SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|6 Months Ended|
May 31, 2016
|Accounting Policies [Abstract]|
|SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES||
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Securities and Exchange Commission (the “SEC”) Form 10-Q and Article 8 of SEC Regulation S-X and do not include all the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The Company has made estimates and judgments affecting the amounts reported in our condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from our estimates. The consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended November 30, 2015, filed with the SEC on April 28, 2017. Results for the three and 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.
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.
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.
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.
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.
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.
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:
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.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef