NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 -
Business and basis of presentation:
The
condensed consolidated financial statements include the accounts of Diamond
Discoveries International Corp., which was incorporated in the State of Delaware
on April 24, 2000, and its wholly owned subsidiary Diamond Discoveries Canada,
Inc. (the “Company”). All intercompany accounts and transactions have been
eliminated in consolidation. The Company is engaged in activities related to
the
exploration for mineral resources in Canada. It conducts exploration and related
activities through contracts with third parties.
In
the
opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal recurring
accruals, necessary to present fairly the financial position of the Company
as
of September 30, 2007, its results of operations for the nine and three months
ended September 30, 2007 and 2006, its changes in stockholders’ deficit for the
nine months ended September 30, 2007, its cash flows for the nine months ended
September 30, 2007 and 2006 and the related cumulative amounts for the period
from April 24, 2000 (date of inception) to September 30, 2007. Pursuant to
the
rules and regulations of the United States Securities and Exchange Commission
(the “SEC”), certain information and disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed in or omitted from these
financial statements unless significant changes have taken place since the
end
of the most recent fiscal year. Accordingly, these unaudited condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements as of December 31, 2006 and for the periods
ended December 31, 2006 and 2005 and the notes thereto (the “Audited Financial
Statements”) and the other information included in the Company’s Annual Report
on Form 10-KSB (the “Form 10-KSB”) for the year ended December 31, 2006 that was
previously filed with the SEC.
The
results of operations for the nine and three months ended September 30, 2007
are
not necessarily indicative of the results to be expected for the full year
ending December 31, 2007.
As
further explained in Note 3 in the Audited Financial Statements, the Company
acquired its mineral permits for property in the “Torngat Fields” located in the
Province of Quebec, Canada. The Company intends to develop the permits from
early stage exploration through completion of the exploration phase. Prior
to
any further exploration decisions, a mineral deposit must be appropriately
assessed. Gathering this data usually takes several years. Once the appropriate
data has been gathered, management will determine whether and how to proceed.
The Company has discovered tiny diamonds in samples taken from the property
and
has contracted with Watts, Griffis & McOuat (“WGM”) and Prospecting
Geophysics Ltd. (“PGL”) to conduct surveys and exploration at the property to
begin to enable it to determine whether it can extract and produce diamonds
from
this kimberlite.
Other
than contracting with WGM and PGL to conduct exploration and gather data on
its
behalf, the Company had not conducted any operations or generated any revenues
as of September 30, 2007. Accordingly, it is considered an “exploration stage
company” for accounting purposes. In addition to exploration costs, the Company
incurs general and administrative expenses which consist primarily of
professional fees relating to corporate filings and consulting and other
expenses incurred in operating our business.
The
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. However, in addition
to
not generating any revenues, the Company had a working capital deficit of
approximately $1,975,000 and a stockholders’ deficit of approximately $1,804,000
as of September 30, 2007. Management believes that the Company will not generate
any revenues during the twelve month period subsequent to September 30, 2007
in
which it will be gathering and evaluating data related to the permits for the
Torngat Fields. Since its inception, the Company has received total
consideration of $6,947,156 as a result of proceeds from shareholder advances,
the issuance of notes payable and the sales of common stock. Management believes
that the Company will still need total additional financing of approximately
$1,500,000 to continue to operate as planned during the twelve month period
subsequent to September 30, 2007. These conditions raise substantial doubt
about
the Company’s ability to continue as a going concern.
Management
plans to obtain such financing through private offerings of debt and equity
securities. However, management cannot assure that the Company will be able
to
obtain any or all of the additional financing it will need to continue to
operate through at least September 30, 2008 or that, ultimately, it will be
able
to generate any profitable commercial mining operations. If the Company is
unable to obtain the required financing, it may have to curtail or terminate
its
operations and liquidate its remaining assets and liabilities.
The
accompanying condensed consolidated financial statements do not include any
adjustments related to the recoverability and classification of assets or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue its operations as a going concern.
Note
2 -
Net earnings (loss) per share:
The
Company presents “basic” earnings (loss) per share and, if applicable, “diluted”
earnings per share pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, “Earnings per Share”. Basic earnings (loss)
per share is calculated by dividing net income or loss by the weighted average
number of common shares outstanding during each period. The calculation of
diluted earnings per share is similar to that of basic earnings per share,
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if all potentially dilutive
common shares, such as those issuable upon the exercise of stock options and
warrants, were issued during the period.
Since
the
Company had a net loss for the nine and three months ended September
30,
2007
and 2006, the assumed effects of the exercise of the warrants to purchase
95,576,849 shares of common stock that were issued in 2005 and the application
of the treasury stock method would have been anti-dilutive. Therefore, there
is
no diluted per share amounts in the 2007 and 2006 statements of
operations.
Note
3 -
Refundable tax credit:
The
Company is eligible for a refundable tax credit given by the Province of Quebec
to encourage mineral exploration in the province. Eligible expenses include
exploration expenses within Quebec.
The
Company files a tax return claiming the refundable tax credit. However, the
Quebec government subjects the return to a review process which may result
in a
substantial adjustment to the initial claimed credit prior to issuing an
assessment of the refundable tax credit. Due to the uncertainty of the amount
approved by the Quebec government, the Company’s policy is to record the
refundable tax credit at such time that it has been notified by the Quebec
government of an assessment. During the nine and three months ended September
30, 2007, the Company received refunds under the program of $58,956 and $—,
respectively, and during the nine and three months ended September 30, 2006,
the
Company received refunds under the program of $— and $—,
respectively.
Note 4
- Property and equipment:
Property
and equipment is stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of such assets.
Expenditures for maintenance and repairs are charged to expense as
incurred.
At
September 30, 2007, major classes of property and equipment are as
follows:
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Useful
|
|
|
|
|
2007
|
|
Lives
|
|
|
Drilling
equipment
|
|
$
|
239,403
|
|
|
5
years
|
|
|
Less
accumulated depreciation
|
|
|
(107,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
131,671
|
|
|
|
|
Depreciation
expense for the nine and three months ended September 30, 2007 was $34,963
and
$11,805, respectively, and for the nine and three months ended September 30,
2006 was $35,741 and $11,019, respectively.
Note 5
- Notes payable:
In
November 2005, the Company and Prospecting Geophysics Ltd. (“PGL”) entered into
an agreement whereby the amount due to PGL was converted to a non-interest
bearing note payable totaling $1,500,000 (Canadian). The note is secured with
the permits identified in Note 3 in the Audited Financial Statements. In
connection with the agreement, the Company recorded a gain on the modification
of debt of $1,349,623. The Company recorded the note using a 12% discount rate.
The Company was unable to make the scheduled payments ($600,000 Canadian) during
2006 under this note payable and therefore the note is effectively in default.
As such, the entire balance of the note payable is shown as being currently
due
in the accompanying consolidated balance sheet.
The
Company recorded a charge of $— and $— to interest expense to amortize the
discount on the note payable for the nine and three months ended September
30,
2007, respectively, and $70,571 and $24,900 for the nine and three months ended
September 30, 2006, respectively.
Note
6 -
Advances from stockholders:
Advances
from stockholders of $236,951 at September 30, 2007 were non-interest bearing
and due on demand.
Note
7 -
Income taxes:
In
June
2006, the Financial Accounting Standards Board
(“
FASB”)
issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109,” which clarifies the
accounting for uncertainty in income taxes in accordance with FASB Statement
No.
109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition
threshold and measurement attribute for the measurement and financial statement
recognition of a tax position taken or expected to be taken in a tax
return. The interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Company adopted FIN 48 effective January 1,
2007. The implementation of FIN 48 did not an impact on the Company’s
consolidated results of operations, financial position or
liquidity.
As
of
September 30, 2007, the Company had net operating loss carryforwards of
approximately $18,216,000 available to reduce future Federal taxable income
which will expire through 2021. The Company had no other material temporary
differences as of that date. Due to the uncertainties related to, among other
things, the changes in the ownership of the Company, which could subject those
loss carryforwards to substantial annual limitations, and the extent and timing
of its future taxable income, the Company offset the deferred tax assets of
approximately $7,287,000 attributable to the potential benefits from the
utilization of those net operating loss carryforwards by an equivalent valuation
allowance as of September 30, 2007.
The
Company had also offset the potential benefits from net operating loss
carryforwards by an equivalent valuation allowance as of December 31, 2006.
As a
result of the increases in the valuation allowance of approximately $597,000
and
$321,000 in the nine and three months ended September 30, 2007, respectively,
$1,093,000 and $126,000 for the nine and three months ended September 30, 2006,
respectively, and $7,287,000 in the period from April 24, 2000 to September
30,
2007, the Company did not recognize any credits for income taxes in the
accompanying condensed statements of operations to offset its pre-tax losses
in
any of those periods.
Note
8 -
Stockholders’ deficit:
Common
Stock
In
September 2007, the Company issued 52,000,000 shares of its common stock
in
exchange for services performed by various consultants and recorded a charge
to
general and administrative expenses of $468,000 which approximated the fair
value of the shares.
Stock
Option Plans
2005
Plan
On
November 14, 2005, the Company adopted the Diamond Discoveries International
Corp. 2005 Stock Incentive Plan (the “2005 Plan”). Under the 2005 Plan,
35,000,000 shares of common stock are reserved for issuance. The purpose of
the
2005 Plan is to provide incentives for officers, directors, consultants and
key
employees to promote the success of the Company, and to enhance the Company’s
ability to attract and retain the services of such persons. Options granted
under the 2005 Plan may be either: (i) options intended to qualify as “incentive
stock options” under Section 422 of the Internal Revenue Code of 1986; or (ii)
non-qualified stock options. Stock options may be granted under the 2005 Plan
for all employees and consultants of the Company, or employees of any present
or
future subsidiary or parent of the Company. The 2005 Plan is administered by
the
Board of Directors. The Compensation Committee is empowered to interpret the
2005 Plan and to prescribe, amend and rescind the rules and regulations
pertaining to the 2005 Plan. Options granted under the 2005 Plan generally
vest
over three years. No option is transferable by the optionee other than by will
or the laws of descent and distribution and each option is exercisable, during
the lifetime of the optionee, only by the optionee. The Compensation Committee
may not receive options.
Any
incentive stock option that is granted under the 2005 Plan may not be granted
at
a price less than the fair market value of the Company’s Common Stock on the
date of grant (or less than 110% of the fair market value in the case of holders
of 10% or more of the total combined voting power through all classes of stock
of the Company or a subsidiary or parent of the Company.) Non-qualified stock
options may be granted at the exercise price established by the Compensation
Committee, which may be less than the fair market value of the Company’s Common
Stock on the date of grant.
Each
option granted under the 2005 Plan is exercisable for a period not to exceed
ten
years from the date of grant (or five years in the case of a holder of more
than
10% of the total combined voting power of all classes of stock of the Company
or
a subsidiary or parent of the Company) and shall lapse upon expiration of such
period, or earlier upon termination of the recipient’s employment with the
Company, or as determined by the Compensation Committee.
2004
Plan
On
September 30, 2004, the Company adopted the Diamond Discoveries International
Corp. 2004 Stock Incentive Plan (the “2004 Plan”). Under the 2004 Plan,
35,000,000 shares of common stock are reserved for issuance. The purpose of
the
2004 Plan is to provide incentives for officers, directors, consultants and
key
employees to promote the success of the Company, and to enhance the Company’s
ability to attract and retain the services of such persons. Options granted
under the 2004 Plan may be either: (i) options intended to qualify as “incentive
stock options” under Section 422 of the Internal Revenue Code of 1986; or (ii)
non-qualified stock options. Stock options may be granted under the 2004 Plan
for all employees and consultants of the Company, or employees of any present
or
future subsidiary or parent of the Company. The 2004 Plan is administered by
the
Board of Directors. The Compensation Committee is empowered to interpret the
2004 Plan and to prescribe, amend and rescind the rules and regulations
pertaining to the 2004 Plan. Options granted under the 2004 Plan generally
vest
over three years. No option is transferable by the optionee other than by will
or the laws of descent and distribution and each option is exercisable, during
the lifetime of the optionee, only by the optionee.
Any
incentive stock option that is granted under the 2004 Plan may not be granted
at
a price less than the fair market value of the Company’s Common Stock on the
date of grant (or less than 110% of the fair market value in the case of holders
of 10% or more of the total combined voting power through all classes of stock
of the Company or a subsidiary or parent of the Company.) Non-qualified stock
options may be granted at the exercise price established by the Compensation
Committee, which may be less than the fair market value of the Company’s Common
Stock on the date of grant.
Each
option granted under the 2004 Plan is exercisable for a period not to exceed
ten
years from the date of grant (or five years in the case of a grant of an
incentive stock option to a holder of more than 10% of the total combined voting
power of all classes of stock of the Company or a subsidiary or parent of the
Company) and shall lapse upon expiration of such period, or earlier upon
termination of the recipient’s employment with the Company, or as determined by
the Compensation Committee.
2003
Plan
On
May
30, 2003, the Company adopted the Diamond Discoveries International Corp. 2003
Stock Incentive Plan (the “2003 Plan”). Under the 2003 Plan, 15,000,000 shares
of common stock are reserved for issuance. The purpose of the 2003 Plan is
to
provide incentives for officers, directors, consultants and key employees to
promote the success of the Company, and to enhance the Company’s ability to
attract and retain the services of such persons. Options granted under the
2003
Plan may be either: (i) options intended to qualify as “incentive stock options”
under Section 422 of the Internal Revenue Code of 1986; or (ii) non-qualified
stock options. Stock options may be granted under the 2003 Plan for all
employees and consultants of the Company, or employees of any present or future
subsidiary or parent of the Company. The 2003 Plan is administered by the Board
of Directors. The Compensation Committee is empowered to interpret the 2003
Plan
and to prescribe, amend and rescind the rules and regulations pertaining to
the
2003 Plan. Options granted under the 2003 Plan generally vest over three years.
No option is transferable by the optionee other than by will or the laws of
descent and distribution and each option is exercisable, during the lifetime
of
the optionee, only by the optionee.
Any
incentive stock option that is granted under the 2003 Plan may not be granted
at
a price less than the fair market value of the Company’s Common Stock on the
date of grant (or less than 110% of the fair market value in the case of holders
of 10% or more of the total combined voting power through all classes of stock
of the Company or a subsidiary or parent of the Company.) Non-qualified stock
options may be granted at the exercise price established by the Compensation
Committee, which may be less than the fair market value of the Company’s Common
Stock on the date of grant.
Each
option granted under the 2003 Plan is exercisable for a period not to exceed
ten
years from the date of grant (or five years in the case of a grant of an
incentive stock option to a holder of more than 10% of the total combined voting
power of all classes of stock of the Company or a subsidiary or parent of the
Company) and shall lapse upon expiration of such period, or earlier upon
termination of the recipient’s employment with the Company, or as determined by
the Compensation Committee.
In
February 2004, the Company issued options to acquire 1,000,000 shares of its
common stock at an exercise price of $.10 per share to consultants and other
non-employees. The options had an aggregate fair market value of $90,000 at
the
date of issuance as determined based on the Black-Scholes options-pricing model.
Accordingly, the Company initially increased unearned compensation and
additional paid-in capital by $90,000 to record the fair value of the options.
In
December 2004, the Company issued options to acquire 33,975,000 shares of its
common stock at an exercise price of $.01 per share to consultants and other
non-employees. The options had an aggregate fair market value of $1,049,000
at
the date of issuance as determined based on the Black-Scholes options-pricing
model. Accordingly, the Company initially increased unearned compensation and
additional paid-in capital by $1,049,000 to record the fair value of the
options.
In
July
2005, the Company issued options to acquire 1,150,000 shares of its common
stock
at an exercise price of $.01 per share to consultants and other non-employees.
The options had an aggregate fair market value of $34,500 at the date of
issuance as determined based on the Black-Scholes options-pricing model.
Accordingly, the Company initially increased unearned compensation and
additional paid-in capital by $34,500 to record the fair value of the
options.
In
December 2005, the Company issued options to acquire 30,000,000 shares of its
common stock at an exercise price of $.01 per share to consultants and other
non-employees. The options had an aggregate fair market value of $1,184,000
at
the date of issuance as determined based on the Black-Scholes options-pricing
model. Accordingly, the Company initially increased unearned compensation and
additional paid-in capital by $1,184,000 to record the fair value of the
options.
In
January 2006, the Company issued options to acquire 5,000,000 shares of its
common stock at an exercise price of $.01 per share to consultants and other
non-employees. The options had an aggregate fair market value of $150,000 at
the
date of issuance as determined based on the Black-Scholes options-pricing model.
Accordingly, the Company initially increased unearned compensation and
additional paid-in capital by $150,000 to record the fair value of the
options.
There
were no options granted during the nine and three months ended September 30,
2007.
The
Company recorded a charge of $601,474 and $202,695 to compensation expense
to
amortize unearned compensation for the nine and three months ended September
30,
2007, respectively, and $916,581 and $270,055 for the nine and three months
ended September 30, 2006, respectively.
The
following table summarizes information with respect to options granted under
the
2005 Plan, 2004 Plan and the 2003 Plan as of and for the nine months ended
September 30, 2007 and 2006.
|
|
|
2007
|
|
2006
|
|
|
|
|
Shares
|
|
Weighed
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding beginning of period
|
|
|
1,500,000
|
|
$
|
0.01
|
|
|
11,200,000
|
|
$
|
0.06
|
|
|
Options
canceled
|
|
|
—
|
|
|
—
|
|
|
(2,225,000
|
)
|
|
0.11
|
|
|
Options
exercised
|
|
|
—
|
|
|
—
|
|
|
(11,500,000
|
)
|
|
0.01
|
|
|
Options
granted
|
|
|
—
|
|
|
—
|
|
|
5,000,000
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding end of period
|
|
|
1,500,000
|
|
$
|
0.01
|
|
|
2,475,000
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable end of period
|
|
|
1,500,000
|
|
$
|
0.01
|
|
|
2,475,000
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
price range, end of period
|
|
$
|
0.01
|
|
|
|
|
$
|
0.01
to $0.11
|
|
|
|
|
|
Options
price range for exercised shares
|
|
$
|
0.01
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
Options
available for grant at end of period
|
|
|
3,200,000
|
|
|
|
|
|
2,225,000
|
|
|
|
|
|
Weighted
average fair value of options granted during the period
|
|
$
|
—
|
|
|
|
|
$
|
0.03
|
|
|
|
|
|
Weighted
average exercise price of options granted during the
period
|
|
$
|
—
|
|
|
|
|
$
|
0.01
|
|
|
|
|
Warrants
In
2005,
in connection with its private placement of common stock, the Company issued
warrants to acquire 95,576,849 shares of its common stock at an exercise price
of $.035 per share. The warrants expire on various dates during
2008.
Note
9 -
Guarantee:
On
March 14, 2003, the Company became a guarantor of a promissory note issued
by one of its stockholders with an outstanding balance of approximately $101,200
that was originally scheduled to mature on July 31, 2003. The maturity
dates of the promissory note and the guaranty have been extended to April 30,
2008.
Note
10
-
New
Accounting Pronouncements:
In
September 2006, the FASB issued Statement of Financial Standards No. 157 (“SFAS
No. 157”), “Fair Value Measurements,” which clarifies the definition of fair
value, establishes a framework for measuring fair value, and expands the
disclosures of fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. The Company is currently assessing
the
impact of SFAS No. 157 on its consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Standards
No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets
and Financial Liabilities,” which permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS No. 159
is effective for fiscal years beginning after November 15, 2007. The
Company is currently assessing the impact of SFAS No. 159 on its
consolidated financial statements.
Note
11 -
Internal Controls:
Standard
No. 5, An Audit of Internal Control Over Financial Reporting That Is
Integrated with An Audit of Financial Statements, issued by the Public Company
Accounting Oversight Board (“AS No. 5”) was issued on July 25, 2007 and
replaced Auditing Standard No. 2. Specific implementation requirements and
guidance are being developed. The Company is in the initial stages of conducting
its assessment of internal control over financial reporting as required by
SOX
404. Guidance in AS No. 5 indicates that the size and complexity of the company,
its business processes, and business units, may affect the way in which the
company achieves many of its control objectives and its risk analysis.
Management has not fully addressed the effect of this standard on the Company
and accordingly, it is likely that the Company will be unable to achieve the
level of compliance contemplated in SOX 404 to receive an unmodified opinion
on
its internal control over financial reporting from its external auditors. The
Company will not be required to comply with SOX 404 until its first fiscal
year
ending on or after December 15, 2007.
*
*
*