon management's ability to develop profitable operations. Additional capital will be needed to continue developing its products and services and there can be no assurance that the Company's efforts will be successful. There is no assurance that can be given that management's actions will result in profitable operations or the resolution of its liquidity problems. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

NOTE 4- PROPERTY AND EQUIPMENT

Property, plant and equipment at July 31, 2015 and 2014 are as follows: 

		July 31, 2015				July 31, 2014
Machinery and equipment		$	857,021			$	854,496
Office furniture			14,070				14,070
Office equipment			10,668				9,511
Computers			4,094				2,023
Leasehold improvements			60,067				34,709
			946,020				914,809
Less: accumulated depreciation			(235,293	)			(46,934	)
		$	710,627			$	867,875

During the years ended July 2015 and 2014, depreciation expense charged to operations was $188,359 and $46,934, respectively.

NOTE 5 –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 25% 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 July 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 6– ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

As of July 31, 2015 and 2014, accounts payable and accrued liabilities for the period ending are comprised primarily of accrued professional fees and accrued compensation.

 NOTE 7– NOTES PAYABLE, RELATED PARTY

From October 25, 2013 through July 28, 2015, the Company issued an aggregate of $587,947 unsecured notes payable to Eduard Musheyev, the Company’s Chief Executive Officer for cash advances and purchases on the Company’s behalf.  The notes bear 4% per annum interest, payable monthly in arrears and are due five years from the date of issuance.

F-10

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From August 2014 through July 2015, the Company issued three unsecured notes payable to Alexander Musheyev, a family member of the Company’s 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 year expenses $21,698 and $4,157 as related party interest for the years ended July 31, 2015 and 2014, respectively.

 

NOTE 8– 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 June 9, 2015, the Company issued an aggregate of $58,187 unsecured promissory notes payable.  The notes bear 4% per annum interest, payable monthly in arrears and are due June 1, 2016.

The Company recorded $6,378 and $1,467 as interest expense for the years ended July 31, 2015 and 2014, respectively.

 

NOTE 9– RELATED PARTY TRANSACTIONS

The Company’s officers and shareholders have contributed capital to the Company for working capital purposes.  As of July 31, 2015 and 2014, advances from related party were $18,946 and $51,566, respectively.  These are interest free advances.

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 July 31, 2015, an aggregate of $601,067 of accrued consulting fees due to officers for services.

NOTE 10- STOCKHOLDERS EQUITY

There is not a viable market for the Company’s common stock to determine its fair value, therefore management is required to estimate the fair value to be utilized in the determining stock based compensation costs.  In estimating the fair value, management considers recent sales of its common stock to independent qualified investors and other factors. Considerable management judgment is necessary to estimate the fair value.  Accordingly, actual results could vary significantly from management’s estimates.

Preferred stock

 

The Company has authorized 10,000,000 shares of preferred stock, with a par value of $0.0001 per share. As of July 31, 2015 and 2014, the Company had 1,000,000 shares of Series A preferred stock issued and outstanding.

In January 2013, the Board of Directors authorized the issuance of up to 1,000,000 shares of Series A Convertible Preferred Stock (the “Series A preferred stock”).

The Series A preferred stock is entitled to preference over holders of junior stock upon liquidation in the amount of the stated value plus any accrued and unpaid dividends and other fees or liquidated damages owing thereon. The holders of Series A preferred stock have 100 votes for each share of Series A preferred stock.

 

F-11

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The Series A preferred stock is convertible, at the option of the holder at any time, whereby each share of Series A preferred stock is convertible into a number of paid and non-assessable shares of the Company common stock at a one to one conversion.  

In October 2013, the Company issued an aggregate of 1,000,000 shares of its Series A Convertible preferred stock as founder shares.

Common stock

 

The Company has authorized 240,000,000 shares of common stock, with a par value of $0.0001 per share. As of July 31, 2015 and 2014, the Company had 69,575,000 and 67,575,000 and 68,815,000 and 66,815,000 shares of common stock issued and outstanding, respectively.

During the year ended July 31, 2014, the Company received $5,100 as common stock subscription for 51,000 shares of common stock.

In November 2013, the Company issued an aggregate of 64,100,000 shares of its common stock as founder shares.

In November 2013, the Company issued 760,000 shares of its common stock to acquire equipment from a related party.  In July, 2014, the Company rescinded this issuance.

In November 2013, the Company issued an aggregate of 2,661,000 shares of its common stock for services rendered valued at $68,100.

In November 2013, the Company issued an aggregate of 54,000 shares of its common stock for subscriptions received.

Stock based payable

In connection with a service agreement dated August 6, 2013, as amended, the Company was obligated to issue

a)

Upon execution, the Company shall issue to Mortman or his designee that number of shares ("Equity Compensation") of the Company's Common Shares representing 2% or Two Million shares ownership interest (whichever is greater) in the Company on a fully diluted basis.

b)

One year following the date hereof, as additional consideration for Mortman's performance of the consulting services and executive duties hereunder, the Company shall issue to Mortman or his designee that number of shares of the Company's Common Stock representing an additional 2% or Two Million shares of ownership interest (whichever is greater) in the Company on a fully diluted basis.

On August 6, 2014, the Company issued 2,000,000 shares of its common stock in accordance with the term of the service agreement.  The fair value of the common stock was previously accrued during the year ended July 31, 2014.

NOTE 11- COMMITMENTS

Operating leases 

 

On February 19, 2014, the Company entered into a five-year lease for office space in New York City, with monthly payments escalating from approximately $5,322 in the first year to approximately $5,990 in the fifth year. The current rent is $5,481.66 per month. The Company has posted a security deposit of approximately $23,300 for the benefit of the landlord.

On June 26, 2014, the Company entered into a one-year lease for office space in New York City, with monthly payments $1,000. As of September 30, 2015 the lease expired and was not renewed.

On March 1, 2015, the Company entered into an agreement for industrial space at a monthly rate of $3,000, cancelable upon 30 days’ notice.

F-12

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Future minimum lease payments under the operating lease are as follows: 

Year Ending July 31,
2016	$		66,602
2017			68,600
2018			70,658
2019			41,930
		$	247,790

 

Rent expense charged to operations, which differs from rent paid due to the rent credits and to increasing amounts of base rent, is calculated by allocating total rental payments on a straight-line basis over the term of the lease. During the year ended July 31, 2015 and 2014, rent expense was $108,753 and $47,548, respectively and as of July 31, 2015 and 2014 deferred rent payable was $12,424 and $11,554, respectively.

Compensation agreements

Effective July 15, 2013 the Company entered into a consulting/servicing agreement with David A. Mortman that obligated the Company to issue to Mr. Mortman 2,000,000 shares of common stock at the one year anniversary of the agreement for services rendered. On August 4, 2014, the Company authorized the issuance of these shares to Mr. Mortman. Mr. Mortman has provided and continues to provide strategic business advice to the Company specifically relating to pre-operational issues, e.g. leasehold facilities for the executive offices and manufacturing facilities required by the company, investigating various leasehold locations for those purposes, meetings with brokers and landlord representatives, reviewing personnel requirements to implement the business plan, discussing the best options available for the purchase of raw materials. Mr. Mortman has also provided services in the business review of the Company’s Form S-1 and has prepared an ongoing business plan for the management and operation of the Company. Mr. Mortman will also assist in the negotiations on behalf of the Company with financing sources.

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.  This is disclosed under related party transactions above.

Deferred Salary.  There is a written deferred salary agreement in place at this time with Jordan Friedberg.  The deferred salary will be paid at such time as the Company is financially able. To date no deferred salary has been earned.

 

Consulting Agreements

The Company has consulting agreements with outside contractors to provide marketing and financial advisory services. The Agreements are generally for a term of 12 months from inception and renewable automatically from year to year unless either the Company or Consultant terminates such engagement by written notice.

Share Commitment

The Company was obligated to issue an aggregate of 34,500,000 shares of its common stock to Vadim Nikitin, a former member of the Company’s board of directors.  17,250,000 shares were to be issued upon the Company obtaining a working capital facility of $1,500,000 and financing to acquire 10 additional processing machines.  An additional 17,250,000 was to be issued upon the Company acquiring the balance of 30 processing machines.  When the Company removed him from the Board and other positions with the Company, it believes this obligation to be terminated.  

F-13

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Litigation

From time to time, 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 from time to time that may harm Company’s business. The company is currently not party to any such legal proceedings that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results.

NOTE 12 – INCOME TAXES

The Company utilizes ASC 740 “Income Taxes”, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

For the year ended July 31, 2015, the Company had available for U.S federal income tax purposes net operating loss carryovers of approximately $1,466,000, which expiring through the year of 2034. The net operating loss carryovers may be subject to limitations under Internal Revenue Code due to significant changes in the Company’s ownership. The Company has provided a full valuation allowance against the full amount of the net operating loss benefit, since, in the opinion of management, based upon the earnings history of the Company it is more likely than not that the benefits will not be realized.

The income tax provision (benefit) for the period ended July 31, 2015 and 2014 consist of the following:

		2015							2014
Federal:
Current		$	-			$		-
Deferred			384,000					160,000
Total			384,000					160,000
State and local:
Current			-					-
Deferred			58,000					24,300
Total			58,000					24,300
Change in valuation allowance			(442,000	)				(184,300		)
Income tax provision (benefit)		$	-			$		-

The provision for income taxes differ from the amount of income tax determined by applying the applicable U.S statutory rate to losses before income tax expense for the period ended July 31, 2015 and 2014 as follows:

    

			2015			2014
Statutory federal income tax rate			(35.0	%)		(35.0	%)
Statutory state and local income tax rate (8.25%), net of federal benefit			(5.4	%)		(5.4	%)
Change in valuation allowance			40.4	%		40.4	%
Effective tax rate			0.00	%		0.00	%

      

Deferred income taxes result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following:

   

			2015			2015
Deferred tax assets (liabilities):
Stock based compensation to be issued for services rendered		$	-			3,300
Net operating loss carry forward			1,240,600			16,900
Less: valuation allowance			(1,240,600	)		(20,200	)
Net deferred tax asset		$	-			-

   

The provisions of ASC 740 require companies to recognize in their financial statements the impact of a tax position if that position is more likely than not to be sustained upon audit, based upon the technical merits of the position. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.

Management does not believe that the Company has any material uncertain tax positions requiring recognition or measurement in accordance with the provisions of ASC 740. Accordingly, the adoption of these provisions of ASC 740 did not have a material effect on the Company’s consolidated financial statements. The Company’s policy is to record interest and penalties on uncertain tax positions, if any, as income tax expense.

All tax years for the Company remain subject to future examinations by the applicable taxing authorities.

NOTE 13 – 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 noteholder’s option, if the Company fails to pay any principal and/or accrued interest on May 2, 2016 (or after acceleration due to default), the noteholder may choose to have all or any part of the outstanding principal and accrued interest repaid in shares of the Company’s common stock at a conversion rate of 50% of the closing bid price on the day of conversion.

F-15

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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.

None.

ITEM 9A – CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of July 31, 2015. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on management’s evaluation, our chief executive officer and chief financial officer concluded that, as a result of the material weaknesses described below, as of July 31, 2015, our disclosure controls and procedures are not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  The material weaknesses, which relate to internal control over financial reporting, that were identified are: 

a)	We did not have sufficient personnel in our accounting and financial reporting functions. As a result, we were not able to achieve adequate separation of duties and were not able to provide for adequate reviewing of the financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis; and
b)	We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of U.S. GAAP commensurate with out complexity and our financial accounting and reporting requirements. This control deficiency is pervasive in nature. Further, there is a reasonable possibility that material misstatements of the financial statements including disclosures will not be prevented or detected on a timely basis as a result.

We are committed to improving our accounting and financial reporting functions. As part of this commitment, we will create a segregation of duties consistent with control objectives and will look to increase our personnel resources and technical accounting expertise within the accounting function as soon as our finances allow for additional personnel to appropriately address non-routine or complex accounting matters. In addition, we have engaged an outside consultant to provide additional knowledgeable personnel with technical accounting expertise to further support the current accounting personnel at the Company.

 

Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weaknesses: (A) lack of sufficient personnel in our accounting and financial reporting functions to achieve adequate segregation of duties; and (B) insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of US GAAP commensurate with our complexity and our financial accounting and reporting requirements. 

Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole.

Due to the fact that our accounting staff consists of our sole officer and an accounting clerk, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turnover issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

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We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

(b) Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting that occurred during the quarter ended July 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Management’s report on internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of July 31, 2015 for the reasons discussed above.

This annual report does not include an attestation report by RBSM LLP, our independent registered public accounting firm regarding internal control over financial reporting.  As a smaller reporting company, our management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.

ITEM 9B – OTHER INFORMATION

None.

PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Name	Age	Position
Eduard Musheyev	53	Chairman of the Board, President and Secretary
Jordan Friedberg	60	Chief Financial Officer, Treasurer and Director

Eduard Musheyev

Chairman of the Board, Director, President, and Secretary

Eduard Musheyev (53) was born in Tashkent Uzbekistan.  Upon immigrating to the United States in the early 1980’s, Mr. Musheyev was employed in the design and manufacturing of jewelry.  Thereafter, he founded his first successful company in the retail jewelry sector where he built up an extensive network of wholesale and retail customers.  

In 1990, Mr. Musheyev opened his retail jewelry operation in New York City, and within five years had expanded to eight retail stores within the New York City area.  He then established his wholesale jewelry operation, in New York City’s jewelry district.  Mr. Musheyev continues to excel in his retail and wholesale operations, operating Ed & Serge Gold & Diamond Corp.   He has over 30 years’ experience in the gold and jewelry industry, Mr. Musheyev has vast knowledge and hands on experience in the purchasing and selling of precious stones, with a specific emphasis on Diamonds.  Aside from the Registrant, over the last five years, Mr. Musheyev has been involved with the following companies in the capacities indicated:

ESM Taxi, LLC, CEO/Owner - 4/8/13 - Present

Ed & Serge Gold & Diamonds Corp, CEO/Owner - 3/20/08 - Present

ESM Pawn Brokers, Inc. (dormant company), CEO -5/3/12 - Present

ESM Refiners, Inc., CEO/Owner - 4/17/09-7/25/09

GoldExCom, Inc., CEO/Owner -9/12/10- 2011

EZ Sell Gold and Diamonds Corp., CEO/Owner -9/23/09-7/31/13

ESM Refiners Arizona, Inc., CEO/Owner -3/12/10-9/12/10

EZ Sell Gold.com, CEO/Owner -6/28/08-12/28/11

Caseycorp, CEO/Shareholder -     2009 - 2013

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Jordan S. Friedberg

Chief Financial Officer, Treasurer, Board of Directors Member

Jordan Friedberg (60) has over 28 years of experience in production and post-production management. He has strong financial analytical business skills in all areas of accounting, forensic accounting, budgeting, and finance. He has worked with innovative leaders in both film and video postproduction and production.  Jordan has been a CFO for many companies including, VISUALIZE / Pacific Ocean Post (12/89-3/94), Prime Time Post (3/82-4/85), Phoenix Books (6/04-4/10), Cinema Research Inc. (1/97-3/00), and Accounting Director for ABC (8/89-3/94), and CFO/Associate Producer for Filmroos (3/94-1/97).  He has been an Associate Producer of more than 480 hours of productions for television including, Discovery Channel, History Channel, ABC TV, Learning Channel, and A&E, and several independent films. Mr. Friedberg holds an MBA from Pepperdine University. In addition he has a consulting company Aremac Consultants, LLC, founded in May 2003, specializing in budgets, financial analysis, mergers and or restructure modeling primarily in the film and television production / postproduction industry Services include, Forensic Accounting, Expert Witness Testimony and Advice, as well as Financial Investigation, consulting services to insurance providers, the banking and accounting communities, leasing companies, production, postproduction, and sound companies, film laboratories, and digital facilities, in all segments of the film and television industry.

Mr. Friedberg has also served as Advisory Board Member and Board of Director for the BEL-AIR FILM FESTIVAL (08-Present) and an original Executive Producer / Board of Directors for RADD/Recording Artists, and Actors & Athletes Against Drunk Driving® (86-Present).

Family Relationships.  

 There are no family relationships among the directors and executive officers of the company.

Board Committees and Independence

 

We are not required to have any independent members of the Board of Directors. Neither of our directors would be deemed to be an “independent director” as defined in the Marketplace Rules of The NASDAQ Stock Market.  As we do not have any board committees, the board as a whole carries out the functions of audit, nominating and compensation committees, and such “independent director” determination has been made pursuant to the committee independence standards.

Involvement in Certain Legal Proceedings

Our Directors and Executive Officers have not been involved in any of the following events during the past ten years:

	1.	any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
	2.	any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
	3.	being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities;
	4.	being found by a court of competent jurisdiction in a civil action, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
	5.	being subject of, or a party to, any federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

	6.	being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Code of Business Conduct and Ethics/Business Conduct Policy

We intend to adopt a Code of Business Conduct and Ethics in the future when we have additional officers, directors and/or employees that will apply to all of our directors, officers, employees and consultants.

 

 

21

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ITEM 11 - EXECUTIVE COMPENSATION

Summary Compensation Table.   The following table sets forth certain information concerning the annual and long-term compensation of our Chief Executive Officer and our other executive officers during the last fiscal year and for the last two fiscal years.

			(a)	(b)	(c)
Name and Principal Position	Year	Salary	Bonus	Option Awards	All Other Compensation**	Total Compensation
Eduard Musheyev Chairman of the Board, President, Secretary	2014	-0-	-0-	-0-	-0-	-0-
	2015	$295,000*	-0-	-0-	-0-	$295,000
Jordan S. Friedberg Chief Financial Officer	2014	-0-	-0-	-0-	-0-	-0-
	2015	$40,000*	-0-	-0-	-0-	$40,000

 

*Salary is accruing until Company is financially able to pay

Deferred Salary.  There is a written deferred salary agreement in place at this time with Jordan Friedberg.  The deferred salary will be paid at such time as the Company is financially able. To date no differed salary has been earned.

 

Outstanding Equity Awards at Fiscal Year End.   There were no outstanding equity awards as of July 31, 2015.

Compensation of Non-Employee Directors.   We currently have no non-employee directors and no compensation was paid to non-employee directors in the year ended July 31, 2015.   We intend to identify qualified candidates to serve on the Board of Directors and to develop a compensation package to offer to members of the Board of Directors and its Committees.

Audit, Compensation and Nominating Committees.  As noted above, we intend to apply to have our common stock quoted on the OTC Markets, which does not require companies to maintain audit, compensation or nominating committees. The company’s shares may never be quoted on the OTC Markets or listed on an exchange.

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 Considering the fact that we are an early stage company, we do not maintain standing audit, compensation or nominating committees. The functions typically associated with these committees are performed by the entire Board of Directors which currently consists of two members who are not considered independent.

ITEM 12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding beneficial ownership of our common stock as of December 17, 2015:

	•	by each person who is known by us to beneficially own more than 5% of our common stock;
	•	by each of our named executive officers and directors; and
	•	by all of our executive officers and directors as a group.

 (*)     Beneficial ownership is determined in accordance with the rules of the SEC which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those securities. Unless otherwise indicated, voting and investment power are exercised solely by the person named above or shared with members of such person’s household.   This includes any shares such person has the right to acquire within 60 days.

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(**)   Percent of class is calculated on the basis of the number of shares outstanding on December 17, 2015 (68,815,000).

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

It is our practice and policy to comply with all applicable laws, rules and regulations regarding related person transactions, including the Sarbanes-Oxley Act of 2002.  A related person is an executive officer, director or more than 5% stockholder of Diamond Technology Enterprises, Inc., including any immediate family members, and any entity owned or controlled by such persons.  Our Board of Directors (excluding any interested director) is charged with reviewing and approving all related-person transactions, and a special committee of our Board of Directors is established to negotiate the terms of such transactions.  In considering related-person transactions, our Board of Directors takes into account all relevant available facts and circumstances.

Loans and Advances from Affiliates

Through July 31, 2014 Eduard Musheyev personally paid Company expenditures aggregating $30,749. The Company’s officers and shareholders have contributed capital to the Company for working capital purposes, paid expenses incurred on behalf the Company and contributed equipment since the Company’s inception in January 2013 in aggregate of $745,559, consisting of $688,833 in January 2013 for the Machine that was purchased and shipped to the United States; and $30,749 expenses such as legal, accounting and other ancillary expenses and contributed cash to the Company of $25,975.

The aggregate contributions are reflected as additional paid in capital in the Company’s financial statements.  

In January 2013, Eduard Musheyev, our founder and a member of our board of directors contributed one Machine valued at $688,833 to the Company and in May 2013, Nikitin Vadim Vladimirovich (“Nikitin”), who was then a member of our Board of Directors, sold one additional machine to the Company in exchange for 760,000 shares of common stock.  The machine was acquired by Nikitin from an unrelated third party on May 17, 2012, for approximately 42,000,000 Russian rubles (the equivalent of $1,400,000). The Company and Nikitin entered into an agreement on May 1, 2013 whereby the Company agreed to issue 760,000 shares of its common stock valued at $1.00 per share in exchange for the machine. The number of shares issued and the assigned value of $1.00 per share was negotiated by the two parties based in part on the Company’s start-up status at the time the agreement was entered into. Mr. Vladimirovich was not an affiliate at the time of this acquisition.  Mr. Vladimirovich and the Company had also agreed once the Company obtained working capital of One Million Five Hundred Thousand Dollars and financing to obtain the first ten (10) Machines, Mr. Vladirmirovich would be issued 17,250,000 additional shares of the Company’s common stock.  Further, upon the Company acquiring another forty (40) Machines he would be issued an additional 17,250,000 shares of the Company’s common stock. This agreement has not been reduced to writing. In July of 2014, the Company removed Mr. Vladimirovich from the Company’s Board of Directors and has relinquished all rights to the second machine located in Russian, in exchange for retaining the 760,000 shares, which are in the Company’s possession.  The Company also believes it has no further obligations to Mr. Vladimirovich.  There is no written agreement to this effect.

During the quarter ended January 31, 2014, the Company issued varies notes payable totaling $161,765 to Eduard Musheyev, the Company’s Chief Executive Officer, for advances and costs incurred on the behalf of the Company.  The notes are due on or before five years from the date thereof and accrue interest at the rate of 4% per annum, payable monthly. Late fee is applicable in the amount of 5% of the amount due.

During the quarter ended April 30, 2014, the Company issued varies notes payable totaling $60,000 to Eduard Musheyev, the Company’s Chief Executive Officer, for advances and costs incurred on the behalf of the Company.  The notes are due on or before five years from the date thereof and accrue interest at the rate of 4% per annum, payable monthly. Late fee is applicable in the amount of 5% of the amount due.

During the quarter ended July 31, 2014, the Company issued varies notes payable totaling $94,000 to Eduard Musheyev, the Company’s Chief Executive Officer, for advances and costs incurred on the behalf of the Company.  The notes are due on or before five years from the date thereof and accrue interest at the rate of 4% per annum, payable monthly. Late fee is applicable in the amount of 5% of the amount due.

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During the quarter ended October 31, 2014, the Company issued a note payable totaling $3,400 to Eduard Musheyev, the Company’s Chief Executive Officer, for advances and costs incurred on the behalf of the Company.  The note is due on or before five years from the date thereof and accrue interest at the rate of 4% per annum, payable monthly. Late fee is applicable in the amount of 5% of the amount due.

During the quarter ended January 31, 2015, the Company issued varies notes payable totaling $145,616 to Eduard Musheyev, the Company’s Chief Executive Officer, for advances and costs incurred on the behalf of the Company.  The notes are due on or before five years from the date thereof and accrue interest at the rate of 4% per annum, payable monthly. Late fee is applicable in the amount of 5% of the amount due.

During the quarter ended April 30, 2015, the Company issued a note payable totaling $77,967 to Eduard Musheyev, the Company’s Chief Executive Officer, for advances and costs incurred on the behalf of the Company.  The note is due on or before five years from the date thereof and accrue interest at the rate of 4% per annum, payable monthly. Late fee is applicable in the amount of 5% of the amount due.

During the quarter ended July 31, 2015, the Company issued varies notes payable totaling $45,200 to Eduard Musheyev, the Company’s Chief Executive Officer, for advances and costs incurred on the behalf of the Company.  The notes are due on or before five years from the date thereof and accrue interest at the rate of 4% per annum, payable monthly. Late fee is applicable in the amount of 5% of the amount due.

Director Independence

Our Board of Directors has adopted the definition of “independence” as described under the Sarbanes Oxley Act of 2002 (Sarbanes-Oxley) Section 301, Rule 10A-3 under the Securities Exchange Act of 1934 (the Exchange Act) and NASDAQ Rules 4200 and 4350.  Our Board of Directors has determined that its members do not meet the independence requirements.

ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Fees. The aggregate fees billed by our independent auditors, for professional services rendered for the audit of our annual financial statements for the years ended July 31, 2015 and 2014, and for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q during the fiscal years were $10,500 and $9,500 respectively.

Audit Related Fees. We incurred fees to our independent auditors of $17,500 for audit related fees during the fiscal years ended July 31, 2015 and 2014.  

Tax and Other Fees. We incurred fees to our independent auditors of $0 for tax and fees during the fiscal years ended July 31, 2015 and 2014.  

The Board of Directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant's independence.

It is the Board of Directors’ policy to have all audit and audit-related fees pre-approved by the Board. All such fees were pre-approved during the fiscal years ended July 31, 2015 and 2014.

PART IV

ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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SIGNATURES

In accordance with the requirements of Section 13 or 15(d) 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: December 22, 2015	By:	/s/ EDUARD MUSHEYEV
		Eduard Musheyev
		President, Secretary and Treasurer (Principal Executive Officer)
Date: December 22, 2015	By:	/s/ JORDAN FRIEDBERG
		Jordan Friedberg
		Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ EDUARD MUSHEYEV		Chairman of the Board and President		December 22, 2015
Eduard Musheyev		(principal executive officer)
/s/ JORDAN FRIEDBERG		Chief Financial Officer and Director		December 22, 2015
Jordan Friedberg		(principal financial officer and principal accounting officer)

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