Cannagistics Inc. - Quarter Report: 2017 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Precious Investments, Inc.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

[ ] Yes [X] No

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

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

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]

Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 12,816,299 common shares as of March 20, 2018.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Our financial statements included in this Form 10-Q are as follows:

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended October 31, 2017 are not necessarily indicative of the results that can be expected for the full year.

PRECIOUS INVESTMENTS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these audited financial statements

PRECIOUS INVESTMENTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

The accompanying notes are an integral part of these audited financial statements

PRECIOUS INVESTMENTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of these audited financial statements

Precious Investments, Inc.

Notes to Condensed Interim Financial Statements (unaudited)

October 31, 2017

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Description of Business

Precious Investments, Inc. (Formerly FIGO Ventures, Inc.) (‘The Company’) was incorporated under the laws of the State of Nevada on May 26, 2004. The Company was an Exploration Stage Company with the principle business being the acquisition and exploration of resource properties.

The Company had allowed its charter with the state of Nevada to be revoked by the Secretary of State for failure to file the required annual lists and pay the required annual fees. Its last known officers and directors reflected in the records of the Secretary of State were unresponsive or stated they were no longer involved with the Company. The purported replacement officers and directors were unresponsive.

On September 14, 2012, NPNC Management, LLC filed a petition in the Eighth Judicial District Court in Clark County, Nevada and was appointed custodian of the Company on October 15, 2012.

In order to obtain basic operating capital to pay for the reinstatement of the Company’s good standing with the Nevada Secretary of State, to bring the Company’s account current with creditors essential for the reorganization of the Company, such as the transfer agent, and for basic general corporate purposes, on October 24, 2012, the interim board authorized the sale of 55,000,000 (2,200,000 split adjusted) shares of common stock for $6,000 to NPNC Management, LLC, in a private placement transaction exempt from the Securities Act of 1933, as amended, pursuant to section 4(2) thereof and the rules and regulations promulgated there under.

On October 24, 2012, NPNC Management, LLC appointed Bryan Clark as director of the Company, to hold office until such time as the shareholders elected a board. The interim board, consisting of Mr. Clark, further acted to appoint Mr. Clark as president, treasurer, and secretary of the Company, to act on behalf of the Company, and to hold such offices until removed by any subsequent board elected by the shareholders.

On November 13, 2013, Bryan Clark tendered his resignation from all positions as an Officer and Director of the Company and the Board appointed Anna Wlodarkiewicz as a Director, President, Secretary and Treasurer of the Company.

On October 9, 2014, Ania Wlodarkiewicz tendered her resignation from all positions as an Officer and Director of the Company and the Board appointed Nataliya Hearn as a Director, President, Secretary and Treasurer of the Company.

On March 28, 2016, Nataliya Hearn resigned as the Company’s Chief Executive Officer and Director. Mr. Kashif Khan is the Company’s sole officer and director.

The Company has completed an asset purchase agreement dated August 10, 2015 where the Company acquired from Kashif Khan, its sole officer and director, colored diamonds with a wholesale value of US$4 Million, which he was in control of, in exchange for issuing three secured demand convertible promissory notes totaling US$4 Million.

The Company is in the business of purchasing and selling colored diamonds.

On March 1, 2017, the Company entered into a joint venture agreement with Eddeb Management (“Eddeb”). The purpose of the joint venture is to build a fund for the purpose of trading in precious gems, notably, colored diamonds.

Precious Investments, Inc.

Notes to Condensed Interim Financial Statements (unaudited)

October 31, 2017

Basis of Presentation and Principles of Consolidation

The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted. The consolidated financial statements include the financial statements of the Company and its 75% owned subsidiary Flawless Fund GP, Inc. All inter-company balances and transactions have been eliminated.

Unaudited Condensed Consolidated Interim Financial Statements

These unaudited condensed consolidated interim financial statements have been prepared on the same basis as the annual financial statement and should be read in conjunction with those annual financial statements filed on Form 10-K for the year ended July 31, 2017. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results for a full year or for any future period. Cash and cash equivalents 

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.

The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. At October 31, 2017, no cash balances exceeded the federally insured limit.

Accounts receivable and allowance for doubtful accounts

Accounts receivable are stated at the amount management expects to collect. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. As of October 31, 2017 and 2016 the allowance for doubtful accounts was $0 and $0, respectively.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date the financial statements and the reported amount of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Income Taxes

The Company’s calculation of its tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. The Company recognizes tax liabilities for uncertain tax positions based on management’s estimate of whether it is more likely than not that additional taxes will be required. The Company had no uncertain tax positions as of October 31, 2017 and 2016.

Deferred income taxes are recognized in the consolidated financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating losses, differences in depreciation methods of archived images, and property and equipment, stock-based and other compensation, and other accrued expenses. A valuation allowance is established when it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized.

Precious Investments, Inc.

Notes to Condensed Interim Financial Statements (unaudited)

October 31, 2017

The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S., or the various state jurisdictions, may be materially different from management’s estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities. Interest and penalties are included in tax expense.

The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of October 31, 2017 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

The Company reviews the terms of convertible loans, equity instruments and other financing arrangements to determine whether there are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. Also, in connection with the issuance of financing instruments, the Company may issue freestanding options or warrants to employees and non-employees in connection with consulting or other services. These options or warrants may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.

Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at fair value and then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. To the extent that the initial fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received an immediate charge to income is recognized in order to initially record the derivative instrument liabilities at their fair value.

The discount from the face value of the convertible debt instruments resulting from allocating some or all of the proceeds to the derivative instruments, together with the stated rate of interest on the instrument, is amortized over the life of the instrument through periodic charges to income, using the effective interest method.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument, as of the determination date, is reclassified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

Fair value of financial instruments

The Company’s financial instruments consist of its liabilities. The carrying amount of payables and the loan payable – related party approximate fair value because of the short-term nature of these items. The promissory notes, and convertible notes payables are measured at amortized cost using the effective interest method, which approximates fair value due to the relationship between the interest rate on long-term debt and the Company’s incremental risk adjusted borrowing rate.

Precious Investments, Inc.

Notes to Condensed Interim Financial Statements (unaudited)

October 31, 2017

Inventories

Inventory consist of loose colored precious stones and is stated at the lower of cost or net realizable value. The Company writes-down inventory once it has been determined that conditions exist that may not allow the inventory to be sold for its intended purpose or the inventory is determined to be excess or obsolete based on our forecasted future sales. The charge related to inventory write-downs is recorded as a cost of revenue.

Discontinued Operations

For those businesses where management has committed to a plan to divest, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Fair value is estimated using accepted valuation techniques such as a DCF model, valuations performed by third parties, earnings multiples, or indicative bids, when available. A number of significant estimates and assumptions are involved in the application of these techniques, including the forecasting of markets and market share, sales volumes and prices, costs and expenses, and multiple other factors. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the divestiture of a business may differ from the estimated fair value reflected in the Consolidated Financial Statements. Depreciation, depletion, and amortization expense is not recorded on assets of a business to be divested once they are classified as held for sale. Businesses to be divested are classified in the Consolidated Financial Statements as either discontinued operations or held for sale.

For businesses classified as discontinued operations, the balance sheet amounts and results of operations are reclassified from their historical presentation to assets and liabilities of operations held for sale on the Consolidated Balance Sheet and to discontinued operations on the Consolidated Statement of Operations, respectively, for all periods presented. The gains or losses associated with these divested businesses are recorded in discontinued operations on the Consolidated Statement of Operations. The Consolidated Statement of Cash Flows is also reclassified for assets and liabilities of operations held for sale and discontinued operations for all periods presented.

Revenue Recognition

The Company recognizes revenue related to product sales when (i) the seller’s price is substantially fixed, (ii) shipment has occurred causing the buyer to be obligated to pay for product, (iii) the buyer has economic substance apart from the seller, and (iv) there is no significant obligation for future performance to directly bring about the resale of the product by the buyer as required by ASC 605 – Revenue Recognition. Cost of sales, rebates and discounts are recorded at the time of revenue recognition or at each financial reporting date.

NOTE 2 – GOING CONCERN

These condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As of October 31, 2017, the Company has an accumulated deficit of $79,600,723. The Company’s ability to continue as a going concern is contingent upon the successful completion of additional financing arrangements and our ability to achieve and maintain profitable operations. While we are expanding our best efforts to achieve the above plans, there is no assurance that any such activity will generate funds that will be available for operations. These conditions raise substantial doubt about our ability to continue as a going concern. These condensed consolidated interim financial statements do not include any adjustments that might arise from this uncertainty.

Precious Investments, Inc.

Notes to Condensed Interim Financial Statements (unaudited)

October 31, 2017

NOTE 3 – PROMISSORY NOTES

Promissory notes payable as of October 31, 2017 and July 31, 2017 consisted of the following:

On February 2, 2018, these notes were extended by the noteholder to December 31, 2018 and are no longer in default.

Interest expense related to the notes for the three months ended October 31, 2017 and 2016 was $498 and $498 respectively.

NOTE 4- CONVERTIBLE DEBT

Convertible debt as of October 31, 2017 and July 31, 2017 consisted of the following:

During the three months ended October 31, 2017 and 2016, Interest expense related to these notes for the three months ended October 31, 2017 and 2016 was $286 and $611, respectively.

NOTE 5 – RELATED PARTY TRANSACTIONS

A shareholder of the Company has paid certain expenses of the Company. These amounts are reflected as a loan payable to related party. The shareholder advanced $13,623 and $113,810 during the three months ended October 31, 2017 and 2016, respectively. As of October 31, 2017 and July 31, 2017, there were $473,689 and $460,066 due to related parties, respectively.

ASSET PURCHASE AGREEMENT

On March 28, 2016, the Company signed a letter of intent (the “LOI”) with Karrah Inc., an Ontario corporation (“Karrah”), and the sole shareholder of Karrah, Farrah Khan (“Khan”). Khan is the wife of the Company’s officer and director, Kashif Khan. Pursuant to the LOI, the parties set forth their understandings in contemplation of an acquisition from Khan of all of the issued and outstanding shares of stock in Karrah, resulting in a parent subsidiary relationship. In consideration for the acquisition of Karrah, the Company planned to issue to Khan a three year promissory note (the “Note”) for $1,500,000, with interest at 6% per annum. Interest would have been payable at maturity or from time to time at the Company’s sole discretion. The Company had the right to prepay the Note and it would have been secured by the assets of Karrah.

Precious Investments, Inc.

Notes to Condensed Interim Financial Statements (unaudited)

October 31, 2017

On October 26, 2016, the Company learned that it was not possible to obtain an audit of Karrah. As such on October 28, 2016, the Company restructured the entire transaction by entering into a Termination and Restructure Agreement.

As part of the Termination and Restructure Agreement, the Company and Khan mutually agreed to cancel the Agreement to acquire the issue and outstanding shares of stock in Karrah. Second, the Company agreed to purchase from Karrah its customer list in exchange for a revised promissory note. The New Note will be in favor of Karrah, valued at $1,500,000 with interest at 6% per annum, and will not be secured by the assets of Karrah. During the three months ending October 31, 2017 and 2016, the Company recognized of $7,118 and $14,003 of interest expense. As of the October 31, 2017 and July 31, 2017, the note had a balance of $673,634 and $470,634, respectively.

CONSULTING AGREEMENT

On December 6, 2016, the Company entered into a one year Consulting Agreement with Karrah, Inc. and Kashif Khan for the team to act as a non-exclusive advisor and sales agent in assisting the Company in the marketing and sales of the Company’s colored diamond inventory on an international basis and domestically.

In exchange for the consulting services, the Company agreed to allow the consultant to retain up to the first $1,500,000 in revenues generated, which shall be used exclusively to pay off that certain promissory note we issued to Karrah, Inc. dated October 28, 2016 in the principal amount of $1,500,000. Following such payment, The Company has agreed to a revenue share, with the consultant allotted 5% of all gross revenues received solely from the efforts of the consultant in the sale of our diamond inventory. Sales conducted by the Company will not be subject to a revenue share.

During the three months ended October 31, 2017, the Consultant retained $203,000 in Company sales in payment of the above mentioned note payable.

NOTE 6 – STOCKHOLDERS’ EQUITY

The Company is authorized to issue 250,000,000 shares of its $0.001 par value common stock. As of October 31, 2017 and July 31, 2017 there were 12,565,645 shares of common stock issued and outstanding.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Litigations, Claims and Assessments

The Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise that may harm its business. The Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results.

 NOTE 8 – SUBSEQUENT EVENTS

On November 1, 2017, we effected a one-for- four reverse stock split. All share and per share information has been retroactively adjusted to reflect the stock split.  

On November 16, 2017, the Company entered into an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”) with American Freight Xchange, Inc., a privately held New York corporation (“American Freight”), and Shipzooka Acquisition Corp. (“Shipzooka Sub”), a newly formed wholly-owned Nevada subsidiary. In connection with the closing of this merger transaction, Shipzooka Sub merged with and into American Freight (the “Merger”) on December 5, 2017, with the filing of Articles of Merger with the Nevada Secretary of State and Certificate of Merger with the New York Division of Corporations.

Precious Investments, Inc.

Notes to Condensed Interim Financial Statements (unaudited)

October 31, 2017

The following tables summarized the financial position of American Freight as of the date of acquisition.

On February 20, 2018, Precious Investments, Inc. (the “Company”), entered into a Letter of Intent (“Letter of Intent”) for the Company to purchase 100% of the issued and outstanding stock of Recommerce Group, Inc. (“Recommerce”), along with certain other related documents.

Recommerce provides retailers and manufacturers with a comprehensive green approach to managing, remanufacturing, recycling and selling returned consumer products creating profits from returns.

Along with the Letter of Intent, the Company executed a Secured Promissory Note, dated February 20, 2018 (“Note 1”) of the Company with Professional Trading Services, Ltd. (the “Lender”), in the principal amount of $1,034,000, to be used a Bridge Loan pursuant to second Secured Promissory Note, dated February 20, 2018, between the Company and Recommerce (“Note 2”). The proceeds of Note 1 were to be used as a loan to Recommerce, prior to the closing of the transaction, for specific payments to be made by Recommerce, as detailed by a Use of Proceeds agreed to by the Company, Lender and Recommerce. Note 1 and Note 2 were both due on March 8, 2018, subsequent Events or upon the funding to the Company of a total of $2,000,000, to be used for the acquisition of Recommerce, whichever was later. Additionally, as part of Note 1 and Note 2, an “escrow account” was to be set up regarding the specific use of proceeds of the Proceeds of Note 1 and Note 2, that being a loan to Recommerce by the Company, and as set forth on the Schedule 1.02 annexed to Note 1 and Note 2. The Company, Lender and Recommerce, also agreed, as set forth in Note 1 and Note 2 to the appointment of an Escrow Agent to hold the Proceeds of the Note to be disbursed pursuant to the Use of Proceeds agreed upon in Note 1 and Note 2.

The Letter of Intent had an expiration date of March 30, 2018. On April 4, 2018, Recommerce notified the Company that the Letter of Intent had expired. The Company and Recommerce continued to engage in discussion about a transaction past the expiration date of the Letter of Intent.

On April 4, 2018, the Company was notified that the remaining balance of funds from Note 1, in the amount of approximately $203,000, that had not been disbursed and released pursuant to the agreed upon Use of Proceeds, as specified in Note 1 and Note 2, had without any notification or approval by the Company, had been removed from the account and sent to a third party, and not the Lender, by agents of the Lender.

The Company did not give any approval for this action.

Pursuant to Note 1 and Note 2, it was agreed that the Lender or his/its designee shall approve any and all disbursements of the Proceeds by the Escrow Agent from the Proceeds of this Note, prior to any disbursement by the Escrow Agent. The Company agrees to provide the Escrow Agent and the Lender reasonable documentation as to the use of any of the Proceeds.

The President of the Company, James W. Zimbler is also a control person of Recommerce.

On November 16, 2017, the Company entered into an Agreement of Conveyance, Transfer and Assignment of Assets, where we transferred all assets and business operations associated with our colored diamond business and joint venture, Flawless Fund GP Inc., to the other parties to the agreement. In exchange, the Company received 16,000,000 shares in our company and a promise to assume up to $100,000 in liabilities relating to our former business. At the time the colored diamond business was considered to represent the entire Company and therefore cannot be distinguished from the rest of the Company. As such, the colored diamond business does not meet the definition of a component of the Company and is not presented as discontinued operations in the current quarter financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Overview

On November 16, 2017, we entered into an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”) with American Freight Xchange, Inc., a privately held New York corporation (“American Freight”), and Shipzooka Acquisition Corp. (“Shipzooka Sub”), our newly formed wholly-owned Nevada subsidiary. In connection with the closing of this merger transaction, Shipzooka Sub merged with and into American Freight (the “Merger”) on November 16, 2017, with the filing of Articles of Merger with the Nevada Secretary of State and Certificate of Merger with the New York Division of Corporations.

In addition, pursuant to the terms and conditions of the Merger Agreement:

Each share of American Freight common stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to receive 73,000,000 shares of our Series C Preferred Stock. As a result, the shareholders of American Freight received 1,000,000 newly issued shares of our Series C Preferred Stock.

For a period of 12 months from the Closing Date of the Merger, we agreed that no new convertible instruments will be issued that would cause outstanding shares to be issued below a $20 million market cap. In addition, for the same period of time, we are permitted to issue up to and no more than 145 million shares of common stock or convertible securities that convert up to and no more than 145 million shares of common stock. Moreover, any such issuance can only be made to acquire another business entity and for no other reason. However, if we receive permission from the majority of the minority shareholders, then this restriction may be waived. In addition, the number of shares of common stock that we can issue depends on the number of shares exercised from outstanding warrants, as follows:

American Freight provided customary representations and warranties and closing conditions, including approval of the Merger by a unanimous vote of its board of directors and voting stockholders.

Spin-Out of Assets

At the same time as the Merger, we entered into an Agreement of Conveyance, Transfer and Assignment of Assets (the “Conveyance Agreement”) with our prior officer and director, Kashif Khan, along with shareholders Faeghen Niakab, and Parand Bioukzadeh and joint venture partner, Eddeb Management. Pursuant to the Conveyance Agreement, we transferred all assets and business operations associated with our colored diamond business and joint venture, Flawless Fund GP Inc., to the other parties to the agreement. In exchange, Mr. Khan, Mr. Niakab and Mr. Bioukzadeh agreed to cancel 16,000,000 shares in our company and to assume up to $100,000 in liabilities relating to our former business.

This transaction was fully disclosed in a Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 5, 2017.

We intend to carry on the business of American Freight, as our primary line of business. We have relocated our principal executive offices to 170 Traders Blvd East, Mississauga, Ontario L4Z 1W7, and our telephone number is 631-994-3242.

In the near future, we intend to change our name to American Freight Xchange, Inc. or something similar, which is more in line with our new business direction.

American Freight Xchange, Inc. is an integrated 3PO and logistics company. We are engaged in the business of the fulfillment of e-commerce transportation and logistics for third parties.

American Freight Xchange, Inc. manages the entire “logistics process”. Our freight management program obtains the most effective combination of rates, carriers, tracking and service points to pick up returned products from store and distribution center levels with centralized billing, auditing and claims capabilities.

American Freight Xchange, Inc., through our wholly owned subsidiary KRG Logistics, Inc. has the expertise to manage all the manufacturers and retailers shipping. Due to our strategic placement in the supply chain relative to the manufacturers and retailers or distributors position, we are best suited to offer these services. American Freight Xchange, Inc. customizes freight management and fulfillment programs that provide manufacturers and retailers with the most cost-effective services from the moment the shipment authorization is issued to the time the product is shipped and received.

Our Business

We are both a less-than-truckload (“LTL”) and a Third-Party Logistics (“3PL”) carrier, providing regional, inter-regional and national LTL and or 3PL services. These include arranging for ground and air expedited transportation and consumer household pickup and delivery (“P&D”), through a single integrated organization. In addition to our core LTL services, we offer a range of value-added services which cover different areas, such as, truckload brokerage, supply chain consulting and warehousing and pick and ship services.

We believe the growth in demand for our services can be attributed to our ability to consistently provide a superior level of customer service at a fair price, which allows our customers to meet their supply chain needs. Our integrated structure allows us to offer our customers consistent high-quality service from origin to destination, and we believe our operating structure and proprietary information systems enable us to efficiently manage our operating costs. Our services are complemented by our technological capabilities, which we believe provide the tools to improve the efficiency of our operations while also empowering our customers to manage their individual shipping needs.

Results of Operation for Three Months Ended October 31, 2017 and 2016

Revenues

We generated revenue of $203,000 for the three months ended October 31, 2017, as compared revenues of $668,566 for same period ended 2016. All of our revenues were generated from the sale of our colored diamond inventory. Since we have divested our colored diamond business, all future revenues are expected to come from our freight logistics business.

Our cost of revenues was $203,000 for the three months ended October 31, 2017, as compared with cost of revenue of $668,556 for the same period ended 2016. This is attributable to the fair market value of the shares of common stock that we sold to acquire our colored diamonds.

Operating Expenses

Operating expenses decreased to $91,443 for the three months ended October 31, 2017 from $158,975 for the three months ended October 31, 2016. Our operating expenses for the three months ended October 31, 2017 consisted of the equity expense to compensate our sole officer and director of $25,000, equity and cash consideration for professional fees of $38,798 and general and administrative expenses of $26,445. Our operating expenses for the three months ended October 31, 2016 consisted of professional fees of $80,288, general and administrative expenses of $53,687 and executive compensation of $25,000.

We expect that our operating expenses will increase for the year ended 2018 as a result of the transaction with American Freight Xchange, Inc., and KRG Logistics, Inc.

Other Expenses

We had other expenses of $(7,901) for the three months ended October 31, 2017, compared with other expenses of $(16,090) for the three months ended October 31, 2016. Other expenses for the three months ended October 31, 2017 consisted solely of interest expense. Other expenses for the three months ended October 31, 2016 consisted of interest expense of $16,090, the loss on the purchase of assets of $4,506,438.

Net Loss

Net loss for the three months ended October 31, 2017 was $(93,304) compared to net loss of $(4,681,528) for the three months ended October 31, 2016.

Liquidity and Capital Resources

As of October 31, 2017, we had current assets of $25,824 consisting of Cash on hand of $5,824 and Accounts and other receivables of $20,000. Our total current liabilities as of October 31, 2017 were $824,136. We therefore had negative working capital of $(798,312) as of October 31, 2017.

Operating activities provided $184,204 in cash for the three months ended October 31, 2017, as compared with cash provided of $440,090 for the same period ended 2016. Our positive operating cash flow for the three-months ended October 31, 2017 was mainly the discontinues operations. Our positive operating cash flow for the three-months ended October 31, 2016 was mainly the result of an increase in inventory and the loss on assets we purchased, offset mainly by our net loss for the quarter.

Financing activities used $189,377 for the three months ended October 31, 2017, as compared with cash used of $440,090 for the same period ended 2016. Our positive financing cash flow for the three months ended October 31, 2017 was mainly the result of loans. Our negative financing cash flow for the three months ended October 31, 2016 was mainly the result of payments on loans payable, offset up advances from related parties.

We intend to fund operations through sales and debt and/or equity financing arrangements, which may be insufficient to fund expenditures or other cash requirements. We plan to seek additional financing in a private equity offering to secure funding for operations. There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding, the implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all.

Off Balance Sheet Arrangements

As of October 31, 2017, there were no off-balance sheet arrangements.

Critical Accounting Policies

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Our accounting policies are discussed in detail in the footnotes to our financial statements included in our Annual Report on Form 10-K for the year ended July 31, 2017, however we consider our critical accounting policies to be those related to inventory, fair value of financial instruments, derivative financial instruments and long-lived assets.

Going Concern

As of October 31, 2017, we had an accumulated deficit of $25,824. Our ability to continue as a going concern is contingent upon the successful completion of additional financing arrangements and our ability to achieve and maintain profitable operations. While we are expanding our best efforts to achieve the above plans, there is no assurance that any such activity will generate funds that will be available for operations. These conditions raise substantial doubt about our ability to continue as a going concern.

Recently Issued Accounting Pronouncements

We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operation, financial position or cash flow

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information required by this Item.

Item 4.  Controls and Procedures

Disclosure Controls and Procedures

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of October 31, 2017, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of October 31, 2017, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described below.

Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following three material weaknesses that have caused management to conclude that, as of October 31, 2017, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

1.       We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the period ending October 31, 2017. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

2.       We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

3.       Effective controls over the control environment were not maintained. Specifically, a formally adopted written code of business conduct and ethics that governs our employees, officers, and directors was not in place. Additionally, management has not developed and effectively communicated to employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, our Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

To remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party firm to assist us in remedying this material weakness once resources become available.

We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order to segregate duties in a manner that establishes effective internal controls once resources become available.

Changes in Internal Control over Financial Reporting

No change in our system of internal control over financial reporting occurred during the period covered by this report, the period ended October 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are a party to a case titled William Prusin v. Precious Investments Inc. and Kashif Khan. The litigation was commenced in the Ontario Superior Court of Justice (Commercial List) on July 20, 2016. The litigation stems from a diamond purchase agreement entered into on April 1, 2016 between Dr. William Prusin and Precious Investments Inc. By virtue of the terms of the agreement, Precious Investments purchased Dr. Prusin’s diamond portfolio, which was valued at $3.8 million (CDN) for the purposes of the agreement. In exchange for the diamond portfolio, Dr. Prusin was provided with 1,324,413 common shares of Precious Investments.

In the Statement of Claim, the plaintiff is alleging a breach of the Ontario Securities Act and claims that documents provided to him contain untrue statements of material fact or omissions. The plaintiff has also alleged that Precious Investment and Mr. Khan distributed securities in Ontario without issuing a prospectus and obtaining the required prospectus exemption or a registration exemption. In the alternative, the plaintiff has alleged that Mr. Khan made fraudulent misrepresentations which induced Dr. Prusin to enter into the diamond purchase agreement. The fraudulent misrepresentation allegation involves the future value of Precious shares, the timing by which Dr. Prusin had to sign the diamond purchase agreement, the involvement of Dundee Capital Markets, Mr. Khan’s investment in Precious Investments, and the management team at Precious Investments. Given these allegations, the plaintiff claims that he is entitled to obtain an order rescinding the diamond purchase agreement.

Precious Investments and Mr. Khan deny all of the plaintiff’s allegations. Precious Investments and Mr. Khan deny that any documents provided to Dr. Prusin constitute an “offering memorandum”, or that any prospectus was required under the Ontario Securities Act since the transaction falls within the exemption set out in National Instrument 45-106. In addition, the defendants deny that any fraudulent misrepresentation was made to Dr. Prusin. The defendants have filed a counter-claim against Dr. Prusin, alleging a breach of the diamond purchase agreement.

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

The information set forth below relates to our issuances of securities without registration under the Securities Act of 1933 during the reporting period which were not previously included in a Quarterly Report on Form 10-Q.

These securities were issued pursuant to Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

N/A

Item 5. Other Information

None

Item 6. Exhibits

SIGNATURES

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