NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2013
(Unaudited – prepared by Management)
Note 1 – Basis of Presentation and Nature of Operations
These unaudited financial statements reflect all adjustments which, in the opinion of management, are necessary to fairly state the Company’s financial position and the results of its operations for the periods presented in accordance with the accounting principles generally accepted in the United States of America. All adjustments are of a normal recurring nature.
Organization
The financial statements presented are those of Dussault Apparel Inc. (the “Company”). The Company was incorporated under the laws of the State of Nevada on August 1, 2006 as Release Your Lease Inc. Business operations had not commenced when in May, 2007, control of the company changed hands. Jason Dussault bought 1,500,000 common shares of the majority shareholder and assumed the offices of President, CEO, CFO, Secretary and Treasurer, and a Director.
On June 11, 2007 Release Your Lease Inc. effected a reverse forward merger with Dussault Apparel, Inc., a Nevada shell company. The name was changed to Dussault Apparel Inc. The Company changed its orientation toward the retail fashion clothing business. The Company opened a retail clothing and accessory store on Melrose Avenue in Los Angeles in November, 2007. Designs were produced in the Vancouver, Canada office, manufactured in China and warehoused in Los Angeles. The Company closed this store in November, 2008 in the wake of declining sales and deteriorating economic conditions.
Current Business of the Company
The Company moved operations to Vancouver in 2009. In the spring of 2011 its design and head office moved to Los Angeles California where it was designing apparel for its licensing partner, the Company continues to market over the internet a very limited line of apparel. Our samples are manufactured by our licensing partner in North America. The Company has transitioned from being a manufacturer–wholesaler to licensing of its trademark to other wholesalers in the primarily in the Canadian market, while promoting its marque. The Company also purchased the trademark of a cosmetics line. Currently no sales, production or sampling of the cosmetic line has occurred or is planned. The Company recently renegotiated its licensing agreement and is receiving royalty income only for its designs with one current manufacturer. In July, 2012, the Company had a further change in management and operations were moved to Florida. The Company is currently reviewing its business and is seeking other acquisitions, as sales have declined year over year.
Note 2 – Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of the Company’s financial position and results of operations.
DUSSAULT APPAREL INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2013
(Unaudited – prepared by Management)
Note 2 – Summary of Significant Accounting Policies (continued)
Foreign Currency Translation
The functional currency of the Company is the Canadian Dollar. The Company uses the United States dollar as its reporting currency. All transactions initiated in Canadian Dollars are translated to U.S. Dollars in accordance with ASC 830-10-20 “
Foreign Currency Translation
” as follows:
·
|
Revenue and expense items at the average rate of exchange in effect on the transaction date;
|
·
|
Non-monetary assets and liabilities at historical exchange rates, unless such items are carried at market, in which case they are translated at the exchange rate in effect on the balance sheet date; and
|
·
|
Monetary assets and liabilities at the exchange rate at the balance sheet date.
|
Adjustments arising from such translations are deferred until realization and are included as a separate component of stockholders’ equity (deficit) as a component of comprehensive income (loss). Therefore, translation adjustments are not included in determining net income but reported as other comprehensive income.
For foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the period.
Fair value of financial instruments
The Financial Accounting Standards Board issued ASC (Accounting Standards Codification) 820-10 (SFAS No. 157),
“Fair Value Measurements and Disclosures"
for financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. FASB ASC 820-10 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that the Company uses to measure fair value:
·
|
Level 1: Quoted prices in active markets for identical assets or liabilities.
|
·
|
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
|
·
|
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The following are the major categories of liabilities measured at fair value on a recurring basis as of April 30, 2013 and October 31, 2012, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
|
|
|
April 30, 2013
|
|
|
October1, 2012
|
|
Derivative liabilities
|
Level 3
|
|
$
|
42,900
|
|
|
$
|
53,100
|
|
DUSSAULT APPAREL INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2013
(Unaudited – prepared by Management)
Note 2 – Summary of Significant Accounting Policies (continued)
Derivative Liabilities
Fair value accounting requires bifurcation of embedded derivative instruments, such as ratchet provisions or conversion features in convertible debt or equity instruments, and measurement of their fair value. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
Once derivative liabilities are determined, they are adjusted to reflect fair value at the end of each reporting period. Any increase or decrease in the fair value is recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
Loss Per Common Share
Net loss per share is calculated in accordance with FASB ASC 260,
Earnings Per Share
, for the periods presented. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. The Company has potentially dilutive securities in convertible loans payable; however the conversion would be anti-dilutive and is not considered in the calculation.
Royalty Income
The Company receives royalty income from licensing third parties to use its intellectual property. Previously we received a royalty of 50% of the total sales, net of all costs of goods, returns, marketing expenses, shipping costs and fees. Subsequent to the fiscal year end October 31, 2013, the Company and the licensee of its trademarks and intellectual property renegotiated the royalty agreement so that retroactive to August 1, 2012 the Company would receive a 4% royalty based on top line gross sales as opposed to a royalty of 50% of the total sales, net of all costs of goods, returns, marketing expenses, shipping costs and fees. (ref Note 6 – Distribution agreement)
Recent Accounting Pronouncements
ASU 2011-08,
Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment
is applicable to fiscal years beginning after December 15, 2011. Early application is permitted. The Company does not expect this ASU has a material impact on its financial position or carrying value of its intangible assets at this time.
The Company does not expect the adoption of any other recent accounting pronouncements will have a material impact on its financial statements.
DUSSAULT APPAREL INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2013
(Unaudited – prepared by Management)
Note 2 – Summary of Significant Accounting Policies (continued)
Going Concern
The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company as at April 30, 2013 had not established an ongoing source of revenues sufficient to cover its operating costs and to allow it to continue as a going concern.
As shown in the accompanying financial statements, the Company continues to incur losses. Its ability to continue as a going concern is dependent on the successful stimulation of wholesale sales or in other areas in order to fund operating losses and become profitable. If the Company is unable to make it profitable, the Company could be forced to cease development of operations. Management cannot provide any assurances that the Company will be successful in its retail operation. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 3 – Restatement
A prior period adjustment was made to the April 30, 2012 financial statements for an accounting error. An embedded derivative in a convertible note payable had not been identified under ASC 815-40. The effect of disclosing the derivative liability was recorded as a prior period adjustment to Deficit and to accumulated expense amounts in the current year. The note payable was also reclassified in the restatement. (ref Note 6 – (a))
For the three months ended April 30, 2012
Item
|
|
As Originally
Reported
($)
|
|
|
As Restated
($)
|
|
|
Effect on
Earnings
($)
|
|
|
Effect on
Net Equity
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense on amortization
|
|
|
-
|
|
|
|
(1,900
|
)
|
|
|
(1,900
|
)
|
|
|
(1,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1,900
|
)
|
|
|
(1,900
|
)
|
For the six months ended April 30, 2012
Item
|
|
As Originally
Reported
($)
|
|
|
As Restated
($)
|
|
|
Effect on
Earnings
($)
|
|
|
Effect on
Net Equity
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative loss
|
|
|
-
|
|
|
|
(700
|
)
|
|
|
(700
|
)
|
|
|
(700
|
)
|
Interest expense on amortization
|
|
|
-
|
|
|
|
(3,800
|
)
|
|
|
(3,800
|
)
|
|
|
(3,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(4,500
|
)
|
|
|
(4,500
|
)
|
DUSSAULT APPAREL INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2013
(Unaudited – prepared by Management)
Note 4 - Trademarks
On April 9, 2010 the Company entered into an asset acquisition agreement (the “Agreement”) with Open Sundaes Ventures Ltd. (“Open Sundaes”) for the acquisition of certain assets relating to the business of the production and development of beauty and bath products including inventory, intellectual property and business knowhow. In consideration for the acquisition of these assets, the Company paid $43,860 and agreed to issue an aggregate of 9,000,002 shares of its common stock to the shareholders of Open Sundaes and certain creditors. The Agreement was approved by the shareholders of Open Sundaes at a special meeting held on April 22, 2010. As of October 31, 2011, the Company had issued a total of 6,424,697 shares pursuant to the Agreement, 1,424,697 shares to the shareholders of Open Sundaes and 5,000,000 shares to a creditor of Open Sundaes in settlement of certain debt related to Open Sundaes that was agreed to be paid between the parties. The Company recorded the fair value of Trade Mark based on the fair value of shares issued and cash payments, which amount totaled $197,000. On October 31, 2011, in accordance with corporate policies, the Company assessed the Trademark for impairment and determined the book value was no longer recoverable. As a result we have recorded a loss on impairment relating to the Trademark of $192,214, leaving a value of $4,786 on the balance sheets of the Company as at October 31, 2011. On January 17, 2012, the Company issued the remaining 2,575,305 shares pursuant to the Agreement, fully satisfying the terms of the acquisition. As at the date of these financial statements, the Company has issued a total of 9,000,002 shares; 4,000,002 shares to the shareholders of Open Sundaes and 5,000,000 shares to a creditor of Open Sundaes.
The Company capitalized the fair value of the 2,575,305 shares issued on January 17, 2012 in the amount of $7,468. On October 31, 2012, in accordance with corporate policies, the Company assessed the Trademark value for impairment and determined to fully impair the $12,254, including a total of $4,786 on the balance sheet as at October 31, 2011.
Note 5 – Convertible Promissory Note and Derivative Liabilities
(a)
Perati Finance Corporation
On April 1, 2010 the Company issued a promissory note to Perati Finance Corporation for $38,000. The note matures in five years and accrues interest at 3%. The loan is convertible to common stock with conversion price is the greater of $0.01 or 50% of the average closing bid prices for the ten trading days immediately preceding the conversion date.
In our evaluation of the financing arrangement, we concluded that the conversion features were not afforded the exemption as a conventional convertible instrument and it did not otherwise meet the conditions set forth in current accounting standards for equity classification. Accordingly, they do not meet the conditions necessary to obtain equity classification and are required to be carried as derivative liabilities.
Since equity classification is not available for the conversion feature, we were required to bifurcate the embedded conversion feature and carry it as a derivative liability, at fair value. Derivative financial instruments are carried initially and subsequently at their fair values.
We estimated the fair value of the compound derivative on the inception dates, and subsequently, using the Black-Scholes Merton valuation technique, adjusted for the effect of dilution, because that technique embodies all of the assumptions (including, volatility, expected terms, and risk free rates) that are necessary to fair value complex compound derivate instruments.
DUSSAULT APPAREL INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2013
(Unaudited – prepared by Management)
Note 5 – Convertible Promissory Note and Derivative Liabilities (continued)
(a)
|
Perati Finance Corporation (continued)
|
As a result of the application of ASC No. 815 in period ended April 30, 2013 and October 31, 2012, the fair value of the conversion feature is summarized as follows:
Derivative liabilities, October 31, 2012
|
|
$
|
42,000
|
|
Fair value mark to market adjustment
|
|
|
900
|
|
Derivative liabilities, April 30, 2013
|
|
$
|
42,900
|
|
The Company recorded the debt discount to the extent of the gross proceeds raised, and recorded the derivative expense immediately the remaining value of the gross proceeds as it exceeded the derivative liabilities. The Company recorded a derivative expense of $900 during the six month period ended April 30, 2013.
The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of October 31, 2012 and April 30, 2013:
|
|
Commitment Date
|
|
|
Re-measurement
October 31, 2012
|
|
|
Re-measurement
April 30, 2013
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
293.92
|
%
|
|
|
317.54
|
%
|
|
|
339.39
|
%
|
Expect term
|
|
5 years
|
|
|
3 years
|
|
|
2.62 years
|
|
Risk free interest rate
|
|
|
2.35
|
%
|
|
|
0.38
|
%
|
|
|
0.32
|
%
|
Amortization of the $38,000 discount over the three and six month period ended April 30, 2013 was $1,900 and $3,800 respectively (2012- $1,900 and $3,800), which amount has been recorded as interest expense and is reflected on the Company's balance sheet as Convertible Note Liabilities, Net. The unamortized discount of $12,667 will be expensed in future periods.
During the six month period ended April 30, 2013, the Company accrued interest expenses of $565.
(b) Asher Enterprises Inc.
On November 10, 2011, Asher Enterprises Inc. funded a promissory note executed by the Company on October 25, 2011 in the total amount of $63,000. The note matured July 27, 2012 and accrued interest at 8% or alternately 22% in the event of default. The loan was convertible to common stock at a conversion price of 58% of the market price.
In our evaluation of the financing arrangement, we concluded that the conversion features were not afforded the exemption as a conventional convertible instrument and it did not otherwise meet the conditions set forth in current accounting standards for equity classification. Accordingly, they do not meet the conditions necessary to obtain equity classification and are required to be carried as derivative liabilities.
Since equity classification is not available for the conversion feature, we were required to bifurcate the embedded conversion feature and carry it as a derivative liability, at fair value. Derivative financial instruments are carried initially and subsequently at their fair values.
DUSSAULT APPAREL INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2013
(Unaudited – prepared by Management)
Note 5 – Convertible Promissory Note and Derivative Liabilities (continued)
(b)
Asher Enterprises Inc. (continued)
We estimated the fair value of the compound derivative on the inception dates, and subsequently, using the Black-Scholes Merton valuation technique, adjusted for the effect of dilution, because that technique embodies all of the assumptions (including, volatility, expected terms, and risk free rates) that are necessary to fair value complex compound derivate instruments.
During the year ended October 31, 2012, the Company converted debt totaling $54,600 into 132,687,009 shares of common stock resulting in a loss on conversion of $78,087, which was recorded as additional paid in capital, leaving $8,400 of convertible notes matured without conversion.
During the period ended December 26, 2012, the Company converted the remaining $8,400 of convertible notes with $2,520 accrued unpaid interest into 37,227,140 shares of common stock resulting in a loss on conversion of $12,500, which was recorded as additional paid in capital, with the $2,624 balance of unpaid accrued interest contributed to additional paid in capital.
As a result of the application of ASC No. 815, the fair value of the conversion feature is summarized as follows:
Derivative liabilities, October 31, 2012
|
|
$
|
11,100
|
|
Fair value market to market adjustment
|
|
|
(1,225)
|
|
Reclassification to additional paid in capital for financial instruments that ceased to be a derivative liability
|
|
|
(9,875)
|
|
Derivative liabilities, April 30, 2013
|
|
$
|
-
|
|
Note 6 – Distribution Agreement
On March 13, 2013, the Company and the licensee of its trademarks and intellectual property renegotiated the royalty agreement so that effective August 1, 2012 the Company would receive a 4% royalty based on top line gross sales as opposed to a royalty of 50% of the total sales, net of all costs of goods, returns, marketing expenses, shipping costs and fees. The term of the agreement is beginning August 1, 2010 ending July 31, 2013 with three years renewal option beginning August 1, 2013 ending July 31, 2016.
Note 7 – Demand Loan
During the six month period ended April 30, 2013, the Company received funds in the amount of $4,975 from a third party lender. The amount is unsecured, bears interest at 10% per annum, and is due on demand.
Note 8 – Common Stock
On November 12, 2012, $4,900 of the remaining balance of a Convertible Promissory note entered into on October 25, 2011 was retired by the issuance of 13,243,243 common shares at a deemed price of $0.00037.
On November 30, 2012, $3,400 of the remaining balance of a Convertible Promissory note entered into on October 25, 2011 was retired by the issuance of 12,592,593 common shares at a deemed price of $0.00027.
On December 26, 2012, $100 of the remaining balance of a Convertible Promissory note entered into on October 25, 2011 with accrued interest of $2,520 was retired by the issuance of 11,391,304 common shares at a deemed price of $0.00023. As at April 30, 2013, there were a total of 353,444,347 shares issued and outstanding.
DUSSAULT APPAREL INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2013
(Unaudited – prepared by Management)
Note 9 – Related Party Transactions
On June 1, 2012 the Company entered into a month to month consulting agreement with Rodhan Management and Consulting Services (“Rodhan”) for the provision of administrative, consulting and website maintenance services. The agreement provided for services to be charged based on work performed during each month at an hourly rate. Mr. Robert Mintak, the Company's prior Chief Financial Officer and Chief Operating Officer, also provides consulting services to Rodhan and acts as their Chief Financial Officer. On December 31, 2012, the Board of Directors received the resignation of Mr. Robert Mintak as Chief Financial Officer and Chief Operating Officer of the Company. During the period ended December 31, 2012, Rodhan Management invoiced $ 3,154 (CAD$3, 154) plus applicable taxes for services rendered. The Company did not make any cash payments, leaving $6,544 (CAD$6,640) (October 31 2012 - $3,213) on the balance sheet as accounts payable.
On July 11, 2012, Ms. Natalie Bannister was appointed as a Director of Dussault Apparel Inc. (the “Corporation”).On October 4, 2012, with the resignation of Mr. Jason Dussault as an officer and director of the Company, Ms. Bannister consented to act as Chief Executive Officer, President, Secretary and Treasurer in addition to her role as a director.
During the six month period ended April 30, 2013, Ms. Bannister charged the Company $15,000 for consulting fees. The Company made cash payments in the amount of $5,000 against outstanding fees due to Ms. Bannister as at April 30, 2013, leaving a balance owing of $17,500 (October 31, 2012 - $7,500) which is reflected on the balance sheets as accounts payable – related party.
Note 10 – Subsequent Events
Subsequent to the six month period ended April 30, 2013, the Company received notice from the licensee of its trademarks and intellectual property of the exercise of the option as specified in the distribution agreement dated March 13, 2013, in which the option begins August 1, 2013 and runs for a term of 3 years, ending July 31, 2016 with all terms and conditions remaining the same as the distribution agreement dated March 13, 2013.