Our consolidated financial statements included
in this Form 10-Q are as follows:
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
1.
|
ORGANIZATION AND DESCRIPTION
OF BUSINESS
|
Avalanche International,
Corp. (the
“Company”
or
“Avalanche”
) was incorporated under the laws of the
State of Nevada on April 14, 2011. The Company is a holding company with operations at the subsidiary level only. The Company has
formed two wholly-owned subsidiaries, Smith and Ramsay Brands, LLC (
“SRB”
) and Restaurant Capital Group,
LLC (
“RCG”
). SRB was formed on May 19, 2014, and RCG was formed on October 22, 2015. SRB was originally
formed as a manufacturer and distributor of flavored liquids for electronic vaporizers and eCigarettes and accessories; this business
ceased in June 2015. RCG was formed to hold the Company’s investments in the restaurant industry.
|
2.
|
LIQUIDITY AND GOING CONCERN
|
The accompanying unaudited condensed
consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company
has incurred recurring losses and reported losses available to common stockholders for the nine months ended August 31, 2016 and
2015, totaling $674,155 and $1,506,480, respectively, as well as an accumulated deficit as of August 31, 2016 amounting to $3,886,972.
As a result of the Company’s continued losses, at August 31, 2016, the Company’s current liabilities significantly
exceed current assets, resulting in negative working capital of $2,614,313. Further, the Company does not have adequate cash to
cover projected operating costs for twelve months from the issuance date of these financial statements and to repay convertible
notes payable and notes payable in the aggregate principal amount of $679,278 that are in default at August 31, 2016. These factors
raise substantial doubt about the ability of the Company to continue as a going concern. In order to ensure the continued viability
of the Company, either future equity or debt financings must be obtained or profitable operations must be achieved in order to
repay the existing short-term debt and to provide a sufficient source of operating capital. To address its liquidity issues, the
Company continues to explore opportunities for additional financing and/or restructuring of its existing debt. No assurances can
be made that the Company will be successful obtaining additional equity or debt financing and/or in restructuring existing debt,
or that the Company will achieve profitable operations and positive cash flow. The unaudited condensed consolidated financial statements
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the
amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. Further,
subsequent to year end the Company has primarily funded its operations through the issuance of additional debt financings (see
Note 12).
|
3.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with the instructions to Securities and Exchange Commission
(the “SEC”) Form 10-Q and Article 8 of SEC Regulation S-X and do not include all the information and disclosures required
by generally accepted accounting principles in the United States of America (
“GAAP”
). The Company has
made estimates and judgments affecting the amounts reported in our condensed consolidated financial statements and the accompanying
notes. The actual results experienced by the Company may differ materially from our estimates. The consolidated financial
information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair
statement of results for the interim periods presented. These unaudited condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form
10-K for the year ended November 30, 2015, filed with the SEC on April 28, 2017. Results for the three and nine months ended
August 31, 2016, are not necessarily indicative of the results to be expected for the full year ending November 30, 2016.
Principles of Consolidation
The unaudited condensed
consolidated financial statements include accounts of Avalanche and its wholly-owned subsidiaries, SRB and RCG (collectively referred
to as the
“Company”
). All significant intercompany accounts and transactions have been eliminated in
consolidation.
Accounting Estimates
The preparation of
financial statements, in conformity with GAAP 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 of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The Company’s critical accounting policies that involve significant
judgment and estimates include fair value of bifurcated embedded conversion options and derivative warrant liabilities and the
valuation of deferred income taxes. Actual results could differ from those estimates.
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Fair Value of Financial Instruments
The Company’s
significant financial instruments include cash, accounts receivable, notes receivable, accounts payable and accrued expenses, notes
payable, and convertible notes payable. The recorded values of cash, accounts receivable, notes receivable, and accounts payable
approximate their fair values based on their short-term nature. Notes payable and convertible notes payable are recorded inclusive
of the value of any bifurcated embedded feature, which approximates their fair value.
Equity-Linked Financial Instruments
Derivative liabilities
are recognized in the consolidated balance sheets at fair value based on the criteria specified in Financial Accounting Standards
Board (
“FASB”
) Accounting Standards Codification (
“ASC”
) Topic 815-15
– Derivatives
and Hedging – Embedded Derivatives
(
“ASC 815-15”
). The Company evaluates all of its financial
instruments, including embedded conversion features in convertible debt and warrants, to determine if such instruments are derivatives
or contain features that qualify as embedded derivatives. The classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Pursuant to ASC Topic
815-15 an evaluation of the embedded conversion feature of convertible debt is evaluated to determine if the embedded debt conversion
feature is required to be bifurcated from the debt instrument, valued and classified with the related loan host instrument. When
the terms of the embedded conversion features of the Company’s convertible debt provides for the issuance of shares of common
stock at the election of the holders and the number of shares is subject to adjustment for a decline in the price of the Company’s
common stock, the Company determined that the embedded conversion option should be bifurcated. The estimated fair value of the
conversion features, when bifurcated, are primarily determined using a Monte Carlo model or, in certain circumstances, the Black-Scholes
option pricing model. The models utilize Level 3 unobservable inputs to calculate the fair value of the derivative liabilities
at each reporting period. The Company determined that in instances where a Black-Scholes option pricing model was used that using
an alternative valuation model such as a Monte Carlo model would result in minimal differences. Each reporting period the embedded
conversion feature for each applicable debt instrument is re-valued and adjusted through the caption “change in fair value
of derivative liability” on the consolidated statements of operations.
Certain of the Company’s
convertible notes issued during the year ended November 30, 2015 contain conversion terms that provide for a variable conversion
price (e.g. 55% of the lowest trading price of the Company’s common stock for the 25 days preceding conversion) for a fixed
amount (i.e. face value of the note). This results in the number of shares to be issued upon conversion to be essentially indeterminable
and prevents the Company from concluding that the related conversion feature does not need to be bifurcated as a derivate liability
in accordance with ASC 815. Thus, equity-linked financial instruments, which are convertible or exercisable into common stock,
issued subsequent to the convertible notes are classified as derivative liabilities, with the exception of instruments related
to employee share-based compensation.
Warrant Liability
The Company accounts
for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting
period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is
recognized in the Company's consolidated statements of operations. The fair value of the warrants issued by the Company has been
estimated using a Black-Scholes option pricing model, at each measurement date.
Debt Discounts
The Company accounts
for debt discounts originating in connection with conversion features that remain embedded in the related notes in accordance with
ASC 470-20,
Debt with Conversion and Other Options
. These costs are classified on the consolidated balance sheet as a direct
deduction from the debt liability. The Company amortizes these costs over the term of its debt agreements as interest expense-debt
discount in the consolidated statement of operations.
Sequencing
As of March 1, 2016,
the Company adopted a sequencing policy whereby all future instruments may be classified as a derivative liability with the
exception of instruments related to share-based compensation issued to employees or directors.
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Revenue Recognition
The Company recognizes
revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all
of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services
have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
During the three and
nine months ended August 31, 2016, the Company’s revenues primarily consisted of services provided under the management services
agreement with Alzamend. During the three and nine months ended August 31, 2015, the Company’s revenues consisted solely
of sales of flavored liquids for electronic vaporizers and eCigarettes and accessories from SRB.
Net Income (Loss) per Common Share
Pursuant to ASC Topic
No. 260,
Earnings per Share,
basic net income (loss) per share is computed by dividing net income (loss) available to common
shareholders by the weighted-average number of common shares outstanding. Diluted net income (loss) per share is computed similar
to basic net income (loss) per share except that the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Diluted net income (loss) per common share reflects the potential dilution that could occur if diluted instruments were to be exercised
or converted or otherwise resulted in the issuance of common stock that then shared in the earnings of the Company.
Since the effects
of the conversion of convertible debt are anti-dilutive in all periods presented, shares of common stock underlying these instruments
have been excluded from the computation of loss per common share.
The following sets
forth the number of shares of common stock underlying convertible debt as of August 31, 2016 and 2015:
|
|
August 31,
|
|
|
|
2016
|
|
|
2015
|
|
Convertible notes payable
|
|
|
11,987,571
|
|
|
|
2,254,942
|
|
Conversion of preferred stock
|
|
|
-
|
|
|
|
528,193
|
|
Common stock warrants
1
|
|
|
75,000
|
|
|
|
-
|
|
Total
|
|
|
12,062,571
|
|
|
|
2,783,135
|
|
|
(1)
|
The Company has excluded the 100,000 warrants with an exercise price of $0.01 per share in its
anti-dilutive securities but included the warrants in its weighted average shares outstanding.
|
The following table
sets forth the inputs for the computation of basic and diluted net income (loss) per common share for the period indicated:
|
|
For the Three
Months Ended
August 31, 2016
|
|
Income:
|
|
|
|
Net income (loss)
|
|
$
|
316,220
|
|
Interest expense - convertible notes
|
|
|
37,331
|
|
Mark-to-market - convertible notes (gain)/loss
|
|
|
(435,318
|
)
|
Adjusted net income (loss)
|
|
$
|
(81,767
|
)
|
|
|
|
|
|
Common Shares:
|
|
|
|
|
Basic - weighted average common shares
|
|
|
6,942,254
|
|
Effect of dilutive securities:
|
|
|
|
|
Convertible notes
|
|
|
11,987,571
|
|
Diluted - weighted average common shares
|
|
|
18,929,825
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.05
|
|
Basic weighted average shares outstanding
|
|
|
6,942,254
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.00
|
|
Diluted weighted average shares outstanding
|
|
|
18,929,825
|
|
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Recent Accounting Pronouncements
In May 2014, the
Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-9,
Revenue from
Contracts with Customers (Topic 606)
(“ASU 2014-9”). ASU 2014-9 outlines a new, single comprehensive model
for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining
when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or
services. The FASB subsequently issued additional clarifying standards to address issues arising from implementation of the new
revenue standard, including a one-year deferral of the effective date for the new revenue standard. Public companies should now
apply the guidance in ASU 2014-9 to annual reporting periods beginning after December 15, 2017 and interim periods within
those annual periods. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016,
including interim periods within that annual period. Companies may use either a full retrospective or a modified retrospective
approach to adopt ASU 2014-9. The Company is currently assessing the impact that adopting this new accounting guidance will have
on its financial statements and footnote disclosures.
In August 2014,
the FASB issued ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity’s Ability to Continue as a Going Concern
, which defines management’s responsibility
to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures if there is substantial
doubt about its ability to continue as a going concern. The pronouncement is effective for annual reporting periods ending after
December 15, 2016 with early adoption permitted. The adoption of this guidance is not expected to have a significant impact
on the Company’s financial statements.
In November 2015, the FASB issued ASU No.
2015-17,
Balance Sheet Classification of Deferred Taxes
. The new guidance requires that all deferred tax assets and liabilities,
along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual
periods beginning after December 15, 2016 and interim periods within those annual periods. The adoption of ASU No. 2015-17 is not
expected to have a material effect on our consolidated financial position, results of operations, or cash flows.
In February 2016,
the FASB issued ASU No. 2016-2,
Leases (Topic 842)
. Under the new guidance, lessees will be required to recognize
the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which
is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary,
lessor accounting with the lessee accounting model and Topic 606,
Revenue from Contracts with Customers
. The new lease
guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and
lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should
apply the amendments in ASU 2016-2 for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities
and all nonpublic business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct
financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach
would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and
lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that adopting this
new accounting guidance will have on its financial statements and footnote disclosures.
In March 2016,
the FASB issued ASU 2016-9,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting
. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations
that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions
are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities;
and (c) classification on the statement of cash flows. For public companies, the amendments are effective for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim
or annual period. The adoption of ASU No. 2016-9 is not expected to have a material effect on our consolidated financial position,
results of operations, or cash flows.
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
During the nine months
ended August 31, 2016, the Company issued a total of 175,000 warrants at an average exercise price of $0.13 per share.
|
(i)
|
On December 2, 2015, the Company issued warrants to purchase an aggregate of 100,000 shares
of common stock at an exercise price equal to $0.01 per share of common stock in connection with the issuance of a promissory note
to Livingston in the aggregate principal amount of $125,000 (See Note 7d).
|
|
(ii)
|
On January 20, 2016, the Company entered into an agreement with LG Capital Funding, LLC to amend
the terms of a convertible promissory note in the principal amount of $50,000. Pursuant to the amendment, the Company issued to
LG Capital 75,000 warrants with an exercise price of $0.30 per share (See Note 6f).
|
The following table
summarizes information about common stock warrants outstanding at August 31, 2016:
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
|
Average
|
Exercise
|
|
Number
|
|
|
Contractual
|
|
Exercise
|
|
|
Number
|
|
Exercise
|
Price
|
|
Outstanding
|
|
|
Life (Years)
|
|
Price
|
|
|
Exercisable
|
|
Price
|
$0.01
|
|
100,000
|
|
|
0.25
|
|
$
|
0.01
|
|
|
100,000
|
|
$
|
0.01
|
$0.30
|
|
75,000
|
|
|
2.39
|
|
$
|
0.30
|
|
|
75,000
|
|
$
|
0.30
|
$0.01 - $0.30
|
|
175,000
|
|
|
1.17
|
|
$
|
0.13
|
|
|
175,000
|
|
$
|
0.13
|
The Company valued
the warrants at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent upon several variables
such as the warrants’ term, exercise price, current stock price, risk-free interest rate and estimated volatility of our
stock over the contractual term of the warrants. The risk-free interest rate used in the calculations is based on the implied yield
available on U.S. Treasury issues with an equivalent term approximating the contractual life of the warrants.
The following weighted
average assumptions were used for grants during the nine months ended August 31, 2016:
|
|
August 31, 2016
|
Weighted average risk-free interest rate
|
|
0.52%
|
Weighted average life (in years)
|
|
2.0
|
Volatility
|
|
167.9% — 184.9%
|
Expected dividend yield
|
|
0%
|
Weighted average grant-date fair value per
share of warrants granted
|
|
$ 0.41
|
|
|
August 31, 2016
|
|
|
|
|
|
Notes receivable - Philo Group
|
|
$
|
325,000
|
|
Total notes receivable
|
|
|
325,000
|
|
Less: original issue discount
|
|
|
(15,247
|
)
|
Total notes receivable, net
|
|
$
|
309,753
|
|
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
On April 13, 2016,
the Company entered into an agreement to finance a new restaurant owned by Philo Group, LLC (“
Philo
”).
Between April 13, 2016 and August 31, 2016, the Company provided $250,000 in financing to Philo under the terms of a Senior
Secured Property Note dated April 4, 2016, as amended (the “
Philo Note
”). The Philo Note bears interest
at a rate of sixteen percent (16%) per annum, requires monthly interest payments, and was due within six (6) months from the date
of issue. Due to delays in the opening of the restaurant, the Philo Note has not yet been repaid and is in default. The Company
has not made a formal demand upon Philo for payment but has reserved its rights as provided for in the Philo Note. The Company
is currently in discussions with Philo regarding payment of the Philo Note and actively monitoring the restaurant operations. The
Philo Note features an original issue discount of $75,000 and allows for legal fees up to $5,000. The Philo Note is personally
guaranteed by the principal of Philo and secured by all assets of Philo. In addition, the principal of Philo has agreed to further
secure the loan by pledging several pieces of real property located in California.
The original issue
discount of $75,000 on the Philo Note is being amortized as interest income through the maturity date using the interest rate method.
During the three and nine months ended August 31, 2016, the Company recorded $37,912 and $59,753, respectively, of interest income
from the discount accretion and $13,107 and $21,315, respectively, of interest income based upon the 16% contractual rate.
JS Technologies, Inc.
On August 4, 2015,
the Company entered into a Secured Promissory Note (the “JST Note”) with JS Technologies, Inc. (“JST”).
Under the JST Note, the Company entered into an agreement to lend up to $400,000 to JST in order to provide short-term financing
pending the Company’s proposed acquisition of JST. The JST Note accrues interest at a rate of ten percent (10%) per annum
and was due on August 5, 2016. The JST Note is secured by substantially all of the assets of JST. Between December 3, 2015 and
February 26, 2016, the Company loaned JST $120,000 pursuant to the term of the JST Note, which included an original issue discount
of $13,333 to the overall JST Note. Of the $120,000 loaned to JST, a payment of $95,000 was made by the Company and a payment of
$25,000 was made by MCKEA Holdings, LLC
(“
MCKEA
”
) directly to JST on the Company’s behalf. The
note receivable fully repaid on June 15, 2016 by payments of $48,333 by JST and JST’s payment of $85,000 directly to a third-party
noteholder. The $85,000 payments made by JST reduced the Company’s outstanding note payable.
The original issue
discount of $13,333 on the JST Note was amortized as interest income using the effective interest rate method. During the three
and nine months ended August 31, 2016, the Company recorded nil and $13,333, respectively, of interest income from the discount
accretion and nil and $5,326, respectively, of interest income based upon the 10% contractual rate.
|
6.
|
CONVERTIBLE NOTES PAYABLE
|
|
|
August 31, 2016
|
|
|
November 30, 2015
|
|
Adar Bays, LLC Note (a):
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
Fair value of bifurcated put option
|
|
|
190,589
|
|
|
|
207,659
|
|
Debt discount
|
|
|
-
|
|
|
|
(40,411
|
)
|
Carrying amount
|
|
|
305,589
|
|
|
|
282,248
|
|
|
|
|
|
|
|
|
|
|
Union Capital, LLC Note (a):
|
|
|
|
|
|
|
|
|
Principal
|
|
|
115,000
|
|
|
|
115,000
|
|
Fair value of bifurcated put option
|
|
|
190,589
|
|
|
|
207,536
|
|
Debt discount
|
|
|
-
|
|
|
|
(40,096
|
)
|
Carrying amount
|
|
|
305,589
|
|
|
|
282,440
|
|
|
|
|
|
|
|
|
|
|
Typenex Co-Investement, LLC Note (b):
|
|
|
|
|
|
|
|
|
Principal
|
|
|
87,500
|
|
|
|
87,500
|
|
Fair value of bifurcated put option
|
|
|
315,692
|
|
|
|
380,858
|
|
Debt discount
|
|
|
-
|
|
|
|
(28,130
|
)
|
Carrying amount
|
|
|
403,192
|
|
|
|
440,228
|
|
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
|
August 31, 2016
|
|
|
November 30, 2015
|
|
Gary Gelbfish Note (c):
|
|
|
|
|
|
|
Principal
|
|
|
87,808
|
|
|
|
100,000
|
|
Fair value of bifurcated put option
|
|
|
136,921
|
|
|
|
118,391
|
|
Debt discount
|
|
|
-
|
|
|
|
-
|
|
Carrying amount
|
|
|
224,729
|
|
|
|
218,391
|
|
|
|
|
|
|
|
|
|
|
JMJ Financial Note (d):
|
|
|
|
|
|
|
|
|
Principal
|
|
|
60,500
|
|
|
|
60,500
|
|
Fair value of bifurcated put option
|
|
|
80,293
|
|
|
|
155,017
|
|
Debt discount
|
|
|
(22,915
|
)
|
|
|
(44,576
|
)
|
Carrying amount
|
|
|
117,878
|
|
|
|
170,941
|
|
|
|
|
|
|
|
|
|
|
Black Mountain Equities, Inc. Note (e):
|
|
|
|
|
|
|
|
|
Principal
|
|
|
42,670
|
|
|
|
55,000
|
|
Fair value of bifurcated put option
|
|
|
37,471
|
|
|
|
81,951
|
|
Debt discount
|
|
|
-
|
|
|
|
(28,028
|
)
|
Carrying amount
|
|
|
80,141
|
|
|
|
108,923
|
|
|
|
|
|
|
|
|
|
|
LG Capital Funding, LLC Note (f):
|
|
|
|
|
|
|
|
|
Principal
|
|
|
42,500
|
|
|
|
50,000
|
|
Fair value of bifurcated put option
|
|
|
71,102
|
|
|
|
94,905
|
|
Debt discount
|
|
|
-
|
|
|
|
-
|
|
Carrying amount
|
|
|
113,602
|
|
|
|
144,905
|
|
|
|
|
|
|
|
|
|
|
GCEF Opportunity Fund, LLC Note (g):
|
|
|
|
|
|
|
|
|
Principal
|
|
|
27,500
|
|
|
|
27,500
|
|
Fair value of bifurcated put option
|
|
|
30,346
|
|
|
|
50,532
|
|
Debt discount
|
|
|
-
|
|
|
|
(15,973
|
)
|
Carrying amount
|
|
|
57,846
|
|
|
|
62,059
|
|
|
|
|
|
|
|
|
|
|
Lord Abstract, LLC Note (h):
|
|
|
|
|
|
|
|
|
Principal
|
|
|
1,300
|
|
|
|
8,800
|
|
Fair value of bifurcated put option
|
|
|
2,438
|
|
|
|
16,163
|
|
Debt discount
|
|
|
-
|
|
|
|
(5,111
|
)
|
Carrying amount
|
|
|
3,738
|
|
|
|
19,852
|
|
|
|
|
|
|
|
|
|
|
JLA Realty Notes (i):
|
|
|
|
|
|
|
|
|
Principal
|
|
|
325,600
|
|
|
|
-
|
|
Fair value of bifurcated conversion option
|
|
|
143,874
|
|
|
|
-
|
|
Debt discount
|
|
|
(243,235
|
)
|
|
|
-
|
|
Carrying amount
|
|
|
226,239
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other convertible notes payable (j):
|
|
|
|
|
|
|
|
|
Principal
|
|
|
11,000
|
|
|
|
-
|
|
Fair value of bifurcated put option
|
|
|
17,218
|
|
|
|
-
|
|
Debt discount
|
|
|
(8,307
|
)
|
|
|
-
|
|
Carrying amount
|
|
|
19,911
|
|
|
|
-
|
|
Total carrying amount of convertible notes
|
|
|
1,858,454
|
|
|
|
1,729,987
|
|
Less current portion of carrying amount of convertible notes
|
|
|
1,612,304
|
|
|
|
-
|
|
Non-current portion of carrying amount of convertible notes
|
|
$
|
246,150
|
|
|
$
|
-
|
|
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
|
August 31, 2016
|
|
|
November 30, 2015
|
|
Total convertible notes payable:
|
|
|
|
|
|
|
Principal
|
|
$
|
916,378
|
|
|
$
|
619,300
|
|
Fair value of bifurcated put option
|
|
|
1,216,533
|
|
|
|
1,313,012
|
|
Debt discount
|
|
|
(274,457
|
)
|
|
|
(202,325
|
)
|
Carrying amount
|
|
$
|
1,858,454
|
|
|
$
|
1,729,987
|
|
Accounting for Redemption Feature -
Put Option
Management determined
that the variable share settlement feature as a “conversion feature” as defined above represents, in substance, a put
option (redemption feature) because the value of the variable share settlement feature does not depend on the issuer’s stock
price and does not vary with the value of the shares. Management determined that this put option should be bifurcated from the
notes and accounted for as a separate derivative liability primarily because the number of shares issuable upon net share settlement
is indeterminate. The Company does not have a sufficient quantity of authorized but unissued shares and, therefore, the put option
does not meet conditions necessary for it to be classified in stockholders’ equity.
The put option, with
a fair value of approximately $1.2 million at inception, was recorded as a derivative liability on the accompanying condensed consolidated
balance sheet with a corresponding discount to the note. The Company accreted the discount to interest expense in the accompanying
condensed consolidated statements of operations over the term of the note using the effective interest method. During the three
months ended August 31, 2016 and 2015, the Company recognized aggregate interest expense of $77,401 and $164,685, respectively,
resulting from accreting the discount for the above convertible promissory notes. During the nine months ended August 31, 2016
and 2015, the Company recognized interest expense of $336,269 and $248,863, respectively, resulting from accreting the discount
for the above convertible promissory notes. The issuance date fair value in excess of the principal amount of the notes is reflected
as excess interest on issuance of convertible debt. During the three and nine months ended August 31, 2016, excess interest on
issuance amounted to $7,614 and $78,675, respectively. In January 2016, the Company issued 457,619 shares of common stock in payment
of principal and accrued interest on three of its convertible notes. The shares were valued based on the closing price of the Company’s
common stock on the date of issuance, $183,048, resulting in a loss on extinguishment of $154,694. The accrued interest associated
with the convertible notes was $147,899 as of August 31, 2016. All long-term notes are due in fiscal year 2019.
|
(a)
|
The Adar Bays, LLC and Union Capital, LLC convertible notes payable were due and payable 12 months after issuance date of May
11, 2015 with interest at 8% per annum. At the election of the holder, outstanding principal and accrued but unpaid interest under
the notes were convertible into shares of the Company’s common stock at any time prior to maturity at a conversion price per
share equal to a forty percent (40%) discount to the lowest trading price for the twenty (20) consecutive trading days immediately
preceding the notice of conversion. If these notes were not paid at maturity, the outstanding principal due under these notes
shall increase by 10%. In January 2016, the notes were amended to decrease the conversion price per share to a forty-five percent
(45%) discount to the lowest trading price for the twenty-five (25) consecutive trading days immediately preceding the notice of
conversion, and the pre-payment penalty was increased to 150%. The notes were not repaid on the maturity date of May 12, 2016 and
as such were in default as of August 31, 2016. The Company recorded a default penalty charge of $11,500 for each note, representing
10% of the outstanding principal balance of these notes, as a component of interest expense in the accompanying condensed consolidated
statements of operations. As of August 31, 2016, there were 1,900,826 shares issuable upon conversion for each note.
|
On January 23, 2018, the Company,
Adar Bays, LLC and Union Capital, LLC entered into Note Settlement and Termination Agreements. Pursuant to the terms of the settlement
agreements, the Company agreed to satisfy each of the outstanding notes for $200,000 in cash and 100,000 shares of common stock.
The payments were made on January 26, 2018. The closing price of the Company's common stock on January 23, 2018 was $1.40 per share
resulting in an aggregate settlement amount of $340,000 for each note.
|
(b)
|
The Typenex Co-Investment, LLC convertible note payable was due and payable 13 months after its issuance date of May 29, 2015
with interest at 10% per annum. At the election of the holder, outstanding principal and accrued but unpaid interest under the
note are convertible into shares of the Company’s common stock at any time prior to maturity at a conversion price per
share equal to $1.30. However, in the event the Company’s market capitalization falls below $3.0 million at any time, the
conversion price per share shall be equal to the lower of $1.30 or the market price at the date of conversion. The note was
not repaid on the maturity date of June 29, 2016 and as such was in default as of August 31, 2016. The Company recorded a default
penalty of $18,200 in the accompanying condensed consolidated statements of operations. As of August 31, 2016, there were 2,272,727
shares issuable upon conversion of this note.
|
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
On or about April 19, 2016,
the Company received from counsel for Typenex, a written demand to accelerate payment of the entire outstanding balance of the
Typenex note. On June 7, 2016, Typenex filed suit in the State of Utah, the Third Judicial District Court, County of Salt Lake,
for repayment of all principal, default effects, late fee and accrued interest. According to the complaint, Typenex asserted an
aggregate amount due, as of June 6, 2016, of $149,054. On April 4, 2017, the Company and Typenex agreed to settle the lawsuit for
payment of $90,000, which was made in April 2017. On May 9, 2017, an order of dismissal with prejudice was entered by the Third
Judicial District Court.
|
(c)
|
The Gary Gelbfish convertible note payable was due and payable six months after its issuance date of March 27, 2015 with interest
at 10% per annum. If this note was not paid at maturity, at the election of the holder, outstanding principal and accrued but unpaid
interest under the note was convertible into shares of the Company’s common stock at a conversion price per share equal
to lesser of: (i) fifty percent (50%) discount to the average closing price for the twenty (20) consecutive trading days immediately
preceding the maturity date or (ii) $0.50 per share. The note was not repaid on the maturity date of September 23, 2015 and as
such was in default as of August 31, 2016 and remains in default as of the date of this report. As of August 31, 2016, there were
1,000,663 shares issuable upon conversion of this note.
|
|
(d)
|
The JMJ Financial convertible note payable is due and payable 24 months after its issuance date of April 29, 2015 with interest
at 12% per annum. At the election of the holder, outstanding principal and accrued but unpaid interest under the notes are convertible
into shares of the Company’s common stock at any time prior to maturity at a conversion price per share equal to a forty
percent (40%) discount to the lowest trading price for the twenty-five (25) consecutive trading days immediately preceding the
notice of conversion. As of August 31, 2016, there were 1,008,333 shares issuable upon conversion of this note. Between May 2018
and July 2018, the Company made principal payments of $35,000 on this note and the remaining principal balance of $25,500 is in
default as of the date of this report.
|
|
(e)
|
The Black Mountain Equities, Inc. convertible note payable is due and payable 12 months after its issuance date of June 4,
2015 with interest at 10% per annum. At the election of the holder, outstanding principal and accrued but unpaid interest under
the note is convertible into shares of the Company’s common stock at any time prior to maturity at a conversion price per
share equal to the lesser of: (i) forty percent (40%) discount to the lowest trading price for the twenty-five (25) consecutive
trading days immediately preceding the notice of conversion or (ii) $1.06 per share. As of August 31, 2016, there were 494,381
shares issuable upon conversion of this note. The Note was not repaid on the maturity date of June 4, 2016 and remains in default
as of the date of this report.
|
|
(f)
|
The LG Capital Funding, LLC convertible note payable was due and payable 13 months after its issuance date of November 3, 2014
with interest at 8% per annum. At the election of the holder, outstanding principal and accrued but unpaid interest under the note
were convertible into shares of the Company’s common stock, at any time after 180 days from the date of issuance, at a conversion
price per share equal to a forty percent (40%) discount to the lowest trading price for the twenty (20) consecutive trading
days immediately preceding the notice of conversion. In January, 2016, the note was amended to grant LG Capital 75,000 warrants
with an exercise price of $0.30 per share, and to permit the Company to re-pay the LG Capital Note with a pre-payment penalty of
120%. The fair value of the warrants amounted to $26,250, which was expensed at the time of issuance due to the short-term nature
of the note. The note was not repaid on the maturity date and as such is in default as of August 31, 2016 and as of the date of
this report. Upon default, the note accrues interest at 24% per annum. As of August 31, 2016, there were 643,939 shares issuable
upon conversion of this note.
|
|
(g)
|
The GCEF Opportunity Fund, LLC convertible note payable is due and payable 12 months after its issuance date of June 30, 2015
with interest at 10% per annum. At the election of the holder, outstanding principal and accrued but unpaid interest under the
note are convertible into shares of the Company’s common stock, at any time after 30 days from the date of issuance, at a
conversion price per share equal to the lower of: (i) a forty percent (40%) discount to the lowest closing price for the twenty
(20) consecutive trading days immediately preceding the notice of conversion or (ii) $1.00. If this note is not paid at maturity,
then the interest rate shall increase to 24% thereafter. As of August 31, 2016, there were 416,667 shares issuable upon conversion
of this note. On March 9, 2017, the Company issued an aggregate of 216,946 shares of its common stock as full repayment of the
principal and accrued interest on the note.
|
|
(h)
|
The Lord Abstract, LLC convertible note payable is due and payable 12 months after its issuance date of June 30, 2015 with
interest at 10% per annum. At the election of the holder, outstanding principal and accrued but unpaid interest under the note
are convertible into shares of the Company’s common stock, at any time after 30 days from the date of issuance, at a conversion
price per share equal to a forty percent (40%) discount to the lowest closing price for the twenty (20) consecutive trading
days immediately preceding the notice of conversion. If this note is not paid at maturity, then the interest rate shall increase
to 24% thereafter. As of August 31, 2016, there were 19,697 shares issuable upon conversion of this note. Between June 2016 and
August 2016, the Company made payments of $7,500 on this note and the remaining principal balance of $1,300 remains in default
as of the date of this report.
|
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
(i)
|
The JLA Realty convertible note payable is due and payable 36 months after proceeds have been received by the Company, which
occurred between April 25, 2016 and August 8, 2016 with interest at 12% per annum. At the election of the holder, outstanding principal
and accrued but unpaid interest under the note is convertible into shares of the Company’s common stock at any time prior
to maturity at a fixed price per share equal to $0.15. In connection with the issuance of the JLA Realty note described above,
the Company recognized a debt discount of $89,087 and an excess interest of $7,614 during the three months ended August 31,
2016, which represents the excess of the fair value of the bifurcated conversion option of approximately $58,000 over the principal
amount of convertible debt issued. The fair value of the conversion feature is separately measured at fair value, with
changes in fair value recognized in operations. During the three and nine months ended August 31, 2016, the Company
recognized interest expense of $20,599 and $24,750, respectively, resulting from amortization of the debt discount for the JLA
Realty note. As of August 31, 2016, the conversion option has a fair value of $247,527 and is presented on a combined basis with
the related loan host in the Company’s Condensed Consolidated Balance Sheet at August 31, 2016. As of August 31, 2016,
there were 2,170,667 shares issuable upon conversion of this note.
|
|
(j)
|
The other convertible notes payable are due and payable 36 months after issuance with interest at 10% per annum. At the election
of the holder, outstanding principal and accrued but unpaid interest under the note are convertible into shares of the Company’s
common stock, at any time after six months from the date of issuance, at a conversion price per share equal the lesser of:
(i) fifty percent (50%) discount to the volume weighted average price over the twenty (20) consecutive trading days immediately
preceding the notice of conversion. As of August 31, 2016, there were 158,845 shares issuable upon conversion of these notes.
|
Notes payable at August
31, 2016, and November 30, 2015, are comprised of the following:
|
|
August 31, 2016
|
|
|
November 30, 2015
|
|
|
|
|
|
|
|
|
Notes payable to Studio Capital, LLC
(a)
|
|
$
|
117,500
|
|
|
$
|
125,000
|
|
Notes payable to Argent Offset, LLC
(b)
|
|
|
-
|
|
|
|
16,825
|
|
Notes payable to Strategic IR, Inc.
(c)
|
|
|
12,500
|
|
|
|
12,500
|
|
Notes payable to Lori Livingston
(d)
|
|
|
30,000
|
|
|
|
-
|
|
Notes payable to JLA Realty
(e)
|
|
|
330,000
|
|
|
|
-
|
|
Total notes payable
|
|
|
490,000
|
|
|
|
154,325
|
|
Less: debt discount
|
|
|
(22,645
|
)
|
|
|
(19,294
|
)
|
Total notes payable
|
|
$
|
467,355
|
|
|
$
|
135,031
|
|
During the three and
nine months ended August 31, 2016, the Company recognized interest expense of $45,723 and $127,635, respectively, resulting from
amortization of the debt discount for the above notes payable. The Company did not recognize any interest expense from amortization
of the debt discount during the three and nine months ended August 31, 2015. The debt discount is being amortized as non-cash interest
expense over the term of the debt using the effective interest method. The accrued interest associated with the above notes payable
was $95,323 as of August 31, 2016, which is recorded in accrued interest on convertible and promissory notes payable on the accompanying
condensed consolidated balance sheet.
|
(a)
|
On October 8, 2015, the Company entered into a promissory note agreement with Studio Capital, LLC,
(“Studio Capital”) for an aggregate principal amount of $125,000 (the “Studio Capital Note”). The Studio
Capital Note carries an original issue discount of $25,000, provided for a loan fee of 5,000 shares of the Company’s common
stock and had a maturity date of April 8, 2016. The Studio Capital Note was not repaid on the maturity date and as such is in default
as of August 31, 2016 and remains in default as of the date these financial statements are issued. The Company recorded in interest
expense, including penalties, on the condensed statements of operations a one-time default penalty of $25,000 representing 20%
of the outstanding principal balance of the Studio Capital Note.
|
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
(b)
|
On November 26, 2014, the Company entered into a promissory note agreement with Argent Offset,
LLC (“Argent”) for an aggregate principal amount of $13,000 (the “Argent Note”). The Argent Note included
a $500 loan fee, accrues interest at 10%, compounded monthly, and had a maturity date of December 5, 2014. On February 1, 2015,
the Company entered into a Temporary Forbearance Agreement with Argent. Under the forbearance agreement, the Company agreed to
pay a forbearance fee of $7,000 to extend the maturity date to August 1, 2015. Argent also advanced the Company an additional $19,825
pursuant to the terms of the Argent Note. During the nine months ended August 31, 2016, the Company paid $16,825 on the Argent
Note. As of August 31, 2016, all remaining amounts due were repaid on the Argent Note.
|
|
(c)
|
On March 17, 2015, the Company entered into a promissory note agreement with Strategic, IR, Inc.
(“Strategic”) for an aggregate principal amount of $12,500 (the “Strategic Note”). The Strategic Note included
a $1,750 loan fee, accrued interest at 10% and had a maturity date of April 16, 2015. The Strategic Note is currently is in default
as of August 31, 2016 and remains in default as of the date these financial statements are issued and is accruing interest at the
default rate of 21% per annum.
|
|
(d)
|
On December 2, 2015, the Company entered into a promissory note agreement (the “Livingston
Note”) with a third party for an aggregate principal amount of $125,000. The Livingston Note carries an original issue discount
of $25,000. As additional consideration to the investor, the Company agreed to issue a warrant to purchase up to 100,000 shares
of the Company’s common stock at a price of $0.01 per share. The Company recorded debt discount in the amount of $30,987
based on the fair value of the warrants. The Livingston Note is currently in default and accruing interest at the default rate
of 29%. In January 2016, the Company recorded in interest expense a one-time default penalty of $25,000 representing 20% of the
outstanding principal balance of the Livingston Note.
|
|
(e)
|
On April 7, 2016 and September 14, 2016, RCG entered into promissory note agreements with JLA Realty
(the “JLA Notes”) for an aggregate amount of $480,000. The JLA Notes accrue interest at 16% per annum and have maturity
dates of October 4, 2016 and March 14, 2017 and carry an original issue discount of $125,000. Between November 2016 and December
2016, the Company made payments of $150,000 on the JLA Notes and the remaining principal balance of $330,000 remains in default
as of the date of these financial statements are issued.
|
|
8.
|
NOTE PAYABLE, RELATED PARTY
|
Note payable, related party, at August 31,
2016 and November 30, 2015, are comprised of the following:
|
|
August 31, 2016
|
|
|
November 30, 2015
|
|
|
|
|
|
|
|
|
Note payable to MCKEA Holdings, LLC
|
|
$
|
38,175
|
|
|
$
|
-
|
|
Less: debt discount
|
|
|
(197
|
)
|
|
|
-
|
|
Total note payable, related party
|
|
$
|
37,978
|
|
|
$
|
-
|
|
On March 4, 2016, RCG
entered into a promissory note (the “MCKEA Note”) with MCKEA Holdings, LLC. The MCKEA Note provides for proceeds up
to $100,000 and bears interest a rate of fifteen percent (15%) per year. All principal and interest accrued under the MCKEA Note
was due on or before August 4, 2016. The MCKEA Note features an original issue discount of 10% of the total cash advanced to RCG.
Between March 4, 2016 and August 31, 2016, $58,216 was advanced to RCG, inclusive of $5,275 of original issue discount of which
$19,844 has been repaid resulting in an outstanding principal balance of $38,372 at August 31, 2016. During the three and nine
months ended August 31, 2016, the Company recognized interest expense of $2,715 and $5,078, respectively, resulting from amortization
of the debt discount for the above note payable, related party.
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
9.
|
FAIR VALUE MEASUREMENTS
|
The following tables
classify the Company’s embedded conversion options, put options, and derivative warrant liabilities measured at fair value
on a recurring basis into the fair value hierarchy as of August 31, 2016 and November 30, 2015:
|
|
Fair value measured at August 31, 2016
|
|
|
|
|
|
|
|
Fair value at
August 31 2016
|
|
|
Quoted prices in
active markets
(Level 1)
|
|
|
Significant other
observable
inputs (Level 2)
|
|
|
Significant
unobservable
inputs (Level 3)
|
|
Bifurcated conversion
options, put options, and
derivative warrant
liabilities
|
|
$
|
1,233,219
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,233,219
|
|
|
|
Fair value measured at November 30, 2015
|
|
|
|
|
|
|
|
Fair value at
November 30, 2015
|
|
|
Quoted prices in
active markets
(Level 1)
|
|
|
Significant other
observable
inputs (Level 2)
|
|
|
Significant
unobservable
inputs (Level 3)
|
|
Bifurcated conversion
options and derivative
warrant liabilities
|
|
$
|
1,313,012
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,313,012
|
|
There were no transfers
between Level 1, 2 or 3 during the nine months ended August 31, 2016 and during the year ended November 30, 2015.
The following table
presents changes in Level 3 liabilities measured at fair value for the nine months ended August 31, 2016. Both observable and
unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level
3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes
in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes
in unobservable long-dated volatilities) inputs.
|
|
December 1, 2015
|
|
|
Derivative
Liabilities from
Convertible
Notes Payable and Notes Payable
|
|
|
Fair value at Inception
|
|
|
Change in estimated
fair value recognized in
results of operations
|
|
|
August 31, 2016
|
|
Embedded conversion
options, put options, and
derivative warrant
liabilities
|
|
$
|
1,313,012
|
|
|
$
|
324,762
|
|
|
$
|
57,237
|
|
|
$
|
(461,792
|
)
|
|
$
|
1,233,219
|
|
The development and
determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility
of the Company’s management. The Company’s put options are valued using a using a Monte Carlo model or, in certain
circumstances, the Black-Scholes option pricing model. As of August 31, 2016, the inputs used in the analysis included discount
rates per the conversion terms of the convertible promissory notes.
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
A summary of quantitative
information about significant unobservable inputs (Level 3 inputs) used in measuring the Company’s embedded conversion options
that are categorized within Level 3 of the fair value hierarchy for the nine months ended August 31, 2016 and for the year ended
November 30, 2015 is as follows:
|
|
Date of valuation
|
|
|
|
August 31, 2016
|
|
|
November 30, 2015
|
|
Stock price
|
|
$
|
0.14
|
|
|
$
|
0.45
|
|
Conversion price
|
|
$
|
.15
|
|
|
|
$0.10 – $0.22
|
|
Volatility
|
|
|
78.17
|
%
|
|
|
161% – 239%
|
|
Risk free interest rate
|
|
|
0.92
|
%
|
|
|
0.11% – 0.86%
|
|
Years to maturity
|
|
|
2.65 – 2.94
|
|
|
|
0.45 – 1.74
|
|
A summary of quantitative
information about significant unobservable inputs (Level 3 inputs) used in measuring the Company’s derivative warrant liabilities
that are categorized within Level 3 of the fair value hierarchy for the nine months ended August 31, 2016:
|
|
August 31, 2016
|
|
|
Stock price
|
|
$
|
0.14
|
|
|
Conversion price
|
|
|
$0.001 – $0.30
|
|
|
Volatility
|
|
|
69.86% – 78.17
|
%
|
|
Risk free interest rate
|
|
|
0.33% – 0.92
|
%
|
|
Years to maturity
|
|
|
0.25 – 2.42
|
|
|
|
|
|
|
|
|
|
10.
|
RELATED PARTY TRANSACTIONS
|
During the three and
nine months ended August 31, 2015, the Company sold nil and $34,017 in products to Vape Nation. These sales represented 88% of
total revenue for the nine month period resulting in accounts receivable, related party of $17,222, which was paid in December
2016. Vape Nation, is 50% owned by MCKEA. MCKEA is the majority member of Philou Ventures, LLC (“Philou”), which is
the Company’s controlling shareholder. Kristine L. Ault, the wife of Milton C. Ault III, Chairman of the Company’s
Board of Directors, is the manager and owner of MCKEA.
At February 29, 2016,
the Company owed MCKEA $53,790, which was included in accounts payable and accrued expenses, related party. Of this amount, $25,000
was advanced directly by MCKEA to JST pursuant to the terms of the JST Note (see Note 5). The Company paid the amount owed MCKEA
during the three months ended May 31, 2016.
On May 1, 2016, the
Company entered into a management services agreement (the “
MSA
”) with Alzamend Neuro, Inc. (“
Alzamend
”),
a related party. Alzamend was formed on February 26, 2016 under the laws of the State of Delaware to acquire and commercialize
patented intellectual property and the know-how to prevent, treat and cure Alzheimer’s. Avalanche provides management, consulting
and financial services to Alzamend. Such services include advice and assistance concerning any and all aspects of operations, planning
and financing of Alzamend and conducting relations with accountants, attorneys, financial advisors and other professionals. The
term of the MSA, as amended, is for the period May 1, 2016 to December 31, 2017, and may be extended by written agreement, with
Avalanche having initially received $40,000 per month and, beginning February 2017, currently receiving $20,000 per month for the
remainder of 2017. During the three and nine months ended August 31, 2016, the Company recorded $160,000 in revenue related to
the management service agreement with Alzamend.
Preferred Stock
The Company is authorized
to issue 10,000,000 shares of Preferred Stock with a par value of $0.001 per share. On July 31, 2014, the Board of Directors designated
50,000 shares of its Preferred Stock as “Class A Convertible Preferred Stock” (the “Class A Preferred Stock”).
Each share of Class A Preferred Stock has a stated value of $5.00 per share. The holders of Class A Preferred Stock have no voting
rights. The holders are entitled to receive cumulative dividends at a rate of 10% of the stated value per annum, payable twice
a year, subject to the availability of funds and approval by the Board of Directors. In the discretion of the Board of Directors,
dividends may be paid with common stock. In the event of a liquidation or dissolution of the Company each holder of Class A Preferred
Stock shall be entitled to be paid in cash $5.00 per share.
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
At any time after August
31, 2015, a holder of Class A Preferred Stock may, at its option, convert all or a portion of its outstanding shares into common
stock.
Common Stock
2016 Transactions
On December 10, 2015,
the Company entered into a subscription agreement with a third party, whereby it sold 25,000 shares of its common stock at a price
of $0.20 per share for total cash proceeds of $5,000.
On January 26, 2016,
the Company issued 50,000 fully vested and non-forfeitable shares of common stock to a third-party service provider of consulting
services. The aggregate fair value of the shares amounted to $20,000 based on the closing price of the Company’s common stock
on the issuance date. The related services were completed during the nine months ended August 31, 2016.
Conversion of debt
2016 Transactions
On January 26, 2016,
the Company issued 297,619 shares of common stock to Typenex Co-Investment, LLC in conversion of $12,500 of accrued interest. The
shares of common stock were valued at $119,048 resulting in a loss on conversion of $106,548.
On January 28, 2016,
the Company issued 100,000 shares of common stock to Black Mountain Equities, Inc. in conversion of $12,830 of principal and accrued
interest. The shares of common stock were valued at $40,000 resulting in a loss on conversion of $27,170.
On January 29, 2016,
the Company issued 60,000 shares of common stock to JMJ Investments, Inc in conversion of $3,024 of accrued interest. The shares
of common stock were valued at $24,000 resulting in a loss on conversion of $20,976.
Common Stock Warrants
On December 2, 2015,
in connection with issuing the Livingston Note (see Note 7d), the Company issued 100,000 common stock warrants which were valued
at $30,987.
In January 2016, in
connection with an amendment to the LG Capital Funding, LLC Note (see Note 6f), the Company issued 75,000 common stock warrants,
which were valued at $26,250.
Stock based compensation
During the three and
nine months ended August 31, 2016, the Company issued nil and 50,000 shares, respectively, of common stock to service providers.
During the three and nine months ended August 31, 2015, the Company issued 127,500 and 440,000 shares, respectively, of common
stock to service providers. The shares of common stock are being expensed over the term of the services being provided. As a result
of these issuances, the Company has recorded stock-based compensation during the three and nine months ended August 31, 2016 of
nil and $20,000, respectively. The Company recorded stock-based compensation during the three and nine months ended August 31,
2015 of $428,654 and $680,487, respectively. The fair value of the shares was determined based on the closing price of the Company’s
common stock on the issuance date and is being recognized over the term of the respective consulting agreement.
In accordance with ASC 855-10,
the Company has analyzed its operations subsequent to August 31, 2016 through March 21, 2019, the date these financial
statements were issued and has determined that there are no material subsequent events to disclose in these financial
statements except for the following.
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Convertible Notes Payable
On October 5, 2016,
November 30, 2016, and February 22, 2017, the Company entered into three convertible promissory notes with DPW Holdings, Inc. (NYSE:
DPW) (the “DPW Notes”), a related party. Under the terms of the DPW Notes, the Company borrowed the sum of $1,575,000.
The DPW Notes featured an original issue discount of $75,000, resulting in net funding to the Company of $1,500,000. The DPW Notes
were due in two years and accrued interest at 12% per annum. The DPW Notes, were convertible into shares of the Company’s
common stock at a conversion price of $0.745 per share.
On September 6, 2017,
DPW Holdings, Inc. and the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with an effective
date of August 21, 2017 pursuant to which DPW will provide the Company a non-revolving credit facility of up to $10,000,000,
for a period ending on August 21, 2019.
In consideration of
entering into the Loan Agreement, the DPW Notes were cancelled and the DPW Notes were consolidated and a new Convertible Promissory
Note was issued (the “New DPW Note”). At December 3, 2018, DPW has provided loans to the Company in the principal amount
$6,795,346 and, in addition to the 12% convertible promissory notes, the Company has issued to DPW warrants to purchase 13,590,692
shares of the Company’s common stock. The New DPW Note is due in two years and accrues interest at 12% per annum on the face
amount. The New DPW Note contains standard events of defaults. Future advances under the Loan Agreement, if any, will be evidenced
by a convertible promissory containing a conversion price feature at $0.50 per share and warrant with an exercise price of $0.50
per share. Further, under the terms of the Loan Agreement, the New DPW Notes are secured by the assets of Avalanche.
Mr. Ault is the Chief
Executive Officer and Chairman of the Board of Directors of DPW’s Board of Directors and the Chairman of the Company’s
Board of Directors. Mr. William B. Horne is the Chief Financial Officer and a director of DPW and the Chief Financial Officer and
a director of the Company.
Preferred Stock
On March 6, 2017, the
Company withdrew its former Class A Convertible Preferred Stock (the “
Previous Class
”), all shares of which
were converted into shares of Common Stock as of September 21, 2015. The certificate of designations of the Previous Class was
originally filed with the Secretary of State of the State of Nevada on July 31, 2014.
On March 7, 2017, the
Company filed a new Certificate of Designations, Preferences, Rights and Limitations of Class A Convertible Preferred Stock (the
“Class A Certificate of Designations”) with the Secretary of State of the State of Nevada, setting forth the terms
of the Class A Shares.
The Class A Shares
each carry a stated value of $20.00. The Class A Shares shall vote together with the shares of Common Stock as a single class and,
regardless of the number of Class A Shares outstanding, provided that at least 25,000 of such Class A Shares are outstanding, shall
represent eighty percent (80%) of all votes entitled to be voted at any annual or special meeting of shareholders of the Company
or action by written consent of shareholders, including any shares of preferred stock other than the Class A Shares that are voted
with the Common Stock. Each outstanding Class A Share shall represent its proportionate share of the 80% which is allocated to
the outstanding Class A Shares. The Class A Shares are convertible at the Holder’s option into shares of Common Stock of
the Company at a conversion price derived by dividing the stated value of each Class A Share by $0.50 per share, subject to customary
adjustment, which conversion may occur at any time at the option of the Holder.
On March 7, 2017, the
Company entered into an agreement (the “Exchange Agreement”) with Philou pursuant to which it agreed to issue to Philou
50,000 shares of its newly created Class A Convertible Preferred Stock (the “Class A Shares”) and 5,000,000 common
stock warrants in exchange for the surrender by Philou of 2,000,000 shares of its Common Stock. On April 26, 2017, the Class A
Shares were issued simultaneously with the surrender and cancellation of the 2,000,000 shares of common stock. The warrants have
a five year term and an exercise price of $0.35 per share.
On March 7, 2017, the
Company filed the Certificate of Designations, Preferences, Rights and Limitations of Class B Convertible Preferred Stock (the
“Class B Certificate of Designations”) with the Secretary of State of the State of Nevada, setting forth the terms
of its Class B Convertible Preferred Stock (the “Class B Shares”).
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The Company designated
100,000 shares of its preferred stock, par value $0.001 per share, as Class B Shares. The Class B Shares will have a priority over
all of the shares of Common Stock on liquidation or sale of the Company, at the rate of $50.00 per Class B Share, or a liquidation
preference of $5,000,000 (the “Class B Stated Value”) as to all Class B Shares. The Class B Shares will pay an annual
dividend (at the option of the Company, either in cash or in additional shares of Common Stock), in an amount that shall be the
greater of (i) an annual rate of 5% per annum, or (ii) 5% of MTIX’s net income as determined in accordance with United States
Generally Accepted Accounting Principles for the fiscal year then ended. The Class B Shares will vote with the Common Stock on
all matters as to which shareholders of the Company are entitled to vote, on an “as converted” basis, as though all
outstanding Class B Shares had been converted into Common Stock immediately prior to the taking of the record date for all shareholders
entitled to vote at any regular or special meeting of the Company’s shareholders. Commencing two (2) years after the Closing
Date, the Class B Shares shall be convertible into shares of Common Stock by dividing the Class B Stated Value by the Conversion
Price applicable to the Notes. The Class B Shares shall contain the respective rights, privileges and designations as are set forth
in the Certificate of Designations, Preferences, Rights and Limitations of Class B Convertible Preferred Stock.
Common Stock
On February 28, 2017,
the Company issued 250,000 shares of its common stock as payment for services to an officer. The shares were valued at $40,000,
$0.16 per share.
On March 9, 2017, the
Company issued an aggregate of 216,946 shares of its common stock as repayment of the principal and accrued interest on the convertible
note due to GCEF Opportunity Fund, LLC (See Note 6g). The shares had an aggregate fair value of $32,542, an average of $0.15 per
share.
On January 23, 2018,
the Company, Adar Bays, LLC and Union Capital, LLC entered into Note Settlement and Termination Agreements. Pursuant to the terms
of the settlement agreements, the Company agreed to satisfy each of the outstanding notes for $200,000 and 100,000 shares of common
stock. The payments were made on January 26, 2018 (See Note 6a).
On May 11, 2018, the
Company issued an aggregate of 20,000 shares of its common stock as repayment of $4,550 in principal on the convertible note due
to JMJ Financial (See Note 6d). The shares had an aggregate fair value of $4,550, an average of $0.23 per share.
MTIX, Ltd. Acquisition
On August 22, 2017,
pursuant to the terms of a Share Exchange Agreement dated as of March 3, 2017, and as amended on July 13, 2017 and August 21, 2017
(the “Exchange Agreement”) with MTIX Limited, a company formed under the laws of England and Wales (“MTIX”)
and the three (3) shareholders of MTIX (the “Sellers”), the Company completed its acquisition of MTIX. Upon the terms
and subject to the conditions set forth in the Exchange Agreement, the Company acquired MTIX from the Sellers through the transfer
of all issued and outstanding ordinary shares of MTIX (the “MTIX Shares”) by the Sellers to the Company in exchange
(the “Exchange”) for the issuance by the Company of: (a) 7% secured convertible promissory notes (individually, a “Note”
and collectively, the “Notes”) in the aggregate principal face amount of $9,500,000 to the Sellers in pro rata amounts
commensurate with their current respective ownership percentages of MTIX’s ordinary shares, (b) (i) $500,000 in cash, $50,000
of which was paid on October 26, 2016, and (ii) 100,000 shares of the Company’s newly designated shares of Class B Shares
to the principal shareholder of MTIX (the “Majority Shareholder”).
At the Closing the
Company delivered to the Majority Shareholder and the two Sellers other than Majority Shareholder (the “Minority Shareholders”)
three Notes, which Notes were in the principal face amount of $6,166,666 with respect to the Majority Shareholder and in the principal
face amount of $1,666,667 with respect to each of the Minority Shareholders.
The Notes
The Notes bear interest
at 7% per annum with interest payable (i) in cash upon maturity or in connection with any voluntary or mandatory conversion or,
(ii) at the option of the Seller, in arrears on the first day of each calendar quarter after the date of issuance (the “Closing
Date” ) by issuing and delivering that number of shares of Common Stock determined by dividing the interest accrued for such
quarter by the average price per share for the ten (10) trading days immediately preceding the determination date as reported by
Bloomberg, L.P.
Commencing two (2)
years from the Closing Date, the Company may prepay any portion of the principal amount of the Notes without the prior written
consent of the holders, provided, however, that the Company shall provide the Sellers with 90 days’ notice of such prepayment,
and any prepayment must be undertaken on a pro rata basis for all Notes then outstanding. The holders of Notes shall have the right
to convert any or all of the amount to be redeemed into common stock prior to prepayment.
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Each Note ranks pari
passu in right of payment with all other Notes now or hereafter issued in accordance with the Exchange Agreement and matures on
the five-year anniversary of the issuance date thereof. Subject to certain limitations, the Notes are convertible at any time at
the option of the holder into shares of the Company’s common stock at a conversion price equal to either (i) if the aggregate
market capital of the Company on the date of conversion (the “Market Cap”) is $35,000,000 or less, at a 25% discount
to the Market Price, or (ii) if the Market Cap is greater than $35,000,000, at a 25% discount to the Market Price, provided that
such discount shall be increased by dividing it by the quotient that shall be obtained by dividing $35,0000,000 by the Market Cap
at the time of conversion, provided, however, any increase in the discount to the Market Price shall not result in a discount that
is greater than a 75% discount (the “Conversion Price”). Notwithstanding the foregoing, in no event shall the Conversion
Price be less than $0.35. In addition, the Company may force the conversion of the Notes at any time commencing two (2) years from
the Closing Date, provided certain conditions are met.
Security Agreement
The Notes are secured,
pursuant to a Security Agreement, by a lien on certain of the Company’s assets, including but not limited to the intellectual
property of MTIX. Upon the occurrence of an event of default under the Notes, a majority in interest of the Notes may require the
Company to repay all of its Notes in cash, at a price equal to 100% of the principal, accrued and unpaid interest and any amounts,
costs and liquidated damages, as applicable.
Registration Rights Agreement
In connection with
the Exchange, the Company and the Sellers entered into a Registration Rights Agreement under which the Company shall be required
to file a registration statement with the Commission covering the resale of the shares of the Common Stock issuable pursuant to
conversion of: (i) the Notes eighteen (18) months from the Closing Date, and (ii) the Class B Shares twenty-four (24) months
from the Closing Date. In addition, the Company use its best efforts to have the registration statement declared effective as soon
as practicable, but in no event later than 90 days after the filing date if the registration statement is not subject to a full
review by the Commission, or 120 days after filing if the registration statement is subject to a full review by the Commission.
The Company will be subject to certain monetary penalties, as set forth in the Registration Rights Agreement, if the registration
statement is not filed, does not become effective on a timely basis, or does not remain available for the resale (subject to certain
allowable grace periods) of the Registrable Securities, as such term is defined in the Registration Rights Agreement.
MTIX, Ltd. And DPW Agreement
On March 14, 2017,
DPW entered into an agreement with MTIX to manufacture and deliver products, which refers to MTIX’s patented, technical textile
treatment systems that utilize MTIX’s proprietary laser/plasma hybrid processing technology in exchange for $50.0 million
plus a $750,000 annual management fee. MTIX may cancel any order at any time at its’ own discretion. Upon cancellation, MTIX
is liable for all verified material and labor expenses incurred up to the date of cancellation plus any cancellation charges owed
by DPW to subcontractors.
MTIX, Ltd. Exchange Agreement
On December 5, 2017,
DPW entered into an exchange agreement with WT Johnson & Sons (Huddersfield) Limited (the “WT Johnson”), pursuant
to which the Company issued to the WT Johnson, (a) a convertible promissory note in the principal amount of $600,000 (“Note
A”), and (b) a convertible promissory note in the principal amount of $1,667,766 (“Note B”), in exchange for
cancellation of (i) an outstanding loan made by WT Johnson to MTIX in the amount of $265,666; and (ii) cancellation of an aggregate
of $2,002,500 owed by MTIX to WT Johnson pursuant to an Agreement for the Sale and Purchase of a Textile Multi-Laser Enhancement
Technology Machine dated as of July 21, 2017 by and between MTIX and WT Johnson.
Note A was convertible
into DPW’s common stock at a conversion price of $1.00 per share, does not bear interest, and matured two years from issuance.
Note B was convertible into DPW’s common stock at a conversion price of $0.85 per share, does not bear interest, and matured
two years from issuance. However, WT Johnson did not have the right to convert any portion of Note B, following receipt by
WT Johnson of an aggregate of $2,267,766 of gross proceeds from the sale of shares of common stock issued upon conversion of Note
A or Note B.
During December 2017,
DPW issued 600,000 shares of its common stock upon the conversion of Note A and WT Johnson notified DPW that gross proceeds during
the month of December 2017 from sales of the 600,000 shares of common stock were sufficient to satisfy the entire $2,267,766 obligation.
As a result of entering into the exchange agreement with WT Johnson, MTIX is obligated to pay DPW $2,668,266, consisting of the
amount of the exchange agreement of $2,267,766 and a value added tax of $400,500 from the sale of the Textile Multi-Laser Enhancement
Technology Machine. Concurrent with entering into the exchange agreement, MTIX issued a promissory note in the amount of $2,668,266
to DPW and Note B was cancelled.
Avalanche International, Corp. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Philo Group, LLC Note Receivable
Between June 2016
to November 2017, the Company provided $947,092 in financing to Philo under the terms of a Senior Secured Property Note dated April
4, 2016, as amended (the “Philo Note”). The Philo Note bears interest at a rate of sixteen percent (16%) per year,
requires monthly interest payments, and was due within six (6) months from the date of issue.
Stock Incentive Plan
On October 27, 2016,
subject to stockholder approval, the Company’s Board of Directors approved the Company’s 2016 Stock Incentive Plan
(the ”Plan”), which provides for the issuance of a maximum of three million (3,000,000) shares of the Company’s
common stock to be offered to the Company’s directors, officers, employees, and consultants. Options granted under the Plan
will have an exercise price equal to or greater than the fair market value of the underlying common stock at the date of grant
and become exercisable based on a vesting schedule determined at the date of grant. The options will expire between 5 and 10 years
from the date of grant. Restricted stock awards granted under the Plan are subject to a vesting period determined at the date of
grant.
On October 27, 2016,
the Company’s Board of Directors granted incentive stock option awards for 1,000,000 shares of common stock to each of the
Company’s Chairman, President and Chief Executive Officer and Chief Financial Officer (collectively, the “Stock Option
Grants”). The Stock Option Grants were issued pursuant to the Plan. Upon obtaining stockholder approval for the Plan an accounting
grant date will be established. The Stock Option Grants have an exercise price of $0.16 and are exercisable for seven years. The
Stock Option Grants will initially vest equally in annual tranches over a three (3) year period beginning on October 27, 2017.
Upon closing of the acquisition of MTIX, the vesting terms of the options change and will vest 50% upon closing and 50% one year
after closing.