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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Or

Commission File Number 333-179028

Avalanche International, Corp.

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code)

 

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

Securities registered under Section 12(g) of the Act:          Common Stock, $0.001 par value per share

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  ☐    No  ☑

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding year (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☐    No  ☑

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

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

Large accelerated filer  ☐						Accelerated filer  ☐
Non-accelerated filer  ☐		(Do not check if a smaller reporting company)				Smaller reporting company  ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☑

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of May 31, 2015 was $3,069,889.

There were 5,092,254 shares of common stock outstanding as of April 27, 2017.

Documents incorporated by reference: None

 

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FORM 10-K

FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2015

TABLE OF CONTENTS

 

 

PART I

 

 

Item 1.  Business.

 

DESCRIPTION OF BUSINESS

In this Annual Report, unless the context requires otherwise, references to the “Company,” “Avalanche,” “we,” “our company” and “us” refer to Avalanche International, Corp., a Nevada corporation, together with its subsidiaries.

Company Overview and Description of Business

Avalanche is a holding company currently engaged in acquiring and/or developing businesses in which the Company maintains a controlling interest. The Company anticipates that its subsidiaries will be engaged in a number of diverse business activities. The Company currently has 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 was discontinued in June 2015. RCG was formed to hold the Company’s investments in the restaurant industry. In March 2017, the Company entered into a definitive agreement to acquire a third business, MTIX Ltd., an advanced materials and processing technology company located in Huddersfield, West Yorkshire, UK (“MTIX”). MTIX has developed a novel cost effective and environmentally friendly material synthesis technology for textile applications that uses a combination of plasma and photonic energy to effect material synthesis of a substrate surface. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed discussion of the definitive agreement to acquire MTIX

The Company is engaged in a variety of activities which we believe will expand the number and type of businesses in which we invest and ultimately have a controlling interest. The Company identifies investment opportunities through an extensive network of contacts with investment banking and venture capital firms and other associations with high net-worth individuals and individuals at universities such as the University of South Florida  and the Byrd Institute. Upon identification of an investment opportunity the Company relies upon the executive management team to conduct a thorough evaluation of the target and its technology. As required, the executive management team may consult with individuals that have specialized expertise in the target industry. In the case of an investment where the executive management team is satisfied with its evaluation, the basic terms of an investment are negotiated directly by the executive management team and, depending on the amount of the transaction, presented to the Board for approval. Upon mutual acceptance of the basic terms, outside counsel would prepare the transaction investment documents.

Avalanche’s operating businesses are managed on a centralized basis. The Company’s senior management participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the key executive officers to head each of the operating businesses. Our capital allocation decisions are based on extensive analysis of potential subsidiary companies' business operations supported by an in-depth understanding of the quality of their revenues and cash flow potential, variability of costs and the inherent value of their assets, including proprietary intangible assets and intellectual property.

Restaurant Capital Group, LLC

On April 13, 2016, RCG entered into an agreement to finance a new restaurant owned by Philo Group, LLC (“Philo”). The restaurant is named Giulia, and will feature Italian fusion cuisine and two stylish full service bars with an intimate lounge atmosphere. Giulia, which opened in March 2017, is located near the Financial District, LA Live, and the Staples Center in downtown Los Angeles. Philo has placed a significant emphasis on the distinctive, contemporary interior design and decor of Giulia. We believe that this stylish restaurant design and decor will contribute to the distinctive dining experience enjoyed by customers and generate higher annual sales per square foot that than is typical in our industry.

Our initial investment in Philo was structured as a loan and between April 2016 and April 2017, we provided $931,000 in financing to Philo under the terms of 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 and is personally guaranteed by the principal of Philo, and secured by all assets of Philo. In addition, we expect to renegotiate the terms of our investment in Philo such that we obtain a significant ownership in Giulia.

 

 

Competitive Positioning

The restaurant business is intensely competitive with respect to food quality, access to qualified operations personnel, price-value relationships, ambiance, service and location. Restaurants in which we invest will compete with national and regional restaurant dining chains, independently-owned restaurants, quick-service restaurants, mobile catering and grocery stores that offer variety and high quality prepared food products. We look for investments in restaurants that will focus on differentiating their operations on key strengths, which may include the following:

·

Extensive and innovative menu;

·

High quality and high profile restaurant location;

·

Distinctive restaurant design and ambience;

·

Mainstream appeal of menu selections;

·

Distinctive upscale casual dining experience;

·

Significant bar and happy hour business;

·

Personalized customer service.

Government Regulation

 

The restaurant industry is governed by numerous federal, state and local laws affecting the conduct of operations. Restaurants are subject to licensing and regulation by a number of government authorities, including alcoholic beverage control, health, sanitation, labor, zoning and public safety agencies and to periodic review by state and municipal authorities for areas in which the restaurant is located. The restaurant industry is also subject to numerous environmental regulations, including water usage and sanitation disposal. Denials, revocation or temporary suspension of necessary licenses or approvals could have a material adverse impact on the restaurant.

In order to serve alcoholic beverages, a restaurant must comply with alcoholic beverage control regulations which require each restaurant to apply to a state authority and, in certain locations, county and municipal authorities, for a license and permit to sell alcoholic beverages on the premises. Typically, licenses must be renewed annually and may be subject to penalties, temporary suspension or revocation for cause at any time. Alcoholic beverage control regulations impact many aspects of the daily operations of a restaurant, including the minimum ages of patrons and employees, hours of operation, inventory control and handling, and storage and dispensing of alcoholic beverages. In many jurisdictions, state and local authorities routinely monitor compliance with alcoholic beverage laws. If a restaurant that we invest in were to encounter any material problems relating to alcoholic beverage licenses or permits it would adversely affect that restaurant’s operations and profitability.

The restaurants that we expect to invest in will almost all serve alcoholic beverages. Most states have adopted “dram shop” statutes. Those statutes generally provide a person who has been injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to such person. Despite the requirement that a restaurant in which we invest must carry liquor liability coverage as a component of its general liability insurance, a judgment against the restaurant under a “dram shop” statute in excess of the liability coverage could have a material adverse effect on that restaurant’s operations.

Restaurant operations are also subject to federal and state laws governing such matters as wages, working conditions, citizenship requirements, and overtime. Several states have set minimum wage rates higher than the current federal level. Hourly personnel at restaurants are paid at rates related to state and federal minimum wage laws and, accordingly, state minimum wage increases that will be implemented during the next several years will increase labor costs. Increases in the minimum wage rate or the cost of workers’ compensation insurance, changes in tip-credit provisions, employee benefit costs or other costs associated with employees could adversely affect a restaurant’s operating results.

Restaurant’s must comply with the applicable requirements of the Americans with Disabilities Act of 1990 (“ADA”) and related federal and state statutes which prohibit discrimination on the basis of disability with respect to public accommodations and employment.

We are subject to laws relating to information security, privacy, cashless payments and consumer credit, protection and fraud. An increasing number of governments and industry groups worldwide have established data privacy laws and standards for the protection of personal information, financial information and health information. Accordingly, operators of restaurants must continually update information technology systems and staff member training in order to comply with these laws.

 

 

Restaurant Operations

 

An upscale restaurant must consistently and properly execute a complex menu offering items prepared daily with high quality, fresh ingredients in a high-volume environment. Thus, the success of those restaurants in which we invest will be largely dependent upon selecting and retaining dedicated General Managers, other management employees and hourly staff members. If the restaurant in which we invest are unable to successfully recruit and retain qualified restaurant management and operating personnel in a very competitive landscape, our restaurants may be unable to effectively operate and grow business and revenues, which could ultimately materially adversely affect our financial performance.

 

We believe that the popularity of the restaurants in which we will invest will allow us to attract and retain high quality, experienced restaurant-level management and other operational personnel. We believe that features that will initially drive the popularity of a restaurant will likely be the location and the distinctive restaurant design and ambience, key factors in our competitive positioning. We envision that highly experienced general managers will be responsible for selecting and training hourly staff members for their respective restaurants. Enthusiasm and commitment in the restaurant’s staff members will be achieved through daily staff meetings and dedicated training. 

Marketing and Advertising

 

We expect that the restaurants in which we invest will rely on their high-profile locations, media interest and positive word of mouth, to retain and grow market share. We will also attempt to build awareness and relationships with retailers located in the same developments, shopping center operators, local hotel concierges and others in the community. At times, we may also engage in marketing and advertising opportunities in selective local markets.

 

Food Safety and Quality Assurance

 

The general managers of restaurants in which we invest will initially oversee food safety, nutritional and regulatory compliance to ensure that safe, high quality foods are produced in a clean and safe environment. Our food safety standards are geared to the prevention of contamination and illness and executing to all regulatory requirements as well as industry standards. The selection of any supplier will be conditioned on that supplier’s ability to demonstrate strict adherence to sanitation, good manufacturing and agricultural practices, product protection and food security. In addition, all food suppliers must have annual food safety and quality system audits.

Competition

 

The restaurant industry is highly fragmented and intensely competitive with respect to food quality, price-value relationships, ambiance, service and location. Actual and potential competitors include national and regional restaurant dining chains, independently-owned restaurants, quick-service restaurants, mobile catering and grocery stores that offer variety and high quality prepared food products. Many of our potential competitors have considerably greater financial resources, higher revenue, and greater economies of scale. It is anticipated that competition will continue to increase due to these factors. The restaurant business is often affected by changes in consumer tastes and discretionary spending patterns; national and regional employment statistics; the cost and availability of raw materials, labor, and energy; purchasing power; governmental regulations; and local competitive factors. Any change in these or other related factors or negative publicity relating to food safety could adversely affect our restaurant operations. We believe that we will compete favorably with respect to each of these factors.

Smith and Ramsay Brands, LLC

The Company established SRB as a manufacturer and distributor of flavored liquids for electronic vaporizers and eCigarettes and accessories (the “Vape Business”). SRB had intended to aggressively expand the Vape business with additional flavors in its signature brand and by expanding through additional new brands and the acquisition and distribution of signature and non-signature accessories. In mid-Fall of 2014, SRB began a targeted rollout of its Vape Business and during June 2015 we made the decision to discontinue operations in the Vape Business. The decision to discontinue this line of business was based upon the highly competitive marketplace and exceedingly small gross margins that we were realizing in the Vape Business combined with other business opportunities, such as the restaurant business, where we expect to generate much greater returns.

 

 

Technology and Intellectual Property

 

Trademarks

 

We believe that having distinguishing marks for products that we may develop will be an important marketing characteristic. Currently, we do not have any U.S. registered trademarks on the principal register at the USPTO. We have not sought any foreign trademark protection at this time. U.S. trademark registrations generally are for fixed, but renewable, terms.

 

Domain Names

www.AvalancheInternationalCorp.com

www.SmithAndRamsay.co

www.SmithAndRamsay.com

www.SmithAndRamsayBrands.co

www.SmithAndRamsayBrands.com

www.SmithAndRamsayBrands.info

www.SmithAndRamsayBrands.net

www.SmithAndRamsayBrands.org

www.SmithNRamsay.com

www.SmithAndRamsay.com

Employees

 

As of April 27, 2017, we employed two permanent management level personnel and work with outside labor and consultants to complete the tasks at hand. We may require additional employees in the future. There is intense competition for capable, experienced personnel and there is no assurance the Company will be able to obtain new qualified employees when required. None of our employees is covered by a collective bargaining agreement and our management considers relations with employees to be good.

Item 1A.  Risk Factors.

 

 

We are an early-stage company, have generated minimal revenues, and have only a limited operating history upon which you can evaluate our business and prospects. An investment in our common stock is highly risky and could result in a complete loss of your investment if we are unsuccessful in our business plans.

 

Our Company was only recently formed; we have just completely changed our initial business plan; we have realized minimal revenues; and we have an accumulated deficit on our balance sheet. We have very little if any operating history upon which to evaluate the future prospects of our current business plan. Such prospects must be considered in light of the substantial risks, expenses and difficulties associated with any new investment strategy or objective, including the risk that we will not achieve our investment objective and that the value of your investment in us could decline substantially. Based upon current plans, we expect to incur operating losses in future periods as we incur expenses associated with the initial startup of our business. Furthermore, we cannot guarantee that we will be successful in achieving or sustaining positive cash flow at any time in the future. Any such failure could result in the possible closure of our operations or force us to seek additional capital through loans or additional sales of our equity securities to continue business operations.

 

Because we may have difficulty managing our growth, our ability to successfully expand sales and revenues may be compromised.

 

We expect to experience growth in the number of our employees and customers, our level of sales, and the general scope of our operations. Our ability to manage this growth will depend upon, among other factors, our ability to broaden our management team; our ability to attract, hire and retain skilled employees; and the ability of our officers and key employees to continue to implement and improve our operational, financial and other systems, and to manage multiple, concurrent customer and supplier relationships such that our various products are manufactured, assembled and delivered to market in a timely and satisfactory fashion. Our future success is heavily dependent upon achieving such growth and acceptance of our products. If we cannot manage this growth, it could have a material adverse effect on our business and we may not become profitable.

Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.

 

Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the years ended November 30, 2015 and November 30, 2014 with respect to this uncertainty. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.

 

We have significant working capital requirements and have historically experienced negative working capital balances. If we experience such negative working capital balances in the future, it could have a material adverse effect on our business, financial condition and results of operations.

 

The Company’s current liabilities significantly exceed current assets, resulting in negative working capital of $2,087,389. Consequently, the Company will be dependent upon additional financing to meet capital needs and repay outstanding debt. Since May 14, 2014, when the Company entered into an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations (the “Agreement”) with John Pulos, its prior sole officer and director, the Company has relied on short-term loans to fund its operating cash flow deficits. There is no assurance that we will generate the necessary net income or operating cash flows to meet our working capital requirements and pay our debt as it becomes due in the future due to a variety of factors discussed in this “Risk Factors” section. If we are unable to do so, our liquidity would be adversely affected and we would consider taking a variety of actions, including curtailing or reducing planned investments and acquisitions, raising additional equity, borrowing additional funds, refinancing existing indebtedness or taking other actions. There can be no assurance, however, that we will be able to successfully take any of these actions, including adjusting expenses sufficiently or in a timely manner, or raising additional equity, increasing borrowings or completing a refinancing on any terms or on terms that are acceptable to us. Our inability to take these actions as and when necessary would materially adversely affect our liquidity, results of operations and financial condition.

 

 

Our significant level of debt could limit cash flows available for our operations, adversely affect our financial health and prevent us from fulfilling our obligations under our credit facilities and other accrued liabilities.

As of November 30, 2015, not including debt discount of $221,619, we had total convertible notes and notes payable of $773,625 and accrued interest and penalties of $71,867. All of these notes payable have maturities of less than one year and if immediate full or partial repayment of such notes payable is required, we cannot assure you that we would have access to sufficient funds or other assets to pay the amounts due. Further, if we were required to use a large portion of our cash flows to pay principal and interest on borrowings under the notes payable, or our other accrued liabilities, it would reduce the availability of cash to fund working capital, investments or acquisitions, capital expenditures and other business activities. If these actions were to occur, it would materially adversely affect our liquidity, results of operations and financial condition.

We must attract quality management in order to manage our growth. Failure to do so may result in slower expansion.

 

In order to support the growth of our business, we will need to expand our senior management team. We currently do not have an active recruitment program for managers, middle managers and senior managers. There is no assurance that we will be capable of attracting quality managers and integrating those individuals into our management system. Without experienced and talented management, the growth of our business may be adversely impacted.

 

Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees we need to support our business. Without skilled employees, the quality of our product development and services could diminish and the growth of our business may be slowed, which may have a material adverse effect on our business, financial condition and results of operations.

 

Our ability to provide high-quality products and services to our clients depends in large part upon our employees’ experience and expertise. We must attract and retain highly qualified personnel with a deep understanding of the industries in which we operate. In addition, we invest significant time and expense in training our employees, increasing their value to clients as well as to competitors who may seek to recruit them, which increases the cost of replacing them. If we fail to retain our employees, the quality of our products and services could diminish and the growth of our business may be slowed. This may have a material adverse effect on our business, financial condition and results of operations.

 

If we lose the services of our key personnel, we may be unable to replace them, and our business, financial condition and results of operations may be adversely affected.

 

Our success largely depends on the continued skills, experience, efforts and policies of our management and other key personnel and our ability to continue to attract, motivate and retain highly qualified employees. In particular, the services of Philip E. Mansour, our Chief Executive Officer, William B. Horne, our Chief Financial Officer, and Milton C. Ault III, our Chairman of the Board, are integral to the execution of our business strategy. Messrs. Mansour, Horne and Ault are not currently subject to an employment or consulting contract with us. We believe that the loss of the services of any of these executive officers or director could materially and adversely affect our business, financial condition and results of operations. We cannot assure you that these executive officers or director will continue to provide services to the Company. We do not maintain key man insurance for any of our key employees.

 

Our future success depends upon our ability to grow, and if we are unable to manage our growth effectively, we may incur unexpected expenses and be unable to meet our customers’ requirements.

As part of the Agreement that we entered into in May 2014, we changed our business plan and are currently restructuring our business. As such, our success in implementing our plan of operations will depend on our ability to grow effectively and efficiently, including our ability to identify, analyze and invest in and finance companies in a timely manner. Accomplishing this result will also require us to raise capital on a cost-effective and timely basis. As we grow, we will need to expand our operations. We cannot be certain that our systems, procedures, controls and existing space will be adequate to support expansion of our operations. Our future operating results will depend on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. We may not be able to expand and upgrade our systems and infrastructure to accommodate these increases. Difficulties in managing any future growth could have a significant negative impact on our business, financial condition and results of operations because we may incur unexpected expenses and be unable to meet our customers’ requirements.

 

 

Any future acquisitions could disrupt our business and harm our financial condition and results of operations.

 

We may decide to acquire businesses, products or technologies in order to expand our product offerings. Any acquisition could require significant capital outlays and could involve many risks, including, but not limited to, the following:

·

To the extent an acquired company has a corporate culture different from ours, we may have difficulty assimilating this organization, which could lead to morale issues, increased turnover and lower productivity than anticipated, and could also have a negative impact on the culture of our existing organization;

·

We may be required to record substantial accounting charges;

·

An acquisition may involve entry into geographic or business markets in which we have little or no prior experience;

·

Integrating acquired business operations, systems, employees, services and technologies into our existing business, workforce and services could be complex, time-consuming and expensive;

·

An acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

·

We may incur debt in order to fund an acquisition, or we may assume debt or other liabilities, including litigation risk, of the acquired company; and

·

We may have to issue equity to complete an acquisition, which would dilute our stockholders’ ownership position.

 

Any of the foregoing or other factors could harm our ability to achieve anticipated levels of profitability from acquired businesses or to realize other anticipated benefits of acquisitions. We may not be able to identify or consummate any future acquisitions on favorable terms, or at all. If we do effect an acquisition, it is possible that investors will view the acquisition negatively. Even if we successfully complete an acquisition, it could adversely affect our business.

The restaurant industry in intensely competitive, which could adversely affect the operations of restaurants in which we invest.

The restaurant industry is highly competitive. The restaurants in which we choose to invest will most likely face sustained, intense competition from both traditional and other competitors, which may include many non-traditional market participants such as convenience stores and coffee shops. We expect this environment to continue to be highly competitive and in any particular reporting period our results from restaurants in which we have invested may be impacted by new actions of competitors.

If we do not anticipate and address evolving consumer preferences, our restaurant business could suffer.

Our continued success depends on our ability to anticipate and respond effectively to continuously shifting consumer demographics, trends in food sourcing, food preparation and consumer preferences in the restaurant industry. We must continuously adapt to deliver a relevant experience for our customers amidst a highly competitive, value-driven operating environment. There is no assurance that we will be successful and, if not, our financial results could be adversely impacted.

Unfavorable general economic conditions could adversely affect our business and financial results.

Dining out is a discretionary expenditure that historically has been influenced by overall domestic economic conditions, and to varying degrees by specific factors such as but not limited to: unemployment, inflation, consumer confidence, consumer purchasing and saving habits, credit conditions and wage rates. Material changes with respect to governmental policy related to domestic and international fiscal concerns or changes with respect to monetary policy also could affect consumer discretionary spending, which could affect our guest traffic and average check per guest, thus potentially having a material impact on our financial performance. While domestic economic indicators have generally improved since 2008, there remains a significant level of uncertainty, which may be exacerbated as forecasts for increased future GDP growth are frequently revised downward. If the economic conditions do not meaningfully improve, our financial performance could be materially and adversely affected.

 

 

Food safety concerns may have an adverse effect on our business.

Our ability to increase sales and profits depends on our system’s ability to meet expectations for safe food and on our ability to manage the potential impact on McDonald’s of food-borne illnesses and food or product safety issues that may arise in the future. Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe food products. However, food safety events, including instances of food-borne illness, have occurred in the food industry in the past, and could occur in the future. In 2014, food quality issues were discovered at a supplier to McDonald’s and other food companies in China. As a consequence of this issue, results in China, Japan and certain other markets were negatively impacted due to lost sales and profitability, including expenses associated with rebuilding customer trust. Any future instances of food tampering, food contamination or food-borne illness, whether actual or perceived, could adversely affect our brand and reputation as well as our revenues and profits.

Concerns relating to food safety, food-borne illness, pandemics and other diseases could reduce customer traffic to our restaurants, or cause us to be the target of litigation, which could materially adversely affect our financial performance.

 

Food safety risks, including the risk of food-borne illness and food contamination, which are common both in the restaurant industry and the food supply chain and cannot be completely eliminated. The success of restaurants in which we invest are partially dependent on their ability to meet expectations for safe food and on their ability to manage the potential impact of food-borne illnesses and food or product safety issues that may arise in the future. Restaurants rely on a network of suppliers to properly handle, store and transport ingredients, until delivery to the restaurant. Any failure by a supplier, or their supplier, could cause ingredients to be contaminated, which could be difficult to detect and put the safety of the restaurants food in jeopardy. In addition, any adverse food safety event could result in mandatory or voluntary product withdrawals or recalls and regulatory and other investigations, any of which could disrupt operations, increase costs, or require responses to findings from regulatory agencies that may divert resources and assets, and result in potential civil fines and penalties as well as other legal action. In extreme cases, adverse findings could lead to criminal fines and penalties.

Changes in, or any failure to comply with, applicable laws or regulations could materially adversely affect our ability to operate our restaurants and/or increase our cost to do so, which could materially adversely affect our financial performance.

 

Restaurants are required to comply with various federal, state and local laws and regulations, including, without limitation, those relating to alcoholic beverage control, public health and safety, access and use by the disabled, environmental hazards, labor and employment laws, including without limitation, equal wage laws and exempt versus non-exempt employee classifications, and food safety and labeling laws. Changes to these laws and regulations may create challenges for those restaurants that we invest. We may incur penalties and other costs, sanctions and adverse publicity by failing to comply with applicable laws, any of which could materially adversely affect our financial performance.

 

The failure to obtain and/or retain licenses, permits or other regulatory approvals required to operate a restaurant could delay or prevent the opening and/or continued operation of a restaurant, materially adversely affecting that facility’s operations and profitability. In addition, the failure to comply with governmental regulations could subject the restaurant to penalties and interruptions in operations. In some states, such as California, we may be subject to “dram shop” statutes that generally allow a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Dram shop litigation may result in significant judgments, including punitive damages. A settlement or judgment against us under a dram shop statute in excess of our general liability insurance coverage could materially adversely affect our financial performance.

 

The restaurants that we invest in are subject to federal and state laws that prohibit discrimination in the workplace and that set standards for the design, accessibility and operation of public facilities, such as the Americans with Disabilities Act. Compliance with these laws and regulations can be costly and failure to comply could create exposure to government proceedings and litigation. In addition, various federal, state and local labor laws and regulations govern our operations and relationships with staff members. Changes in, or any failure to comply with, these laws and regulations could subject the restaurants that we invest in to fines or other legal actions. Settlements or judgments in connection therewith that are not insured against or are in excess of insurance coverage limitations could materially adversely affect our business and financial performance.

 

 

 

Investing in private companies and early stage companies involves a high degree of risk.

The Company invests primarily in private companies and early stage companies. Investments in private and early stage businesses involve a high degree of business and financial risk, which can result in substantial losses and accordingly should be considered speculative. Because of the speculative nature, there is significantly greater risk of loss than is the case with investing in securities issued by established entities. The Company anticipates that it will invest a substantial portion of its assets in either private companies or early stage companies. These private and early stage businesses tend to be thinly capitalized, unproven, small companies with risky technologies that lack management depth and have not attained profitability or have little or no history of operations. There is generally limited publicly available information about the companies in which we invest, and we rely significantly on the diligence of our employees and agents to obtain information in connection with our investment decisions. In addition, some smaller businesses in which we may invest have narrower product lines and market shares than their competition and may be more vulnerable to customer preferences, market conditions, loss of key personnel, or economic downturns, which may adversely affect the return on, or the recovery of, our investment in such businesses.

Our investments may be concentrated in one or more industries and if these industries should decline or fail to develop as expected our investments will be lost.

Our investments may be concentrated in one or more industries. This concentration will mean that our investments will be particularly dependent on the development and performance of those industries. Accordingly, our investments may not benefit from any advantages, which might be obtained with greater diversification of the industries in which our portfolio companies operate. If those industries should decline or fail to develop as expected, our investments in those industries will be subject to loss.

Our financial results could be negatively affected if a significant investment fails to perform as expected.

We intend to purchase controlling equity stakes in companies and our total debt and equity investment in controlled companies may be significant individually or in the aggregate. Investments in controlled portfolio companies are generally larger and in fewer companies than if our investments were in companies that we did not control. As a result, if a significant investment in one or more controlled companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies.

 

There is an active public trading market for our common stock, however the market is illiquid. Until an active, liquid public trading market is established, you may not be able to sell your common stock if you need to liquidate your investment.

 

Our common stock is quoted under the symbol “AVLP” on the OTC Pink operated by OTC Markets Group, Inc. However, the public market for our common stock is extremely illiquid. A liquid trading market may not develop or, if developed, may not be sustained. The lack of a liquid market may impair your ability to sell your shares of common stock at the time you wish to sell them or at a price that you consider reasonable. The lack of a liquid market may also reduce the market value of your common stock and increase the volatility of prices paid for shares of our common stock. An illiquid market may also impair our ability to raise capital by selling shares of common stock and may impair our ability to acquire other companies or assets by using shares of our common stock as consideration.

 

In the event a liquid market develops for our common stock, the market price of our common stock may be volatile and may decline in value.

 

In the event a liquid market develops for our common stock, the market price of our common stock may be volatile and may decline in value. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our common stock. These factors may materially adversely affect the market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. Between the date of the Agreement on May 14, 2014 and April 27, 2017 our stock has traded as high as $5.28 and as low as $0.05 per share.

 

 

We have incurred increased costs as a public company which may affect our profitability. These costs are still substantial and have added to our losses. The incremental audit and legal costs currently make up the majority of these costs. As a result, our financial resources available for normal business operations have been reduced.

 

The Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the Securities and Exchange Commission and the Public Company Accounting Oversight Board, require changes in the corporate governance practices and financial reporting standards for public companies. These new laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting, referred to as Section 404, have materially increased our legal and financial compliance costs and made some activities more time-consuming and more burdensome. We expect these rules and regulations to continue to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We may need to adopt and implement additional policies and procedures to further strengthen our financial reporting capability. However, the process of designing and implementing an effective financial reporting system is a continuous effort that will require us to anticipate and react to changes in our business and the economic and regulatory environments. All of this requires us to expend significant resources on things other than normal business operations. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.

In preparing our consolidated financial statements, our management determined that our disclosure controls and procedures and our internal control over financial reporting were ineffective as of November 30, 2015 which could result in material misstatements in our financial statements.

 

Our management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over our financial reporting, as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). As of November 30, 2015, our management has determined that our disclosure controls and procedures were ineffective due to weaknesses in our financial closing process.

 

We intend to implement remedial measures designed to address the ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting. If these remedial measures are insufficient to address the ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting, or if material weaknesses or significant deficiencies in our disclosure controls and procedures and our internal control over financial reporting are discovered or occur in the future and the ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting continues, we may fail to meet our future reporting obligations on a timely basis, our consolidated financial statements may contain material misstatements, we could be required to restate our prior period financial results, our operating results may be harmed, and we may be subject to class action litigation, Any failure to address the ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting could also adversely affect the results of the periodic management evaluations regarding the effectiveness of our internal control over financial reporting and our disclosure controls and procedures that are required to be included in our annual report on Form 10-K. Internal control deficiencies and ineffective disclosure controls and procedures could also cause investors to lose confidence in our reported financial information. We can give no assurance that the measures we plan to take in the future will remediate the ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting or that any material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or adequate disclosure controls and procedures or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements. See ITEM 9A. of this Annual Report for a more detailed discussion of our internal control weaknesses and deficiencies

Any market that develops in shares of our common stock will be subject to the penny stock restrictions which will create a lack of liquidity and make trading difficult or impossible.

 

SEC Rule 15g-9 establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions. If the price of our shares of common stock remain below $5.00 per share, our shares will continue to be considered as penny stocks. This classification severely and adversely affects the market liquidity for our common stock. For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker-dealer approve a person’s account for transactions in penny stocks and the broker-dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased.

 

 

In order to approve a person’s account for transactions in penny stocks, the broker-dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker-dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which sets forth:

·

the basis on which the broker-dealer made the suitability determination, and

·

that the broker-dealer received a signed, written agreement from the investor prior to the transaction.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

Our stockholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary businesses.

 

If our future operations or acquisitions are financed through the issuance of equity securities, our stockholders could experience significant dilution. In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our common stock. On October 27, 2016, subject to shareholder approval, we established an incentive compensation plan for our management and employees. We have granted and expect to grant common stock and options to purchase shares of our common stock to our directors, employees and consultants and we will grant additional common stock and options in the future. The issuance of shares of our common stock upon the exercise of these options will also result in dilution to our stockholders.

 

Our outstanding options, warrants, and convertible debt may have an adverse effect on the market price of our common stock.

 

As of November 30, 2015, we had outstanding convertible notes payable that were convertible into 3,890,876 shares of our common stock. Therefore, the conversion, or even the possibility of the conversion, of these convertible notes payable into shares of common stock could have an adverse effect on the market price for our securities or on our ability to obtain future financing. If and to the extent the noteholders of these convertible promissory notes exercise their right to convert their convertible notes payable into shares of our common stock, you may experience dilution in your holdings.

 

We do not anticipate paying dividends in the foreseeable future; you should not buy our stock if you expect dividends.

 

We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

We could issue “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder interests and impairing their voting rights, and provisions in our charter documents and under Nevada law could discourage a takeover that stockholders may consider favorable.

 

Our certificate of incorporation provides for the authorization to issue up to 10,000,000 shares of “blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. For example, it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our company. 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 Shares”).

 

  

Our current management can exert significant influence over us and make decisions that are not in the best interests of all stockholders.

 

As of November 30, 2015, our executive officers and directors beneficially own as a group approximately 35.1% of our outstanding shares of common stock. As a result, these stockholders will be able to assert significant influence over all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our outstanding shares of common stock could have the effect of delaying or preventing a change in control, or otherwise discouraging or preventing a potential acquirer from attempting to obtain control. This, in turn, could have a negative effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock. Moreover, the interests of the owners of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and, accordingly, could cause us to enter into transactions or agreements that we would not otherwise consider.

Item 1B.

Unresolved Staff Comments.

Not applicable.

Item 2.

Properties.

The Company's principal offices are located at 5940 S. Rainbow Blvd., Las Vegas, Nevada 89118. In general, we believe that our properties are well-maintained, adequate and suitable for their purposes.

Item 3.

Legal Proceedings.

 

On or around April 19, 2016, we received from counsel for Typenex Co-Investment, LLC, a Utah limited liability company (“Typenex”), a written demand to accelerate and demand payment of the entire outstanding balance of the Convertible Note entered into between the Company and Typenex on May 29, 2015 (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. The Company’s answer to the complaint was filed on February 20, 2017. On April 4, 2017, the Company and Typenex agreed to settle the lawsuit for payment of $90,000 provided such payment is received by Typenex no later than May 1, 2017.

There are no other material claims, actions, suits, proceedings, or investigations that are currently pending or, to the Company’s knowledge, threatened by or against the Company or respecting its operations or assets, or by or against any of the Company’s officers, directors, or affiliates

Item 4.

Mine Safety Disclosures.

Not applicable.

 

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

 

Our common stock was quoted under the symbol “AVLP” on the OTCQB until our shares began being eligible for quotation on the OTC Pink, each as operated by the OTC Markets Group, Inc. The criteria for listing on the OTCQB include that we remain current in our SEC reporting. Our reporting is presently not current.

The following tables set forth the range of high and low prices for our common stock for each of the periods indicated as reported by either the OTCQB or OTC Pink. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.

 

 

On April 27, 2017, the last sales price per share of our common stock was $0.15.

 

Record Holders

 

As of April 27, 2017, there were approximately 75 stockholders of record of our shares of common stock. A number of holders of AVLP common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions

 

Common stock

Our common stock is entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Except as otherwise required by law or provided in any resolution adopted by our Board of Directors with respect to any series of preferred stock, the holders of our common stock will possess all voting power. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of our common stock that are present in person or represented by proxy, subject to any voting rights granted to holders of any preferred stock. Holders of our common stock representing fifty percent (50%) of our capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of our stockholders. A vote by the holders of a majority of our outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to our Articles of Incorporation. Our Articles of Incorporation do not provide for cumulative voting in the election of directors.

Subject to any preferential rights of any outstanding series of preferred stock created by our Board of Directors from time to time, the holders of shares of our common stock will be entitled to such cash dividends as may be declared from time to time by our Board of Directors from funds available therefore. The Company has not declared any cash dividends since inception and does not anticipate paying any dividends in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will depend on the Company's earnings, capital requirements, financial condition, and other relevant factors. There are no restrictions that currently limit the Company’s ability to pay dividends on its common stock other than those generally imposed by applicable state law.

Subject to any preferential rights of any outstanding series of preferred stock created from time to time by our Board of Directors, upon liquidation, dissolution or winding up, the holders of shares of our common stock will be entitled to receive pro rata all assets available for distribution to such holders.

In the event of any merger or consolidation with or into another company in connection with which shares of our common stock are converted into or exchangeable for shares of stock, other securities or property (including cash), all holders of our common stock will be entitled to receive the same kind and amount of shares of stock and other securities and property (including cash). Holders of our common stock have no pre-emptive rights, no conversion rights and there are no redemption provisions applicable to our common stock.

 

 

Recent Sales of Unregistered Securities

During the Year Ended November 30, 2014

Between July 18, 2014 and November 10, 2014, the Company issued and sold to accredited investors 74,400 shares of its common stock. These issuances resulted in aggregate gross proceeds, which were used for general operating expenses, to the Company of $93,000. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act.

Between July 30, 2014 and September 5, 2014, the Company issued and sold to accredited investors 14,000 shares of its preferred stock. These issuances resulted in aggregate gross proceeds, which were used for general operating expenses, to the Company of $70,000. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act.

During the Year Ended November 30, 2015

On December 15, 2014, the Company issued and sold to an accredited investor 1,600 shares of its common stock. This issuance resulted in aggregate gross proceeds, which were used for general operating expenses, to the Company of $2,000. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act.

On January 30, 2015, the Company issued and sold to Finiks Capital, LLC, an accredited investor, 15,380 shares of its preferred stock. This issuance resulted in aggregate gross proceeds, which were paid directly to a related party for accrued expenses, to the Company of $76,900. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act.

During the year ended November 30, 2015, the Company issued an aggregate of 440,000 shares of its common stock as payment for services to its consultants. The shares were valued at $583,125, an average of $1.33 per share. These shares were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act.

During the year ended November 30, 2015, the Company issued an aggregate of 133,990 shares of its common stock as payment for costs incurred in conjunction with the Company’s debt financings. The shares were valued at $111,327, an average of $0.83 per share. Additionally, the Company issued 61,452 shares of its common stock in payment of $13,250 of principal and $887 of accrued interest pursuant to the terms of a convertible promissory note. The shares were valued at $26,276 resulting in a loss on conversion of $12,139. These shares were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act.

Issuances Subsequent to the Year Ended November 30, 2015

On December 2, 2015, the Company issued 100,000 warrants to a third party in connection with a loan to the Company. The warrants were valued at $30,987 and were expensed at the time of issuance as non-cash interest expense using the effective interest method. These securities will be issued pursuant to Section 4(a)(2) of the Securities Act. These warrants were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act.

On December 10, 2015, the Company issued and sold to an accredited investor 25,000 shares of its common stock. This issuance resulted in aggregate gross proceeds, which were used for general operating expenses, to the Company of $5,000. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act.

On January 26, 2016, the Company issued 50,000 shares of its common stock as payment for services to a third party for consulting services. The shares were valued at $20,000, an average of $0.40 per share. These shares were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act.

During January 2016, the Company issued an aggregate of 457,619 shares of its common stock as payment for principal and accrued interest. The shares were valued at $183,048, an average of $0.40 per share. These shares were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act.

 

 

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. These shares were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act.

Issuer Repurchases of Equity Securities

Not applicable.

Item 6.

Selected Financial Data.

As a Smaller Reporting Company, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

 

 

Item 7.

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

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Such forward-looking statements include statements regarding, among others, (a) our expectations about possible business combinations, (b) our growth strategies, (c) our future financing plans, and (d) our anticipated needs for working capital. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “approximate,” “estimate,” “believe,” “intend,” “plan,” “budget,” “could,” “forecast,” “might,” “predict,” “shall” or “project,” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found in this Annual Report on Form 10-K.

Forward-looking statements are based on our current expectations and assumptions regarding our business, potential target businesses, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” in this 10-K, changes in local, regional, national or global political, economic, business, competitive, market (supply and demand) and regulatory conditions and the following:

·

Adverse economic conditions;

·

Our ability to effectively execute our business plan;

·

Inability to raise sufficient additional capital to operate our business;

·

Our ability to manage our expansion, growth and operating expenses;

·

Our ability to evaluate and measure our business, prospects and performance metrics;

·

Our ability to compete and succeed in a highly competitive and evolving industry;

·

Our ability to respond and adapt to changes in technology and customer behavior;

·

Our ability to protect our intellectual property and to develop, maintain and enhance a strong brand; and

·

Other specific risks referred to in the section entitled “Risk Factors”.

 

We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance. All forward-looking statements speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update any forward-looking statements or other information contained herein unless required by law.

Information regarding market and industry statistics contained in this Annual Report is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. Except as required by U.S. federal securities laws, we have no obligation to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. See the section entitled “Risk Factors” for a more detailed discussion of risks and uncertainties that may have an impact on our future results.

Recent Developments

On March 3, 2017, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) with MTIX Limited, an English company (“MTIX”) and the three (3) current shareholders of MTIX (individually, a “Seller” and collectively, the “Sellers”). Upon the terms and subject to the conditions set forth in the Exchange Agreement, the Company will acquire 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 has already been paid, and (ii) 100,000 shares of the Company’s newly designated shares of Class B Convertible Preferred Stock (the “Class B Shares”) to the principal shareholder of MTIX (the “Majority Shareholder”).

 

 

Consummation of the Exchange (the “Closing”) is subject to a number of closing conditions, including, among other things: (i) absence of litigation that seeks to prohibit the Exchange and certain other matters; (ii) the accuracy of the representations and warranties, subject to customary materiality qualifiers; (iii) the performance by the parties of certain covenants and agreements in all material respects, and (iv) the absence of a Material Adverse Effect (as defined in the Exchange Agreement). The Exchange Agreement does not contain a financing condition.

At the Closing the Company shall deliver to the Majority Shareholder and the two Sellers other than Majority Shareholder (the “Minority Shareholders”) three Notes, which Notes shall be 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. Other than the principal amount under the foregoing Notes, the Notes shall be in all respects identical to the Note.

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.

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.

Certificate of Designations of Class B Convertible Preferred Stock

Upon Closing, the Company will issue the 100,000 Class B Shares to the Majority Shareholder. 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.

 

 

Security Agreement

The Notes will be 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 will enter 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.

RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 2015 AND 2014

The following table summarizes the results of our operations for the years ended November 30, 2015 and 2014.

 

 

Revenue

 

During the years ended November 30, 2015 and 2014, the Company recognized total revenue of $38,900 and $46,131, respectively. Total revenue was derived from sales of our vape liquid business, including vape pens and accessories. The decrease in total revenue is attributed to our decision to focus on the development of RCG and discontinue operations in the vape liquid business.

Cost of Revenue

The cost of revenue for the year ended November 30, 2015 decreased $12,915 to $32,231 from $45,146 for the year ended November 30, 2014. The cost of revenue as a percentage of revenue decreased to 83% for the year ended November 30, 2015, compared to 98% for the year ended November 30, 2014. The decrease in cost of revenue as a percent of revenue is attributed to a slight change in the composition of products sold.

 

 

Operating expenses

Operating expenses for the years ended November 30, 2015 and 2014, were $1,400,956 and $394,129, respectively. As reflected in the table below, the increase in operating expenses of $1,006,827 for the year ended November 30, 2015, when compared to the year ended November 30, 2014, was primarily the result of fluctuations in the following expense categories: stock-based compensation, bad debt expense, professional fees, salaries and employee benefits, loan fees and advertising and marketing expenses.

Stock-based compensation 

During the year ended November 30, 2015, the Company issued 440,000 shares of common stock in payment of consulting services. As a result of these issuances, the Company incurred $583,125 in fees related to general corporate matters and financial advisory services. Conversely, during the year ended November 30, 2014, the Company had not entered into any consulting agreements requiring the issuance of stock-based compensation.

Bad debt expense

During the year ended November 30, 2015, the Company incurred bad debt expense of $173,688 as opposed to no bad debt expense during the prior year ended November 30, 2014. The principal source of the bad debt was loans made to Cross Click Media, Inc. (“Cross Click”), a related party. Cross Click performed sales, marketing, investor relations and other incidental services on behalf of the Company. During the year ended November 30, 2015, the Company had loaned Cross Click an aggregate of $202,766. The Company offset the loan receivable by $54,078 in accounts payable due to Cross Click for the services it had performed. As of November 30, 2015, this note was deemed to be uncollectable and the remaining balance due from Cross Click of $148,688 was written off. The remaining bad expense related to two promissory notes, both in the amount of $12,500, entered into on June 5, 2015.

Professional fees

During the year ended November 30, 2014, the Company had limited operations and only incurred a minimal amount of professional fees. The professional fees incurred during the year ended November 30, 2014, primarily related to audit fees of the Company’s financial statements and legal fees stemming from an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations entered into on May 14, 2014 (the “Agreement”), with John Pulos, its prior sole officer and director. Conversely, during the year ended November 30, 2015, the Company incurred professional fees of $229,379, an increase of $184,874 as compared to the previous year.

The increase is attributed to several factors:

·

The Company experienced an aggregate increase of $75,320 in audit and legal fees due to an overall increase in the operations conducted and the level of complexity of the transactions entered into during fiscal year 2015.

 

 

·

In December 2014, the Company initiated multiple projects to increase awareness of the Company. As a result, during the year ended November 30, 2015, the Company incurred $83,843 in fees for public and investor relations services. In the prior fiscal year, due to the lack of significant operations, the Company did not invest in these types of activities.

·

During the year ended November 30, 2016, the Company incurred $17,230 for information technology and website services, an increase of $15,362.

·

The remaining increase in professional fees during fiscal year 2015 are attributed to various items, none of which are significant individually.

Salaries and employee benefits

On May 14, 2014, the Company entered into the Agreement with John Pulos, its prior sole officer and director. In conjunction with the Agreement, there was a change in management and the Company began compensating its officers and directors. Prior to the resignation of Mr. Pulos, which was effective May 15, 2014, the Company did recognize any compensation expense for the services of its director and officer. Subsequent to May 15, 2014, the Company began compensating its Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors (the “Chairman”). During the years ended November 30, 2015 and 2014, salaries and employee benefits were $129,833 and $50,200, respectively. The $79,683 increase in salaries and employee benefits is primarily attributed to an entire year of compensation expense paid to the Company’s officers during the current fiscal year as opposed to only a partial year of compensation expense during the year ended November 30, 2014. Additionally, in November 2015, the Company approved the payment of monthly fees to its Chairman, Milton C. Ault III, in the amount of $20,000.

Loan Fees

During the year ended November 30, 2015, the Company financed its operations primarily through the issuance of debt instruments. At November 30, 2015 and 2014, the aggregate outstanding balance of convertible notes payable and notes payable, excluding debt discount, was $773,625 and $81,550, respectively. As a result of the significant increase in the Company’s borrowings the Company experienced a $102,511 increase in loan fees during the current year ended November 30, 2015. During the year ended November 30, 2015, the Company incurred $103,511 in loan fees, of which $68,011 was stock-based compensation from the issuance of 78,990 shares of common stock. Due to the short-term nature of the underlying loan agreements, these loan fees were expensed at the time incurred.

Advertising and marketing

The Company experienced a significant decrease in advertising and marketing expenses during fiscal year 2015. Advertising and marketing expenses amounted to $137,473 during the prior year ended November 30, 2014 as a result of the promotion of the Company’s vape liquid business. However, during the current year ended November 30, 2015, the Company only incurred $9,663 in advertising and marketing expenses as a result of its decision to discontinue operations in the vape liquid business and instead to focus on the development of RCG.

General and administrative

General and administrative expenses during the years ended November 30, 2015 and 2014 were $171,707 and $160,951, respectively. General and administrative expenses consist of a significant number of different types of expenses, none of which were individually materially, and are consistent for a public company of our size and operations.

Other Income and Expenses

 

Other income and expense includes interest expense, amortization of discounts on notes payable, changes in the fair value of the Company’s derivative liabilities associated with issuances of debt and losses recognized on issuances of the Company’s derivative liabilities. During the year ended November 30, 2015, the Company reported other expense of $1,266,178 compared with expense of $985 during the year ended November 30, 2014.

 

 

Interest expense increased by $75,044, resulting in interest expense of $76,029 in the year ended November 30, 2015, as compared to interest expense of $985 in the year ended November 30, 2014. The increase in interest expense was due to an increase in the amount of the Company’s total borrowings. At November 30 2015, the outstanding balance of the Company’s convertible notes payable and notes payable was $773,625 compared with $81,550 at November 30, 2014, an increase of $692,075.

The other components of other income and expense of amortization of discounts on notes payable of $357,450, losses recognized on issuances of the Company’s derivative liabilities of $472,033 and changes in the fair value of the Company’s derivative liabilities of $360,666 are primarily all attributed to the debt conversion features embedded in the Company’s convertible promissory notes, which are accounted for as derivative liabilities.

At issuance, the estimated fair value of the debt conversion features totaled $952,346. However, the fair value of the debt conversion features was limited by the amount of the gross proceeds of the convertible promissory notes. During the year ended November 30, 2015, the Company recorded non-cash interest expense of $357,450 primarily due to the debt discount of the Company’s convertible notes payable.  Debt discounts are amortized through periodic charges to interest expense over the term of the related financial instrument using the effective interest method. During the years ended November 30, 2015 and 2014, the Company recorded amortization of debt discounts of $357,450 and nil, respectively

The difference between the estimated fair value of the debt conversion feature and the debt discount, of $472,033 was reflected as a loss on issuance of convertible debt. Additionally, the Company is required to mark to market the value of the conversion feature liability. Therefore, as of November 30, 2015, the Company revalued the fair value of the debt conversion feature for the convertible promissory notes and determined the conversion feature liability to be $1,313,012, an increase of $360,666 from the fair value determined at the date of issuance. Changes in the conversion feature liability are recorded as income or expense during the reporting period that the change occurred.

Current and Deferred Income Taxes

The Company has made the decision to fully reserve its net deferred tax assets until such time as profitable operations are achieved. As a result of this decision, we did not record an income tax benefit during the year ended November 30, 2015 and 2014.

 

The ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss carryovers are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryover years, projected future taxable income, available tax planning strategies, and other factors in making this assessment. Based on available evidence, management believes it is less likely than not that all of the deferred tax assets will be realized. Accordingly, the Company has established a 100% valuation allowance of $645,315.

Net Loss

 

For the foregoing reasons, the Company’s net loss for the year ended November 30, 2015, was $2,660,465 compared to a net loss of $394,129 for the year ended November 30, 2014. Net loss available to common shareholders during the year ended November 30, 2015, was $2,777,661 due to preferred dividends of $117,196.

 

 

As reflected in the Company’s consolidated statement of cash flows for the years ended November 30, 2015 and 2014, the Company’s reported net loss is comprised of non-cash charges of $1,841,285 and nil, respectively. A summary of these non-cash charges is as follows:

FINANCIAL CONDITION

 

Our negative working capital of $2,087,389 as of November 30, 2015, increased $1,860,310 from our November 30, 2014 negative working capital of $227,079. Our operating losses during the year ended November 30, 2015 were funded primarily by proceeds from convertible notes payable and loans payable of $613,000.

LIQUIDITY AND CAPITAL RESOURCES

 

We have historically financed operations through cash flows from equity transactions and debt financings. As noted above, the outstanding balance of the Company’s convertible notes payable and notes payable increased $692,075 during the year ended November 30, 2015. Due to the uncertainty of our ability to meet our current operating expenses, in their report on our audited annual financial statements as of and for the years ended November 30, 2015 and 2014, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that led to this disclosure by our independent auditors. There is substantial doubt about our ability to continue as a going concern as the continuation and expansion of our business is dependent upon either obtaining future equity or debt financings or achieving profitable operations in order to repay the existing short-term debt and to provide a sufficient source of operating capital. No assurances can be made that the Company will be successful in obtaining equity or debt financing needed to continue to fund its operations, or that the Company will achieve profitable operations and positive cash flow. Our inability to take these actions as and when necessary would materially adversely affect our liquidity, results of operations and financial condition.

 

Net cash used in operating activities for the years ended November 30, 2015 and 2014, was $351,349 and $249,230, respectively. During the years ended November 30, 2015 and 2014, the Company reported a net loss of $2,660,465 and $394,129, respectively.

Net proceeds from the issuance of convertible notes payable of $508,000 and notes payable of $105,000 offset the negative cash flows from operating activities. However, as a result of loans the Company made to Cross Click, a related party, of $215,266, ultimately, we experienced a slight decrease in cash of $1,842 during the year ended November 30, 2015.

CONTRACTUAL OBLIGATIONS

The Company has issued promissory notes to various individuals and entities. The aggregate principal amount due under the promissory notes is $773,625, all of which is classified as due in the next year.

CRITICAL ACCOUNTING POLICIES

 

Principles of consolidation

 

The consolidated financial statements include accounts of Avalanche and its wholly owned subsidiary, SRB (collectively referred to as "the Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, Avalanche and SRB share certain employees and various costs. Such expenses are principally paid by Avalanche. Due to the nature of the parent and subsidiary relationship, the individual financial position and operating results of Avalanche and SRB may be different from those that would have been obtained if they were autonomous.

 

 

Accounting estimates

 

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, 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. Actual results could differ from those estimates.

Fair value of financial instruments

 

The Company’s financial instruments are accounts receivable, accounts payable, convertible notes payable, notes payable, and derivative liabilities. The recorded values of accounts receivable and accounts payable approximate their values based on their short-term nature. Notes payable are recorded at their issue value or if warrants are attached at their issue value less the value of the warrant. Derivative liabilities are revalued using the Black-Scholes model each quarter based on changes in the market value of our common stock and unobservable level 3 inputs.

Income taxes

 

The Company determines its income taxes under the asset and liability method. Under the asset and liability approach, deferred income tax assets and liabilities are calculated and recorded based upon the future tax consequences of temporary differences by applying enacted statutory tax rates applicable to future periods for differences between the financial statements carrying amounts and the tax basis of existing assets and liabilities. Generally, deferred income taxes are classified as current or non-current in accordance with the classification of the related asset or liability. Those not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are provided for significant deferred income tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company recognizes tax liabilities by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized and also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. U.S. GAAP also requires management to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated tax positions taken by the Company and has concluded that as of November 30, 2015, there are no uncertain tax positions taken, or expected to be taken, that would require recognition of a liability that would require disclosure in the financial statements.

 

Loss per Common Share

 

The Company utilizes Financial Accounting Standards Board (“FASB”) ASC Topic No. 260, Earnings per Share. Basic loss per share is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic 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 loss per common share reflects the potential dilution that could occur if convertible debentures and class A convertible preferred stock were to be exercised or converted or otherwise resulted in the issuance of common stock that then shared in the earnings of the entity.

Since the effects of outstanding class A convertible preferred stock and 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 outstanding class A convertible preferred stock and convertible debt as of November 30, 2015 and 2014:

RECENT ACCOUNTING STANDARDS (PRONOUNCEMENTS)

See Note 3 to our Consolidated Financial Statements as of November 30, 2015, included elsewhere in this document.

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk.

As a Smaller Reporting Company, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

 

 

Item 8. Financial Statements and Supplementary Data.

 

AVALANCHE INTERNATIONAL, CORP. AND SUBSIDIARY

INDEX

---

To the Board of Directors and Stockholders

of Avalanche International, Corp.

We have audited the accompanying consolidated balance sheet of Avalanche International, Corp. (the “Company”) as of November 30, 2015, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avalanche International, Corp., as of November 30, 2015, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2 to the financial statements, the Company has incurred net losses since inception and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ Marcum llp

Marcum llp

New York, NY
April 28, 2017

 

 

GILLESPIE & ASSOCIATES, PLLC

CERTIFIED PUBLIC ACCOUNTANTS

10544 ALTON AVE NE

SEATTLE, WA  98125

206.353.5736

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Avalanche International Corporation and Subsidiary

We have audited the accompanying restated consolidated balance sheet of Avalanche International Corporation and Subsidiary as of November 30, 2014 and the related restated statements of operations, stockholders’ deficit and cash flows for the period then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Avalanche International Corporation and Subsidiary as of November 30, 2013 were audited by other auditors whose report dated February 12, 2014, expressed an unqualified opinion on those statements.

 

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

 

In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avalanche International Corporation and Subsidiary for the restated period ended November 30, 2014 and the restated results of its operations and cash flows for the period then ended in conformity with generally accepted accounting principles in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note #2 to the financial statements, although the Company has limited operations it has yet to attain profitability. This raises substantial doubt about its ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note #2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/S/ GILLESPIE & ASSOCIATES, PLLC

Seattle, Washington

October 18, 2015

 

 

 

 

 

 

 

 

AVALANCHE INTERNATIONAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
		Year Ended November 30,
		2015				2014
Cash flows from operating activities:
Net loss		$	(2,660,465	)		$	(394,129	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization expense -- loan fees			53,791				—
Interest expense -- debt discount			357,450				—
Loss on issuance of convertible debt			472,033				—
Change in fair value on derivative liability			360,666				—
Stock-based compensation			583,125				—
Stock issued for loan fees			68,011				—
Bad debt expense			173,688				—
Changes in operating assets and liabilities:
Accounts receivable, related party			(17,222	)			—
Other receivables			(705	)			(9,566	)
Inventories			25,900				(25,900	)
Other assets			526				—
Accounts payable and accrued expenses			256,726				180,365
Accounts payable, related parties			(24,873	)			—
Net cash used in operating activities			(351,349	)			(249,230	)
Cash flows from investing activities:
Loan issuance			(12,500	)			—
Loan issuance, related party			(12,500	)
Advance to related party			(202,766	)			—
Net cash used in investing activities			(227,766	)			—
Cash flows from financing activities:
Proceeds from issuance of common stock			2,000				93,000
Proceeds from issuance of preferred stock			—				70,000
Payments to related parties			(6,927	)			6,927
Proceeds from convertible notes payable			508,000				63,250
Proceeds from notes payable			105,000				28,300
Payments on notes payable			(25,500	)
Payments on notes payable, related parties			(5,300	)			(10,000	)
Net cash provided by financing activities			577,273				251,477
Net increase (decrease) in cash			(1,842	)			2,247
Cash at beginning of period			2,247				—
Cash at end of period		$	405			$	2,247
Supplemental disclosures of cash flow information:
Cash paid during the period for interest		$	45			$	65
Non-cash financing activities:
Issuance of common stock in payment of preferred dividends		$	117,196			$	-
Issuance of notes payable in payment of accrued expenses		$	35,074			$	-
Derivative liability recorded in connection with convertible debt		$	952,346			$	-
Common stock issued for conversion of debt		$	26,276			$	-
Issuance of preferred stock to shareholder for payment of accrued expenses		$	76,900			$	-
Reduction in related party accounts payable by offset of advances		$	54,078			$	-
The accompanying notes are an integral part of these consolidated financial statements.

    

 

Avalanche International, Corp. and Subsidiary

Notes to the Consolidated Financial Statements

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 had plans to distribute crystallized glass tile in the North American markets to wholesale customers. On May 14, 2014, the Company entered into an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations (the “Agreement”) with John Pulos, its prior sole officer and director. Pursuant to the Agreement, the Company transferred all assets related to its crystallized glass tile business to Mr. Pulos and in exchange Mr. Pulos assumed and cancelled all liabilities due to him. In conjunction with the Agreement, there was a change in management and the Company began to operate as a holding company with operations at the subsidiary levels 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 was discontinued in June 2015. RCG was formed to hold the Company’s investments in the restaurant industry.

2.	LIQUIDITY AND GOING CONCERN

The accompanying 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 loss available to common shareholders for the years ended November 30, 2015 and 2014, totaling $2,777,661 and $394,219, respectively, as well as an accumulated deficit as of November 30, 2015 and 2014, amounting to $3,212,817 and $435,156, respectively. As a result of the Company’s continued losses, at November 30, 2015, the Company’s current liabilities significantly exceed current assets, resulting in negative working capital of $2,087,389. Further, the Company does not have adequate cash to cover projected operating costs for the next 12 months. 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 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

Principles of Consolidation

The consolidated financial statements include accounts of Avalanche and its wholly-owned subsidiaries, SRB and RCG, (collectively referred to as the “Company"). No operations existed in RCG during the year ended November 30, 2015. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Accounting Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, 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 share based compensation, valuation of derivative liabilities and valuation of deferred income taxes. Actual results could differ from those estimates.

 

 

Avalanche International, Corp. and Subsidiary

Notes to the Consolidated Financial Statements (Continued)

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. The recorded carrying amounts of the Company’s cash and cash equivalents approximate their fair value. As of November 30, 2015 and 2014, the Company had no cash equivalents.

Inventory Valuation

Inventory is valued at the lower of cost or market. Cost is determined using the first-in, first-out method; market value is based upon estimated replacement costs.

Fair Value of Financial Instruments

The Company’s financial instruments are accounts receivable, inventory, accounts payable, notes payable, and derivative liabilities. The recorded values of accounts receivable, inventory, and accounts payable approximate their fair values based on their short-term nature. Notes payable and convertible notes payable are recorded at their issue value or if warrants are attached at their issue value less the proportionate value of the warrant, which approximates their fair value. Convertible notes payable and warrants issued with ratcheting provisions are classified as derivative liabilities and are revalued using the Black-Scholes model each quarter based on changes in the market value of our common stock and unobservable level 3 inputs.

The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last is considered unobservable:

 

Level 1: Quoted prices in active markets for identical assets or liabilities.

 

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, 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 assets or liabilities.

 

Level 3 assumptions: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities including liabilities resulting from imbedded derivatives associated with certain warrants to purchase common stock.

Derivative 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”). Pursuant to ASC Topic 815-15 an evaluation of the embedded conversion feature of convertible debt is evaluated to determine if the bifurcated debt conversion feature is required to be classified as a derivative liability. Since 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 met the criteria of a derivative liability. The estimated fair value of the embedded conversion feature of debt classified as derivative liabilities are determined using the Black-Scholes option pricing model. The model utilizes Level 3 unobservable inputs to calculate the fair value of the derivative liabilities at each reporting period. The Company determined that using an alternative valuation model such as a Binomial-Lattice model would result in minimal differences. The fair value of the embedded conversion feature of debt classified as derivative liabilities are adjusted for changes in fair value at each reporting period, and the corresponding non-cash gain or loss is recorded as other income or expense in the consolidated statement of operations. As of November 30, 2015, the embedded conversion feature of $1,313,012 of convertible notes payable was classified as a derivative liability. Each reporting period the embedded conversion feature is re-valued and adjusted through the caption “change in fair value of derivative liabilities” on the consolidated statements of operations.

 

    

Avalanche International, Corp. and Subsidiary

Notes to the Consolidated Financial Statements (Continued)

 When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

Debt Discounts

The Company accounts for debt discount according to ASC 470-20, Debt with Conversion and Other Options. Debt discounts are amortized through periodic charges to interest expense over the term of the related financial instrument using the effective interest method. During the years ended November 30, 2015 and 2014, the Company recorded amortization of debt discounts of $357,450 and nil, respectively.

 

Revenue Recognition

 

The Company will recognize 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 years ended November 30, 2015 and 2014, the Company’s revenues consisted solely of sales of flavored liquids for electronic vaporizers and eCigarettes and accessories from SRB.

Income Taxes

The Company determines its income taxes under the asset and liability method in accordance with FASB ASC 740, Income Taxes (“ASC 740”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Income and Comprehensive Income in the period that includes the enactment date.

ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. ASC 740 also requires management to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated tax positions taken by the Company and has concluded that as of November 30, 2015, there are no uncertain tax positions taken, or expected to be taken, that would require recognition of a liability that would require disclosure in the financial statements.

 

 

Avalanche International, Corp. and Subsidiary

Notes to the Consolidated Financial Statements (Continued)

Stock-Based Compensation

The Company accounts for stock option awards in accordance with FASB ASC Topic No. 718, Compensation-Stock Compensation. Under FASB ASC Topic No. 718, compensation expense related to stock-based payments is recorded over the requisite service period based on the grant date fair value of the awards. Compensation previously recorded for unvested stock options that are forfeited is reversed upon forfeiture. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock.

 

The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of FASB ASC Topic No. 505-50, Equity Based Payments to Non-Employees. Accordingly, the measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

Loss per Common Share

The Company utilizes FASB ASC Topic No. 260, Earnings per Share. Basic loss per share is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic 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 loss per common share reflects the potential dilution that could occur if convertible promissory notes and Class A convertible preferred stock were to be exercised or converted or otherwise resulted in the issuance of common stock that then shared in the earnings of the entity.

Since the effects of outstanding Class A convertible preferred stock and 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 outstanding Class A convertible preferred stock and convertible debt as of November 30, 2015 and 2014:

 

Recent Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 "Revenue from Contracts with Customers (Topic 606)" (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, “Revenue Recognition – Construction - Type and Production - Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU No. 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017 as a result of ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which was issued by the FASB in August 2015 and extended the original effective date by one year. The Company is currently evaluating the impact of adopting the available methodologies of ASU 2014-09 and 2015-14 upon its financial statements in future reporting periods. The Company has not yet selected a transition method. The Company is in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition, and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted.

 

 

Avalanche International, Corp. and Subsidiary

Notes to the Consolidated Financial Statements (Continued)

There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),” was issued in March, 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, “Identifying Performance Obligations and Licensing,” issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, “Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients” provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs.

In August 2014, the FASB issued ASU No. 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.”  ASU No. 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU No. 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory”. Under ASU No. 2015-11 entities should measure inventory that is not measured using last-in, first-out (LIFO) or the retail inventory method, including inventory that is measured using first-in, first-out (FIFO) or average cost, at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU No. 2015-11 is effective for reporting periods beginning after December 15, 2016 and is to be applied prospectively. The adoption of ASU No. 2015-11 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

In August 2015, the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”, which clarifies the guidance set forth in ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, issued in April 2015. ASU No. 2015-03 requires that debt issuance costs related to a recognized liability be presented on the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. ASU No. 2015-15 provides additional guidance regarding debt issuance costs associated with line-of-credit arrangements, stating that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred issuance costs ratably over the term of the line-of-credit arrangement. ASU No. 2015-03 is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. The adoption of ASU No. 2015-03 and ASU No. 2015-15 did not have a material effect on our consolidated financial position, results of operations or cash flows.

 

 

Avalanche International, Corp. and Subsidiary

Notes to the Consolidated Financial Statements (Continued)

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 March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share Based Payment Accounting, to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of this newly issued guidance to its consolidated financial statements. The adoption of ASU No. 2016-09 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. 2016-02, Leases (“ASU 2016-02”), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements.

 

In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements, which includes numerous technical corrections and clarifications to GAAP that are designed to remove inconsistencies in the board’s accounting guidance. Several provisions in this accounting guidance are effective immediately which did not have an impact on the Company’s consolidated financial statements. Additional provisions in this accounting guidance are effective for the Company in annual financial reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact that the adoption of the additional provisions in this accounting guidance may have on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, which revises the guidance in ASC 230, Statement of Cash Flows. The new guidance is intended to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows, and is effective for reporting periods (interim and annual) beginning after December 15, 2017, for public companies. The Company is currently assessing the potential impact of this ASU on our consolidated financial position and results of operations.

 

In January 2017, the FASB issued an ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard, which will be effective for the Company beginning in the first quarter of fiscal year 2021, is required to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact this standard will have on its financial statements.

 

 

Avalanche International, Corp. and Subsidiary

Notes to the Consolidated Financial Statements (Continued)

4.	LOAN RECEIVABLE

 

On June 5, 2015, the Company executed a Promissory Note with Aja Cannafacturing, Inc. for $12,500. The note was unsecured, accrued interest at 10% and was due December 31, 2015. As of November 30, 2015, this note was deemed to be uncollectable and was written off to bad debt expense.

5.	CONVERTIBLE NOTES PAYABLE

Convertible notes payable at November 30, 2015, and November 30, 2014, are comprised of the following:

During the years ended November 30, 2015 and 2014, the Company entered into convertible promissory notes with various entities in which it received aggregate proceeds of $508,000 and $47,500, respectively. As consideration for these loans, the Company issued promissory notes in the aggregate principal amount of $632,550, which included loan fees of $47,500 and original issue discounts of $29,550. The convertible promissory notes accrue interest at rates ranging between 8% and 12% per annum. At November 30, 2015, the Company was in default on the LG Capital Funding, LLC, Gary Gelbfish and Typenex Co-Investment, LLC convertible promissory notes and subject to default interest rates of 24%, 10% and 22%, respectively, on these convertible promissory notes. Further, the Company recorded a default penalty of $18,902 on the Typenex Co-Investments, LLC convertible promissory note. On April 4, 2017, the Company and Typenex agreed to a settlement, see Note 12. As of the date of this report, the Company was in default on all of the convertible notes payable.

The table below summarizes the Company’s convertible promissory notes as of November 30, 2014.

 

 

Avalanche International, Corp. and Subsidiary

Notes to the Consolidated Financial Statements (Continued)

The table below summarizes the Company’s convertible promissory notes as of November 30, 2015.

As reflected below, at November 30, 2015, the Company’s convertible notes payable were convertible into 3,890,876 shares of the Company’s common stock at the conversion terms below.

 

 

Avalanche International, Corp. and Subsidiary

Notes to the Consolidated Financial Statements (Continued)

 

The debt conversion features embedded in the Company’s convertible promissory notes are accounted for under ASC Topic 815 – Derivatives and Hedging. At issuance, the estimated fair value of the debt conversion features utilizing the Black Scholes option pricing model totaled $952,346. However, the fair value of the debt conversion features was limited by the amount of the gross proceeds of the convertible promissory notes of $555,500, and the respective debt discount of $552,101 is being amortized to interest expense over the term of the convertible promissory notes using the effective interest method. The difference between the estimated fair value of the debt conversion feature and the debt discount, of $459,894, was reflected as a loss on issuance of convertible debt. During the year ended November 30, 2015, interest expense of $357,450 was recorded from the debt discount amortization. Additionally, the Company is required to mark to market the value of the conversion feature liability. Therefore, as of November 30, 2015, the Company revalued the fair value of the debt conversion feature for the convertible promissory notes and determined the conversion feature liability to be $1,313,012, an increase of $360,666 from the fair value determined at the date of issuance. Changes in the conversion feature liability are recorded as income or expense during the reporting period that the change occurs.

The tables below summarize the Company’s derivative liabilities and the related non-cash charges at November 30, 2015.