AVLP Avalanche International Corporation (CE)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Avalanche International, Corp. (the “Company” or “Avalanche” ) was incorporated under the laws of the State of Nevada on April 14, 2011. The Company is a holding company with operations at the subsidiary level only. The Company has formed two wholly-owned subsidiaries, Smith and Ramsay Brands, LLC ( “SRB” ) and Restaurant Capital Group, LLC ( “RCG” ). SRB was formed on May 19, 2014, and RCG was formed on October 22, 2015. SRB was originally formed as a manufacturer and distributor of flavored liquids for electronic vaporizers and eCigarettes and accessories; this business ceased in June 2015. RCG was formed to hold the Company’s investments in the restaurant industry.

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company has incurred recurring losses and reported losses available to common stockholders for the six months ended May 31, 2016 and 2015, totaling $990,374 and $773,045, respectively, as well as an accumulated deficit as of May 31, 2016 amounting to $4,203,191. As a result of the Company’s continued losses, at May 31, 2016, the Company’s current liabilities significantly exceed current assets, resulting in negative working capital of $2,927,449. Further, the Company does not have adequate cash to cover projected operating costs for twelve months from the issuance date of these financial statements and to repay convertible notes payable and notes payable in the aggregate principal amount of $716,575 that are in default at May 31, 2016. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In order to ensure the continued viability of the Company, either future equity or debt financings must be obtained or profitable operations must be achieved in order to repay the existing short-term debt and to provide a sufficient source of operating capital. To address its liquidity issues, the Company continues to explore opportunities for additional financing and/or restructuring of its existing debt. No assurances can be made that the Company will be successful obtaining additional equity or debt financing and/or in restructuring existing debt, or that the Company will achieve profitable operations and positive cash flow. The unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. Further, subsequent to year end the Company has primarily funded its operations through the issuance of additional debt financings (see Note 12).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Securities and Exchange Commission (the “SEC”) Form 10-Q and Article 8 of SEC Regulation S-X and do not include all the information and disclosures required by generally accepted accounting principles in the United States of America ( “GAAP” ). The Company has made estimates and judgments affecting the amounts reported in our condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from our estimates. The consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended November 30, 2015, filed with the SEC on April 28, 2017.  Results for the three and six months ended May 31, 2016, are not necessarily indicative of the results to be expected for the full year ending November 30, 2016.

Principles of Consolidation

The unaudited condensed consolidated financial statements include accounts of Avalanche and its wholly-owned subsidiaries, SRB and RCG (collectively referred to as the “Company” ). No operations existed in RCG during the six months ended May 31, 2016. All significant intercompany accounts and transactions have been eliminated in consolidation.

Accounting Estimates

The preparation of financial statements, in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s critical accounting policies that involve significant judgment and estimates include fair value of bifurcated embedded conversion options and derivative warrant liabilities and the valuation of deferred income taxes. Actual results could differ from those estimates.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Fair Value of Financial Instruments

The Company’s significant financial instruments include cash, accounts receivable, notes receivable, accounts payable and accrued expenses, notes payable, and convertible notes payable. The recorded values of cash, accounts receivable, notes receivable, and accounts payable approximate their fair values based on their short-term nature. Notes payable and convertible notes payable are recorded inclusive of the value of any bifurcated embedded feature, which approximates their fair value.

Equity-Linked Financial Instruments

Derivative liabilities are recognized in the consolidated balance sheets at fair value based on the criteria specified in Financial Accounting Standards Board ( “FASB” ) Accounting Standards Codification ( “ASC” ) Topic 815-15 – Derivatives and Hedging – Embedded Derivatives ( “ASC 815-15” ). The Company evaluates all of its financial instruments, including embedded conversion features in convertible debt and warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

Pursuant to ASC Topic 815-15 an evaluation of the embedded conversion feature of convertible debt is evaluated to determine if the embedded debt conversion feature is required to be bifurcated from the debt instrument, valued and classified with the related loan host instrument. When the terms of the embedded conversion features of the Company’s convertible debt provides for the issuance of shares of common stock at the election of the holders and the number of shares is subject to adjustment for a decline in the price of the Company’s common stock, the Company determined that the embedded conversion option should be bifurcated. The estimated fair value of the conversion features, when bifurcated, are primarily determined using a Monte Carlo model or, in certain circumstances, the Black-Scholes option pricing model. The models utilize Level 3 unobservable inputs to calculate the fair value of the derivative liabilities at each reporting period. The Company determined that in instances where a Black-Scholes option pricing model was used that using an alternative valuation model such as a Monte Carlo model would result in minimal differences. Each reporting period the embedded conversion feature for each applicable debt instrument is re-valued and adjusted through the caption “change in fair value of derivative liability” on the consolidated statements of operations.

Certain of the Company’s convertible notes issued during the year ended November 30, 2015 contain conversion terms that provide for a variable conversion price (e.g. 55% of the lowest trading price of the Company’s common stock for the 25 days preceding conversion) for a fixed amount (i.e. face value of the note). This results in the number of shares to be issued upon conversion to be essentially indeterminable and prevents the Company from concluding that the related conversion feature does not need to be bifurcated as a derivate liability in accordance with ASC 815. Thus, equity-linked financial instruments, which are convertible or exercisable into common stock, issued subsequent to the convertible notes are classified as derivative liabilities, with the exception of instruments related to employee share-based compensation.

Warrant Liability

The Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's consolidated statements of operations. The fair value of the warrants issued by the Company has been estimated using a Black-Scholes option pricing model, at each measurement date.

Debt Discounts

The Company accounts for debt discounts originating in connection with conversion features that remain embedded in the related notes in accordance with ASC 470-20, Debt with Conversion and Other Options . These costs are classified on the consolidated balance sheet as a direct deduction from the debt liability. The Company amortizes these costs over the term of its debt agreements as interest expense-debt discount in the consolidated statement of operations.

Sequencing

As of March 1, 2016, the Company adopted a sequencing policy whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

No revenue was recorded during the three and six months ended May 31, 2016. During the three and six months ended May 31, 2016, the Company’s revenues consisted solely of sales of flavored liquids for electronic vaporizers and eCigarettes and accessories from SRB.

Loss per Common Share

Pursuant to ASC Topic No. 260, Earnings per Share, basic net loss per share is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted net loss per share is computed similar to basic net loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted net loss per common share reflects the potential dilution that could occur if diluted instruments were to be exercised or converted or otherwise resulted in the issuance of common stock that then shared in the earnings of the Company.

Since the effects of the conversion of convertible debt are anti-dilutive in all periods presented, shares of common stock underlying these instruments have been excluded from the computation of loss per common share.

The following sets forth the number of shares of common stock underlying convertible debt as of May 31, 2016 and 2015:

Reclassifications

Certain prior period amounts have been reclassified for comparative purposes to conform to the current period financial statement presentation. These reclassifications had no effect on previously reported results of operations. In addition, certain prior period amounts from the revised amounts have been reclassified for consistency with the current period presentation.

Recent Accounting Pronouncements

The Company has considered all recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its condensed consolidated financial statements.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The condensed consolidated financial statements for the three and six months ended May 31, 2015 have been revised to expense the previously capitalized licensing fee and to reclassify original issue discount that was initially recorded as a prepaid asset to debt discount. An analysis of those revised numbers is reflected below.

In accordance with SEC Staff Accounting Bulletin No 108, the Company has evaluated this error, based on an analysis of quantitative and qualitative factors, as to whether it was material to the condensed consolidated statements of operations for the three and six months ended May 31, 2015 and if amendments of previously filed financial statements with the SEC are required. The Company has determined that the adjustment is qualitatively not material and, therefore, the error has no material impact to the condensed consolidated statements of operations for the three and six months ended May 31, 2015 or other prior periods.

During the six months ended May 31, 2016, the Company issued a total of 175,000 warrants at an average exercise price of $0.13 per share.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table summarizes information about common stock warrants outstanding at May 31, 2016:

The Company has valued the warrants at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent upon several variables such as the warrants’ term, exercise price, current stock price, risk-free interest rate and estimated volatility of our stock over the contractual term of the warrants. The risk-free interest rate used in the calculations is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the contractual life of the warrants.

The following weighted average assumptions were used for grants during the six months ended May 31, 2016:

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On April 13, 2016, the Company entered into an agreement to finance a new restaurant owned by Philo Group, LLC (“ Philo ”). Between April 13, 2016 and May 31, 2016, the Company provided $250,000 in financing to Philo under the terms of a Senior Secured Property Note dated April 4, 2016, as amended (the “ Philo Note ”). The Philo Note bears interest at a rate of sixteen percent (16%) per annum, requires monthly interest payments, and was due within six (6) months from the date of issue. Due to delays in the opening of the restaurant, the Philo Note has not yet been repaid and is in default. The Company has not made a formal demand upon Philo for payment but has reserved its rights as provided for in the Philo Note. The Company is currently in discussions with Philo regarding payment of the Philo Note and actively monitoring the restaurant operations. The Philo Note features an original issue discount of $75,000 and allows for legal fees up to $5,000. The Philo Note is personally guaranteed by the principal of Philo and secured by all assets of Philo. In addition, the principal of Philo has agreed to further secure the loan by pledging several pieces of real property located in California.

The original issue discount of $75,000 on the Philo Note is being amortized as interest income through the maturity date using the interest rate method. During the three and six months ended May 31, 2016, the Company recorded $21,841 of interest income from the discount accretion and $8,208 of interest income based upon the 16% contractual rate.

JS Technologies, Inc.

On August 4, 2015, the Company entered into a Secured Promissory Note (the “JST Note”) with JS Technologies, Inc. (“JST”). Under the JST Note, the Company entered into an agreement to lend up to $400,000 to JST in order to provide short-term financing pending the Company’s proposed acquisition of JST. The JST Note accrues interest at a rate of ten percent (10%) per annum and was due on August 5, 2016. The JST Note is secured by substantially all of the assets of JST. Between December 3, 2015 and February 26, 2016, the Company loaned JST $120,000 pursuant to the term of the JST Note, which included an original issue discount of $13,333 to the overall JST Note. Of the $120,000 loaned to JST, a payment of $95,000 was made by the Company and a payment of $25,000 was made by MCKEA Holdings, LLC (“ MCKEA ” ) directly to JST on the Company’s behalf. Through May 31, 2016, the note receivable was offset by a payment of $19,674 by JST and JST’s payment of $10,000 directly to a third-party noteholder. The $10,000 payments made by JST reduced the Company’s outstanding note payable. The JST Note was fully repaid on June 15, 2016.

The original issue discount of $13,333 on the JST Note was being amortized as interest income using the effective interest rate method. During the three and six months ended May 31, 2016, the Company recorded $9,358 and $13,333, respectively, of interest income from the discount accretion and $2,860 and $5,326, respectively, of interest income based upon the 10% contractual rate.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Accounting for Redemption Feature- Put Option

Management determined that the variable share settlement feature as a “conversion feature” as defined above represented, in substance, a put option (redemption feature) designed to provide the investor with a fixed monetary amount, settleable in shares. Management determined that this put option should be separated and accounted for as a derivative and classified as a liability primarily because the put option met the net settlement criterion and the settlement provisions were not consistent with a fixed-for-fixed equity instrument.

The put option, with a fair value of approximately $1.2 million at inception, was initially recorded as a derivative liability on the accompanying balance sheet and a corresponding discount to the note. The Company accreted the discount to interest expense on the statement of operations over the term of the note using the effective interest rate method. During the three months ended May 31, 2016 and 2015, the Company recognized interest expense of $75,891 and $84,178, respectively, resulting from amortization of the debt discount for the above convertible promissory notes. During the six months ended May 31, 2016 and 2015, the Company recognized interest expense of $170,441 and $84,178, respectively, resulting from amortization of the debt discount for the above convertible promissory notes.  The difference between the estimated fair value of the conversion feature and the debt discount was reflected as a loss on issuance of convertible debt and during the three and six months ended March 31, 2016, the loss on issuance amounted to $68,522 and $71,061, respectively. In January 2016, the Company issued 457,619 shares of common stock in payment of principal and accrued interest on three of its convertible notes. The shares were valued based on the closing price of the Company’s common stock on the date of issuance, $183,048, resulting in a loss on conversion of $154,694. The accrued interest associated with the convertible notes was $130,419 as of May 31, 2016. All long-term notes are due in fiscal year 2019.

On January 23, 2018, the Company, Adar Bays, LLC and Union Capital, LLC entered into Note Settlement and Termination Agreements. Pursuant to the terms of the settlement agreements, the Company agreed to satisfy each of the outstanding notes for $200,000 and 100,000 shares of common stock. The payments were made on January 26, 2018. The closing price of the Company's common stock on January 23, 2018 was $1.40 per share resulting in an aggregate value of $340,000 per note.

On or around April 19, 2016, the Company received from counsel for Typenex, a written demand to accelerate and demand payment of the entire outstanding balance of the Typenex note entered into between the Company and Typenex on May 29, 2015. On June 7, 2016, Typenex filed suit in the State of Utah, the Third Judicial District Court, County of Salt Lake, for repayment of all principal, default effects, late fee and accrued interest. According to the complaint, Typenex asserted an aggregate amount due, as of June 6, 2016, of $149,054. On April 4, 2017, the Company and Typenex agreed to settle the lawsuit for payment of $90,000, which was paid in April 2017. On May 9, 2017, an order of dismissal with prejudice was entered by the Third Judicial District Court.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

During the three and six months ended May 31, 2016, the Company recognized interest expense of $35,947 and $81,912, respectively, resulting from amortization of the debt discount for the above notes payable. The Company did not recognize any interest expense from amortization of the debt discount during the three and six months ended May 31, 2015. The debt discount is being amortized as non-cash interest expense over the term of the debt using the effective interest method. The accrued interest associated with the above notes payable was $82,746 as of May 31, 2016, which is recorded in accrued interest on convertible and promissory notes payable on the accompanying condensed consolidated balance sheet.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On March 4, 2016, RCG entered into a promissory note (the “MCKEA Note”) with MCKEA Holdings, LLC. The MCKEA Note provides for proceeds up to $100,000 and bears interest a rate of fifteen percent (15%) per year. All principal and interest accrued under the MCKEA Note was due on or before August 4, 2016. The MCKEA Note features an original issue discount of 10% of the total cash advanced to RCG. Between March 4, 2016 and May 31, 2016, $56,788 was advanced to RCG, inclusive of $5,163 of original issue discount of which $15,851 has been repaid resulting in an outstanding principal balance of $40,937 at May 31, 2016. During the three and six months ended May 31, 2016, the Company recognized interest expense of $2,363 resulting from amortization of the debt discount for the above note payable, related party.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following tables classify the Company’s embedded conversion options, put options, and derivative warrant liabilities measured at fair value on a recurring basis into the fair value hierarchy as of May 31, 2016 and November 30, 2015:

There were no transfers between Level 1, 2 or 3 during the six months ended May 31, 2016 and during the year ended November 30, 2015.

The following table presents changes in Level 3 liabilities measured at fair value for the six months ended May 31, 2016. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management. The Company’s put options are valued using a using a Monte Carlo model or, in certain circumstances, the Black-Scholes option pricing model. As of May 31, 2016, the inputs used in the analysis included discount rates per the conversion terms of the convertible promissory notes.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

A summary of quantitative information about significant unobservable inputs (Level 3 inputs) used in measuring the Company’s embedded conversion options that are categorized within Level 3 of the fair value hierarchy for the six months ended May 31, 2016 and for the year ended November 30, 2015 is as follows:

A summary of quantitative information about significant unobservable inputs (Level 3 inputs) used in measuring the Company’s derivative warrant liabilities that are categorized within Level 3 of the fair value hierarchy for the six months ended May 31, 2016:

During the three and six months ended May 31, 2015, the Company sold $23,547 and $33,784 in products to Vape Nation. These sales represented 88% of total revenue for the six month period resulting in accounts receivable, related party of $17,222, which was paid in December 2016. Vape Nation, is 50% owned by MCKEA. MCKEA is the majority member of Philou Ventures, LLC (“Philou”), which is the Company’s controlling shareholder. Kristine L. Ault, the wife of Milton C. Ault III, Chairman of the Company’s Board of Directors, is the manager and owner of MCKEA.

At February 29, 2016, the Company owed MCKEA $53,790, which was included in accounts payable and accrued expenses, related party. Of this amount, $25,000 was advanced directly by MCKEA to JST pursuant to the terms of the JST Note (see Note 6). The Company paid the amount owed MCKEA during the three months ended May 31, 2016.

On May 1, 2016, the Company entered into a management services agreement (the “ MSA ”) with Alzamend Neuro, Inc. (“ Alzamend ”), a related party. Alzamend was formed on February 26, 2016 under the laws of the State of Delaware to acquire and commercialize patented intellectual property and the know-how to prevent, treat and cure Alzheimer’s. Avalanche provides management, consulting and financial services to Alzamend. Such services include advice and assistance concerning any and all aspects of operations, planning and financing of Alzamend and conducting relations with accountants, attorneys, financial advisors and other professionals. The term of the MSA, as amended, is for the period May 1, 2016 to December 31, 2017, and may be extended by written agreement, with Avalanche having initially received $40,000 per month and, beginning February 2017, currently receiving $20,000 per month for the remainder of 2017. During the three and six months ended May 31, 2016, the Company recorded no revenue related to the management service agreement with Alzamend.

Preferred Stock

The Company is authorized to issue 10,000,000 shares of Preferred Stock with a par value of $0.001 per share. On July 31, 2014, the Board of Directors designated 50,000 shares of its Preferred Stock as “Class A Convertible Preferred Stock” (the “Class A Preferred Stock”). Each share of Class A Preferred Stock has a stated value of $5.00 per share. The holders of Class A Preferred Stock have no voting rights. The holders are entitled to receive cumulative dividends at a rate of 10% of the stated value per annum, payable twice a year, subject to the availability of funds and approval by the Board of Directors. In the discretion of the Board of Directors, dividends may be paid with common stock. In the event of a liquidation or dissolution of the Company each holder of Class A Preferred Stock shall be entitled to be paid in cash $5 per share.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

At any time after August 31, 2015, a holder of Class A Preferred Stock may, at its option, convert all or a portion of its outstanding shares into common stock.

Common Stock

2016 Transactions

On December 10, 2015, the Company entered into a subscription agreement with a third party, whereby it sold 25,000 shares of its common stock at a price of $0.20 per share for total cash proceeds of $5,000.

On January 26, 2016, the Company issued 50,000 fully vested and non-forfeitable shares of common stock to a third-party service provider of consulting services. The aggregate fair value of the shares amounted to $20,000 based on the closing price of the Company’s common stock on the issuance date. The related services were completed during the six months ended May 31, 2016.

Conversion of debt

2016 Transactions

On January 26, 2016, the Company issued 297,619 shares of common stock to Typenex Co-Investment, LLC in conversion of $12,500 of accrued interest. The shares of common stock were valued at $119,048 resulting in a loss on conversion of $106,548.

On January 28, 2016, the Company issued 100,000 shares of common stock to Black Mountain Equities, Inc. in conversion of $12,830 of principal and accrued interest. The shares of common stock were valued at $40,000 resulting in a loss on conversion of $27,170.

On January 29, 2016, the Company issued 60,000 shares of common stock to JMJ Investments, Inc in conversion of $3,024 of accrued interest. The shares of common stock were valued at $24,000 resulting in a loss on conversion of $20,976. 

Common Stock Warrants

                On December 2, 2015, in connection with issuing the Livingston Note (see Note 8d), the Company issued 100,000 common stock warrants which were valued at $30,987.

In January 2016, in connection with an amendment to the LG Capital Funding, LLC Note (see Note 7f), the Company issued 75,000 common stock warrants, which were valued at $26,250.  

Stock based compensation

During the three and six months ended May 31, 2016, the Company issued nil and 50,000 shares, respectively, of common stock to service providers. During the three and six months ended May 31, 2015, the Company issued 100,000 and 312,500 shares, respectively, of common stock to service providers. The shares of common stock are being expensed over the term of the services being provided. As a result of these issuances, the Company has recorded stock-based compensation during the three and six months ended May 31, 2016 of nil and $20,000, respectively. The Company recorded stock-based compensation during the three and six months ended May 31, 2015 of $100,000 and $251,833, respectively. The fair value of the shares was determined based on the closing price of the Company’s common stock on the issuance date and is being recognized over the term of the respective consulting agreement.

In accordance with ASC 855-10, the Company has analyzed its operations subsequent to May 31, 2016 through December 6, 2018, the date these financial statements were issued and has determined that there are no material subsequent events to disclose in these financial statements except for the following.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Convertible Notes Payable

On October 5, 2016, November 30, 2016, and February 22, 2017, the Company entered into three convertible promissory notes with DPW Holdings, Inc. (NYSE: DPW) (the “DPW Notes”), a related party. Under the terms of the DPW Notes, the Company borrowed the sum of $1,575,000. The DPW Notes featured an original issue discount of $75,000, resulting in net funding to the Company of $1,500,000. The DPW Notes were due in two years and accrued interest at 12% per annum. The DPW Notes, were convertible into shares of the Company’s common stock at a conversion price of $0.745 per share.

On September 6, 2017, DPW Holdings, Inc. and the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with an effective date of August 21, 2017 pursuant to which DPW will provide the Company a non-revolving credit facility of up to $10,000,000, for a period ending on August 21, 2019.

In consideration of entering into the Loan Agreement, the DPW Notes were cancelled and the DPW Notes were consolidated and a new Convertible Promissory Note was issued (the “New DPW Note”). At December 3, 2018, DPW has provided loans to the Company in the principal amount $6,795,346 and, in addition to the 12% convertible promissory notes, the Company has issued to DPW warrants to purchase 13,590,692 shares of the Company’s common stock. The New DPW Note is due in two years and accrues interest at 12% per annum on the face amount. The New DPW Note contains standard events of defaults. Future advances under the Loan Agreement, if any, will be evidenced by a convertible promissory containing a conversion price feature at $0.50 per share and warrant with an exercise price of $0.50 per share. Further, under the terms of the Loan Agreement, the New DPW Notes are secured by the assets of Avalanche.

Mr. Ault is the Chief Executive Officer and Chairman of the Board of Directors of DPW’s Board of Directors and the Chairman of the Company’s Board of Directors. Mr. William B. Horne is the Chief Financial Officer and a director of DPW and the Chief Financial Officer and a director of the Company.

Preferred Stock

On March 6, 2017, the Company withdrew its former Class A Convertible Preferred Stock (the “ Previous Class ”), all shares of which were converted into shares of Common Stock as of September 21, 2015. The certificate of designations of the Previous Class was originally filed with the Secretary of State of the State of Nevada on July 31, 2014.

On March 7, 2017, the Company filed a new Certificate of Designations, Preferences, Rights and Limitations of Class A Convertible Preferred Stock (the “Class A Certificate of Designations”) with the Secretary of State of the State of Nevada, setting forth the terms of the Class A Shares.

The Class A Shares each carry a stated value of $20.00. The Class A Shares shall vote together with the shares of Common Stock as a single class and, regardless of the number of Class A Shares outstanding, provided that at least 25,000 of such Class A Shares are outstanding, shall represent eighty percent (80%) of all votes entitled to be voted at any annual or special meeting of shareholders of the Company or action by written consent of shareholders, including any shares of preferred stock other than the Class A Shares that are voted with the Common Stock. Each outstanding Class A Share shall represent its proportionate share of the 80% which is allocated to the outstanding Class A Shares. The Class A Shares are convertible at the Holder’s option into shares of Common Stock of the Company at a conversion price derived by dividing the stated value of each Class A Share by $0.50 per share, subject to customary adjustment, which conversion may occur at any time at the option of the Holder.

On March 7, 2017, the Company entered into an agreement (the “Exchange Agreement”) with Philou pursuant to which it agreed to issue to Philou 50,000 shares of its newly created Class A Convertible Preferred Stock (the “Class A Shares”) and 5,000,000 common stock warrants in exchange for the surrender by Philou of 2,000,000 shares of its Common Stock. On April 26, 2017, the Class A Shares were issued simultaneously with the surrender and cancellation of the 2,000,000 shares of common stock. The warrants have a five year term and an exercise price of $0.35 per share.

On March 7, 2017, the Company filed the Certificate of Designations, Preferences, Rights and Limitations of Class B Convertible Preferred Stock (the “Class B Certificate of Designations”) with the Secretary of State of the State of Nevada, setting forth the terms of its Class B Convertible Preferred Stock (the “Class B Shares”).

The Company designated 100,000 shares of its preferred stock, par value $0.001 per share, as Class B Shares. The Class B Shares will have a priority over all of the shares of Common Stock on liquidation or sale of the Company, at the rate of $50.00 per Class B Share, or a liquidation preference of $5,000,000 (the “Class B Stated Value”) as to all Class B Shares. The Class B Shares will pay an annual dividend (at the option of the Company, either in cash or in additional shares of Common Stock), in an amount that shall be the greater of (i) an annual rate of 5% per annum, or (ii) 5% of MTIX’s net income as determined in accordance with United States Generally Accepted Accounting Principles for the fiscal year then ended. The Class B Shares will vote with the Common Stock on all matters as to which shareholders of the Company are entitled to vote, on an “as converted” basis, as though all outstanding Class B Shares had been converted into Common Stock immediately prior to the taking of the record date for all shareholders entitled to vote at any regular or special meeting of the Company’s shareholders. Commencing two (2) years after the Closing Date, the Class B Shares shall be convertible into shares of Common Stock by dividing the Class B Stated Value by the Conversion Price applicable to the Notes. The Class B Shares shall contain the respective rights, privileges and designations as are set forth in the Certificate of Designations, Preferences, Rights and Limitations of Class B Convertible Preferred Stock.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Common Stock

On February 28, 2017, the Company issued 250,000 shares of its common stock as payment for services to an officer. The shares were valued at $40,000, $0.16 per share.

On March 9, 2017, the Company issued an aggregate of 216,946 shares of its common stock as repayment of the principal and accrued interest on the convertible note due to GCEF Opportunity Fund, LLC (See Note 7g). The shares had an aggregate fair value of $32,542, an average of $0.15 per share.

On January 23, 2018, the Company, Adar Bays, LLC and Union Capital, LLC entered into Note Settlement and Termination Agreements. Pursuant to the terms of the settlement agreements, the Company agreed to satisfy each of the outstanding notes for $200,000 and 100,000 shares of common stock. The payments were made on January 26, 2018 (See Note 7a).

On May 11, 2018, the Company issued an aggregate of 20,000 shares of its common stock as repayment of $4,550 in principal on the convertible note due to JMJ Financial (See Note 7d). The shares had an aggregate fair value of $4,550, an average of $0.23 per share.

MTIX, Ltd. Acquisition

On August 22, 2017, pursuant to the terms of a Share Exchange Agreement dated as of March 3, 2017, and as amended on July 13, 2017 and August 21, 2017 (the “Exchange Agreement”) with MTIX Limited, a company formed under the laws of England and Wales (“MTIX”) and the three (3) shareholders of MTIX (the “Sellers”), the Company completed its acquisition of MTIX. Upon the terms and subject to the conditions set forth in the Exchange Agreement, the Company acquired MTIX from the Sellers through the transfer of all issued and outstanding ordinary shares of MTIX (the “MTIX Shares”) by the Sellers to the Company in exchange (the “Exchange”) for the issuance by the Company of: (a) 7% secured convertible promissory notes (individually, a “Note” and collectively, the “Notes”) in the aggregate principal face amount of $9,500,000 to the Sellers in pro rata amounts commensurate with their current respective ownership percentages of MTIX’s ordinary shares, (b) (i) $500,000 in cash, $50,000 of which was paid on October 26, 2016, and (ii) 100,000 shares of the Company’s newly designated shares of Class B Shares to the principal shareholder of MTIX (the “Majority Shareholder”).

At the Closing the Company delivered to the Majority Shareholder and the two Sellers other than Majority Shareholder (the “Minority Shareholders”) three Notes, which Notes were in the principal face amount of $6,166,666 with respect to the Majority Shareholder and in the principal face amount of $1,666,667 with respect to each of the Minority Shareholders.

The Notes

The Notes bear interest at 7% per annum with interest payable (i) in cash upon maturity or in connection with any voluntary or mandatory conversion or, (ii) at the option of the Seller, in arrears on the first day of each calendar quarter after the date of issuance (the “Closing Date” ) by issuing and delivering that number of shares of Common Stock determined by dividing the interest accrued for such quarter by the average price per share for the ten (10) trading days immediately preceding the determination date as reported by Bloomberg, L.P.

Commencing two (2) years from the Closing Date, the Company may prepay any portion of the principal amount of the Notes without the prior written consent of the holders, provided, however, that the Company shall provide the Sellers with 90 days’ notice of such prepayment, and any prepayment must be undertaken on a pro rata basis for all Notes then outstanding. The holders of Notes shall have the right to convert any or all of the amount to be redeemed into common stock prior to prepayment.

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.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Security Agreement

The Notes are secured, pursuant to a Security Agreement, by a lien on certain of the Company’s assets, including but not limited to the intellectual property of MTIX. Upon the occurrence of an event of default under the Notes, a majority in interest of the Notes may require the Company to repay all of its Notes in cash, at a price equal to 100% of the principal, accrued and unpaid interest and any amounts, costs and liquidated damages, as applicable.

Registration Rights Agreement

In connection with the Exchange, the Company and the Sellers entered into a Registration Rights Agreement under which the Company shall be required to file a registration statement with the Commission covering the resale of the shares of the Common Stock issuable pursuant to conversion of: (i) the Notes eighteen (18) months from the Closing Date, and (ii) the Class B Shares twenty-four (24) months from the Closing Date. In addition, the Company use its best efforts to have the registration statement declared effective as soon as practicable, but in no event later than 90 days after the filing date if the registration statement is not subject to a full review by the Commission, or 120 days after filing if the registration statement is subject to a full review by the Commission. The Company will be subject to certain monetary penalties, as set forth in the Registration Rights Agreement, if the registration statement is not filed, does not become effective on a timely basis, or does not remain available for the resale (subject to certain allowable grace periods) of the Registrable Securities, as such term is defined in the Registration Rights Agreement.

MTIX, Ltd. Exchange Agreement

On December 5, 2017, DPW entered into an exchange agreement with WT Johnson & Sons (Huddersfield) Limited (the “WT Johnson”), pursuant to which the Company issued to the WT Johnson, (a) a convertible promissory note in the principal amount of $600,000 (“Note A”), and (b) a convertible promissory note in the principal amount of $1,667,766 (“Note B”), in exchange for cancellation of (i) an outstanding loan made by WT Johnson to MTIX in the amount of $265,666; and (ii) cancellation of an aggregate of $2,002,500 owed by MTIX to WT Johnson pursuant to an Agreement for the Sale and Purchase of a Textile Multi-Laser Enhancement Technology Machine dated as of July 21, 2017 by and between MTIX and WT Johnson.

Note A was convertible into DPW’s common stock at a conversion price of $1.00 per share, does not bear interest, and matured two years from issuance. Note B was convertible into DPW’s common stock at a conversion price of $0.85 per share, does not bear interest, and matured two years from issuance. However, WT Johnson did not have the right to convert any portion of Note B, following receipt by WT Johnson of an aggregate of $2,267,766 of gross proceeds from the sale of shares of common stock issued upon conversion of Note A or Note B.

During December 2017, DPW issued 600,000 shares of its common stock upon the conversion of Note A and WT Johnson notified DPW that gross proceeds during the month of December 2017 from sales of the 600,000 shares of common stock were sufficient to satisfy the entire $2,267,766 obligation. As a result of entering into the exchange agreement with WT Johnson, MTIX is obligated to pay DPW $2,668,266, consisting of the amount of the exchange agreement of $2,267,766 and a value added tax of $400,500 from the sale of the Textile Multi-Laser Enhancement Technology Machine. Concurrent with entering into the exchange agreement, MTIX issued a promissory note in the amount of $2,668,266 to DPW and Note B was cancelled.

Philo Group, LLC Note Receivable

Between June 2016 to November 2017, the Company provided $947,092 in financing to Philo under the terms of a Senior Secured Property Note dated April 4, 2016, as amended (the “Philo Note”). The Philo Note bears interest at a rate of sixteen percent (16%) per year, requires monthly interest payments, and was due within six (6) months from the date of issue.

Stock Incentive Plan

On October 27, 2016, subject to stockholder approval, the Company’s Board of Directors approved the Company’s 2016 Stock Incentive Plan (the ”Plan”), which provides for the issuance of a maximum of three million (3,000,000) shares of the Company’s common stock to be offered to the Company’s directors, officers, employees, and consultants. Options granted under the Plan will have an exercise price equal to or greater than the fair market value of the underlying common stock at the date of grant and become exercisable based on a vesting schedule determined at the date of grant. The options will expire between 5 and 10 years from the date of grant. Restricted stock awards granted under the Plan are subject to a vesting period determined at the date of grant.

Avalanche International, Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On October 27, 2016, the Company’s Board of Directors granted incentive stock option awards for 1,000,000 shares of common stock to each of the Company’s Chairman, President and Chief Executive Officer and Chief Financial Officer (collectively, the “Stock Option Grants”). The Stock Option Grants were issued pursuant to the Plan. Upon obtaining stockholder approval for the Plan an accounting grant date will be established. The Stock Option Grants have an exercise price of $0.16 and are exercisable for seven years. The Stock Option Grants will initially vest equally in annual tranches over a three (3) year period beginning on October 27, 2017. Upon closing of the acquisition of MTIX, the vesting terms of the options change and will vest 50% upon closing and 50% one year after closing.