UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended May 31, 2015
[  ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number:  333-179028

 

Avalanche International, Corp.

(Exact name of registrant as specified in its charter)

 

Nevada 38-3841757
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

 

5940 S. Rainbow Blvd, Las Vegas, NV 89118
(Address of principal executive offices)

 

(888) 863-9490
(Registrant’s telephone number)
_______________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

 

Indicated 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 12 months (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 [X] Yes [ ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

[ ] Large accelerated filer

[ ] Non-accelerated filer

[ ] Accelerated filer

[X] 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 [X] 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 (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,557,490 common shares as of July 15, 2015.

 
Table of Contents

 

 

TABLE OF CONTENTS

 

Page

 
PART I – FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements 3
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3: Quantitative and Qualitative Disclosures About Market Risk 22
Item 4: Controls and Procedures 22
PART II – OTHER INFORMATION
Item 1: Legal Proceedings 23
Item 1A: Risk Factors 23
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3: Defaults Upon Senior Securities 24
Item 4: Mine Safety Disclosures 24
Item 5: Other Information 24
Item 6: Exhibits 24
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PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Our consolidated financial statements included in this Form 10-Q are as follows:

 

Review Report of Independent Registered Public Accounting Firm 4
Consolidated Balance Sheets as of May 31, 2015 and November 30, 2014 (unaudited) 5

Consolidated Statements of Operations for the Three and Six Months ended May 31, 2015 and 2014 (unaudited)

6
Consolidated Statements of Cash Flows for the Three and Six Months ended May 31, 2015 and 2014 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8

 

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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 reviewed the consolidated balance sheets of Avalanche International Corporation and Subsidiary as of May 31, 2015 and November 30, 2014 and the related consolidated and condensed statements of income and cash flows for the three and six month periods ended May 31, 2015 and 2014. These financial statements are the responsibility of the company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, with the exception of the matters described in the preceding paragraphs, we are not aware of any material modifications that should be made to the accompanying interim financial statements referred to above for them to be in conformity with accounting principles generally accepted 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

July 14, 2015

 

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Avalanche International, Corp. and Subsidiary

Consolidated Balance Sheets

(unaudited) 

 

ASSETS  May 31, 2015    November 30, 2014 
Current Assets:         
  Cash $1,547   $2,247 
  Accounts receivable  16,919    —   
  Prepaid original issued discount on convertible notes  6,395    9,040 
  Prepaid stock for services  188,417    —   
  Loan receivable, related party  150,000    —   
  Inventory  —      25,900 
Total current assets  363,278    37,187 
  Other assets  705    526 
  Product license  54,000    29,250 
     Total assets $417,983   $66,963 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)         
Current Liabilities:         
  Accounts payable and accrued expenses $84,268   $76,917 
  Accounts payable, related party  37,901    88,572 
  Accrued interest  6,998    388 
  Accrued compensation  3,647    9,912 
  Due to related parties  4,892    6,927 
  Derivative liability  444,783    —   
  Convertible notes payable, net of discount of $342,072  84,178    63,250 
  Loans payable  27,500    18,300 
Total current liabilities  694,167    264,266 
     Total liabilities  694,167    264,266 
          
Stockholders' Equity (Deficit):         
 Common stock, $0.001 par value; 75,000,000 shares authorized; 5,552,490 and 5,144,400 shares issued and outstanding, respectively  5,553    5,144 
Class A Preferred stock, $0.001 par value; 50,000 shares authorized, 29,380 and 14,000 shares issued and outstanding, respectively  29    14 
Preferred stock, $0.001 par value; 9,950,000 shares authorized, no shares issued and outstanding  —      —   
  Additional paid-in capital  872,435    203,445 
  Accumulated deficit  (1,154,201)   (405,906)
Total stockholders’ equity (deficit)  (276,184)   (197,303)
      Total liabilities and stockholders’ equity $417,983   $66,963 

 

The accompanying notes are an integral part of these consolidated financial statements.

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Avalanche International, Corp. and Subsidiary

Consolidated Statements of Operations

(unaudited)

 

For the Three Months Ended
May 31,
  For the Six Months Ended
May 31,
  2015  2014  2015  2014
Revenue $23,667   $3,741   $38,662   $3,741 
Cost of revenue  20,758    2,181    29,292    2,181 
Gross margin  2,909    1,560    9,370    1,560 
Operating Expenses:                   
Advertising and marketing  —      —      6,364    —   
Salary expense  13,815    —      36,735    —   
Professional fees  51,043    8,375    56,493    12,193 
Stock for services  195,125    —      251,833    —   
General and administrative  103,786    23,931    192,674    24,689 
  Total operating expense  363,769    32,306    544,099    36,882 
Net loss from operations  (360,860)   (30,746)   (534,729)   (35,322)
Other income (expense):                   
      Interest expense  (6,655)   —      (10,855)   —   
Interest expense – debt discount  (84,178)   —      (84,178)   —   
Derivative expense  (301,309)   —      (301,309)   —   
 Gain on derivative  182,776    —      182,776    —   
Total other expense  (209,366)   —      (213,566)   —   
Loss before income tax  (570,226)   (30,746)   (748,295)   (35,322)
Provision for income taxes  —      —      —      —   
Net Loss $(570,226)  $(30,746)  $(748,295)  $(35,322)
Loss per common share                   
      Basic and diluted $(0.11)  $(0.01)  $(0.14)  $(0.01)
Weighted average common shares                   
      Basic and diluted  5,451,384    5,070,000    5,336,296    5,070,000 

 

The accompanying notes are an integral part of these consolidated financial statements.

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Avalanche International, Corp. and Subsidiary

Consolidated Statements of Cash Flows

(unaudited)

 

For the Six Months Ended May 31,
  2015  2014
Cash flows from operating activities:         
Net loss for the period $(748,295)  $(35,322)
Adjustments to reconcile net loss to net cash used by operating activities:         
    Stock for services  251,833    —   
    Stock issued for financing fees  50,263    —   
    Financing fees  41,000    —   
    Debt discount amortization  84,178    —   
    Derivative expense  301,309    —   
    Gain on derivative liability  (182,776)   —   
Changes in operating assets and liabilities:         
   Increase in accounts receivable  (16,919)   —   
    Decrease in prepaid expenses  2,645    —   
   (Increase) / decrease in inventory  25,900    (11,569)
   Increase in loan receivable  (150,000)   —   
 (Increase) in other assets  (24,928)   —   
    Increase in accounts payable and accrued expense  7,351    42,953 
   Decrease in accounts payable – related party  (50,671)   —   
Increase in accrued interest  6,610    —   
  Decrease in accrued compensation  (6,265)   —   
Net cash used in operating activities  (408,765)   (3,938)
Cash flows from investing activities:  —      —   
Cash flows from financing activities:         
Proceeds from convertible loans  331,250    —   
Proceeds from other loans  10,750    2,086 
Payments of note payable  (10,800)   —   
Advances from an officer  —      4,960 
Advances from related parties  39,808    —   
Repayment of related party advances  (41,843)   —   
Proceeds from issuance of common stock  2,000    —   
Proceeds from issuance of preferred stock  76,900    —   
Net cash provided by financing activities  408,065    7,046 
Increase (decrease) in cash  (700)   3,108 
Cash, beginning of period  2,247    —   
Cash, end of period $1,547   $3,108 
Supplemental Disclosures:         
Cash paid for interest $—     $—   
Cash paid for income tax $—     $—   

 

The accompanying notes are an integral part of these consolidated financial statements.

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Avalanche International, Corp. and subsidiary

Notes to the Consolidated Financial Statements

May 31, 2015

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and business operations

 

Avalanche International, Corp. (“the Company”) was incorporated under the laws of the State of Nevada, U.S. 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 our sole officer and director, John Pulos. Pursuant to the Agreement, the Company transferred all assets to Mr. Pulos. In exchange for this assignment of assets, Mr. Pulos agreed to assume and cancel all liabilities due to him. In conjunction with the change in management, it was decided to abandon this line of business and become a holding company with operations at the subsidiary levels only. The Company formed its first wholly owned subsidiary, Smith and Ramsay Brands, LLC (“SRB”), on May 19, 2014. The Company acquired certain intellectual property, know how, product, name license and other capabilities from Smith and Ramsay, LLC, a Nevada company. Smith and Ramsay Brands, LLC is a manufacturer and distributor of flavored liquids for electronic vaporizers and eCigarettes and distributor of vape accessories. SRB manufactures its premium signature brand of eLiquid, Smith and Ramsay, a line that features all natural flavors produced in the United States. SRB rolled out its flagship product to targeted areas in the fall of 2014, following its pre-launch phase. The Smith and Ramsay line was manufactured, packaged and strategically distributed on a limited basis to generate revenue in test markets. The Company’s goal is to maintain a high standard of quality and to insure the production and warehouse environments, processes and procedures continue to meet or exceed guidelines of the FDA, and are in line with International Organization for Standardization ("ISO") and Current Good Manufacturing Practices ("cGMP") standards.

 

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC") for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments necessary in order for the financial statements to not be misleading have been reflected herein. Operating results for the interim period ended May 31, 2015 are not necessarily indicative of the results that can be expected for the full year. The Company has adopted a November 30 year end.

 

Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial  statements  which present  fairly  the  financial  condition,  results  of  operations  and  cash  flows  of  the Company for the respective periods being presented.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. In management’s opinion, all adjustments necessary for a fair statement of the results for the interim period have been made, and all adjustments are of a normal recurring nature.

 

Principles of Consolidation

The consolidated financial statements include the accounts of Avalanche International, Corp. and its wholly-owned subsidiary Smith and Ramsay Brands, LLC. All significant intercompany accounts and transactions have been eliminated.

 

Cash and Cash Equivalents

The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents. There were no cash equivalents as of May 31, 2015 and November 30, 2014.

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Inventories

Inventories are stated 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. As of May 31, 2015 inventory consists of $0 of product and accessories.

 

Fair Value of Financial instruments

For certain of the Company’s non-derivative financial instruments, including cash and cash equivalents, receivables, prepaids, inventory, accounts payable, accrued liabilities, and notes payable, the carrying amount approximates fair value due to the short-term maturities of these instruments. The estimated fair value of long-term debt is based primarily on borrowing rates currently available to the Company for similar debt issues. The fair value approximates the carrying value of long-term debt.

 

FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. FASB ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.  The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

 

·Level 1. Observable inputs such as quoted prices in active markets;
·Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly;
·Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The following table presents assets and liabilities that are measured and recognized at fair value as of May 31, 2015 on a recurring basis:

 

May 31, 2015

Description  Level 1  Level 2  Level 3  Total Gains and (Losses)
 Derivative    —      —      (444,783)   182,776 
 Total   $—     $—     $(444,783)  $182,776 

 

 

Revenue Recognition

The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for 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 six months ended May 31, 2015, the Company sold $33,783 in products to Vape Nation, generating 87.3% of its revenue.

 

Income Taxes

The Company follows Section 740-10-30 of the FASB Accounting Standards Codification, 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.

 

The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”) with regards to uncertainty income taxes. Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, 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 benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of Section 740-10-25.

9
 

 

Basic and diluted net loss per share

The Company computes net loss per share of common stock in accordance with FASB ASC 260, Earnings per Share (“FASB ASC 260”). Under the provisions of FASB ASC 260, basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants and the conversion of convertible promissory notes. Potentially dilutive shares were excluded from the computation as of May 31, 2015 and 2014 since they would have been anti-dilutive.

 

Recent Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect.  These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued, that might have a material impact on its financial position or results of operations.

 

NOTE 2 – GOING CONCERN

 

The consolidated financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has an accumulated deficit of $1,154,201 as of May 31, 2015 and a net loss of $748,295 for the six months ended May 31, 2015, raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with loans and/or private placement of common stock.

 

NOTE 3 – PRODUCT LICENSE

 

Effective May 23, 2014, the Company licenses certain intellectual property, know how, product and capability from Smith and Ramsay, LLC, a Nevada company. Currently the Company is paying a minimum per bottle licensing fee of $4,500 per month for the perpetual licensing rights, recipes, industry advice, brand and company names, etc., against a royalty stream for twelve months with a 4% royalty fee of gross revenue thereafter in perpetuity. The required per month licensing fee of $4,500 expired in May 2015. This license also provides in perpetuity the first right of refusal of any new products or flavors developed by Smith and Ramsay, LLC. 

 

NOTE 4 - RELATED PARTY TRANSACTIONS

 

As of May 31, 2015, the Company owed a member of the Board of Directors $2,072 for expense reimbursement. The amount due for expense reimbursement is non-interest bearing, due upon demand and unsecured.

 

As of May 31, 2015, the Company owed MCKEA Holdings, LLC $2,820. Amount is due for both expense reimbursement and short term loans that were made to cover certain operating expenses. The amount due is non-interest bearing, due upon demand and unsecured.

 

During the six months ended May 31, 2015, the Company sold $33,783 in products to Vape Nation, generating 87.3% of its revenue. Vape Nation, is 50% owned by MCKEA Holdings, LLC. MCKEA Holdings, LLC is the majority member of Philou Ventures, LLC, which is our controlling shareholder. Kristine L. Ault is the Manager of MCKEA Holdings, LLC and the wife to the Chairman of Avalanche International, Corp.

 

Cross Click Media, Inc. performs sales, marketing, and investor relation services for the Company. As of May 31, 2015, we have paid approximately $196,000 for these services. As of May 31, 2015 and November 30, 2014, we had accounts payable due to CrossClick Media of $37,901 and $88,572, respectively. MCKEA Holdings, LLC is the controlling shareholder of Cross Click Media, Inc. MCKEA Holdings, LLC is also the majority member of Philou Ventures, LLC, which is our controlling shareholder.

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During the six months ended May 31, 2015, the Company loaned Cross Click Media, Inc. $150,000. Although the final details are still being negotiated, that the basic terms of the loan consists of a two-year term and interest at 10% per annum to increase after the first six months. The loan was made as an investment into certain business opportunities that CrossClick Media, Inc. has with its new ad-wheel product/technology. 

 

NOTE 5 – LOAN PAYABLE

 

On November 26, 2014, the Company executed a Promissory Note with Argent Offset, LLC for $12,500. The note included a $500 loan fee, accrued interest at 10%, compounded monthly, and was due December 5, 2014. A late payment fee of $500 per day was to be incurred from December 6, 2014 through December 7, 2014 and then increases to $1,000 per day. On February 1, 2015, we entered into a Temporary Forbearance Agreement with Argent. Under the forbearance agreement, we agreed to pay a forbearance fee of $7,500. The new loan will bear interest at an annual rate of 10% until due on August 1, 2015. Further, we have agreed to pay 12.5% of any new funds invested in the company until the amount due is paid in full. As of May 31, 2015, $5,000 has been repaid on this loan leaving a balance of $15,000 and accrued interest of $727.

 

On March 17, 2015, the Company executed a Convertible Promissory Note for $10,750 with Strategic IR, Inc. The note bears interest at 10% per annum and is due on or before April 16, 2015. The note includes a one-time loan fee of $1,750 for a total due of $12,500. Accrued interest as of May 31, 2015, is $367. This note is currently pas due.

 

NOTE 6 – CONVERTIBLE NOTE PAYABLE

 

On November 3, 2014, the Company executed a Convertible Promissory Note for $63,250 with LG Capital Funding, LLC. The note bears interest at 8% per annum and is due on or before November 3, 2015. The note includes a 15% original issue discount and is convertible at a 40% discount of the lowest trading price prior to the conversion date, any time during the period beginning 180 days following the date of the note. As a result of the conversion feature the Company recorded a debt discount in the amount of $63,250 to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $109,773 based on the Black Scholes Merton pricing model. As of May 31, 2015, $36,217 of the debt discount has been amortized to interest expense and the Company fair valued the derivative at $73,987 resulting in a gain on the change in fair value of the derivative. This note is presented net of debt discount of $27,033 and has accrued interest of $1,969.

 

On March 27, 2015, the Company executed an unsecured Convertible Promissory Note for $100,000 with Dr. Gary Gelbfish. The note bears interest at 10% per annum and is due on or before September 23, 2015.  If not paid by the due date the note and any accrued interest is convertible at the lesser of $0.50 per share or a 50% discount of the average closing price for the twenty days preceding the conversion. In addition, the loan requires a one-time loan fee of $10,000 and the issuance of 50,000 shares of common stock. The fair value of the common stock issued was determined to be $41,349 based its fair value relative to the fair value of the debt issued. This amount has been recorded as a debt discount and will be amortized utilizing the interest method of accretion over the term of the note. As a result of the conversion feature the Company has recorded additional debt discount of $58,651, $34,857 of which has been amortized to interest expense. The discount was determined by calculating the intrinsic value of the loan based on the stock price on the date of the loan of $1.41 and the conversion price of $0.50. The intrinsic value was $182,000; however the total discount is limited to the amount of the loan. This note is presented net of debt discount of $65,143 and has accrued interest of $1,671.

 

On April 29, 2015, we entered into a $300,000 Convertible Promissory Note (the “Note”) with JMJ Financial (“JMJ”). The face amount of the Note includes an original issue discount of $30,000. The initial advance to be made under the Note by JMJ is $30,000. JMJ may, after making this initial advance, lend us additional sums under the terms of the Note in such amounts and at such dates as it chooses. Individual loans mature two years from the effective date of each payment. If repaid within ninety (90) days from the date of issue, the loan will not bear interest. Upon ninety (90) days after the date of issue, a one-time interest charge of twelve percent (12%) of the principal amount will be applied. JMJ may convert all or part of the Note, at its discretion, into shares of our common stock. The conversion price is the lesser of $1.06 or sixty percent (60%) of the lowest trading price for our common stock in the twenty-five trading days immediately preceding the conversion date. For the initial advance the Company recorded a debt discount in the amount of $33,000 (payment plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $120,888 based on the Black Scholes Merton pricing model. As of May 31, 2015, $1,447 of the debt discount has been amortized to interest expense and the Company fair valued the derivative at $45,388 resulting in a gain on the change in fair value of the derivative. This note is presented net of debt discount of $31,553.

11
 

 

On May 11, 2015, the Company issued a Convertible Promissory Note to Union Capital, LLC in the amount of $115,000. The note bears interest at a rate of 8% per annum, is unsecured and matures on May 12, 2016. The Note is convertible into common stock in whole or in part at a variable conversion price equal to a 40% discount to the lowest trading price in the 20-day trading days prior to the conversion date. As a result of the conversion feature the Company recorded a debt discount in the amount of $115,000 to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $193,664 based on the Black Scholes Merton pricing model. As of May 31, 2015, $5,986 of the debt discount has been amortized to interest expense and the Company fair valued the derivative at $162,704 resulting in a gain on the change in fair value of the derivative. This note is presented net of debt discount of $109,014 and has accrued interest of $681.

 

On May 12, 2015, the Company issued a Convertible Promissory Note to Adar Bays, LLC in the amount of $115,000. The note bears interest at a rate of 8% per annum, is unsecured and matures on May 12, 2016. The Note is convertible into common stock in whole or in part at a variable conversion price equal to a 40% discount to the lowest trading price in the 20-day trading days prior to the conversion date. As a result of the conversion feature the Company recorded a debt discount in the amount of $115,000 to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $203,234 based on the Black Scholes Merton pricing model. As of May 31, 2015, $5,671 of the debt discount has been amortized to interest expense and the Company fair valued the derivative at $162,704 resulting in a gain on the change in fair value of the derivative. This note is presented net of debt discount of $109,329 and has accrued interest of $655.

 

A summary of the status of the Company’s debt discounts including original issue discounts, and derivative liabilities, and changes during the periods is presented below:

 

Debt Discount  November 30, 2014  Additions  Amortization  May 30,
2015
LG Capital Funding, LLC – November 4, 2014  $—     $63,250   $(36,217)  $27,033 
Dr. Gary Gelbfish – March 27, 2015   —      100,000    (34,857)   65,143 
JMJ Financial – April 29, 2015   —      33,000    (1,447)   31,553 
Union Capital, LLC – May 11, 2015   —      115,000    (5,986)   109,014 
Adar Bays, LLC – May 12, 2015   —      115,000    (5,671)   109,329 
   $—     $426,250   $(84,178)  $342,072 

 

Derivative Liabilities  November 30, 2014  Initial valuation  Revaluation on 5/31/2015  Gain of fair value of derivative
LG Capital Funding, LLC – November 4, 2014  $—     $109,773   $73,987   $(35,786)
JMJ Financial – April 29, 2015   —      120,888    45,388    (75,500)
Union Capital, LLC – May 11, 2015   —      193,664    162,704    (30,960)
Adar Bays, LLC – May 12, 2015   —      203,234    162,704    (40,530)
   $—     $627,559   $444,783   $(182,776)

  

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NOTE 7 - COMMON STOCK

 

The Company is authorized to issue 75,000,000 common shares with a par value of $0.001 per share.

 

On August 22, 2014, the Company approved a two for one stock split. All shares have been retroactively adjusted to reflect the split.

 

On December 15, 2014, the Company issued 1,600 shares of common stock at a price of $1.25 per share for total cash proceeds of $2,000.

 

On January 28, 2015, the Company issued 200,000 shares of common stock to Hallmark Investments, Inc. for consulting services. The stock was issued at the closing price on the date of grant of $1.60 for total non-cash expense of $320,000. The expense is being recognized over the six month term of the agreement. As of May 31, 2015, $213,333 has been expensed with the balance debited to prepaid stock for services.

 

On January 30, 2015, the Company issued 12,500 shares of common stock to Scott Messier for consulting services. The stock was issued at the closing price on the date of grant of $1.62 for total non-cash expense of $20,250. The expense is being recognized over the six month term of the agreement. As of May 31, 2015, $13,500 has been expensed with the balance debited to prepaid stock for services.

 

On March 27, 2015, the Company issued 50,000 shares of common stock to Dr. Gary Gelbfish in connection with the issuance of a convertible promissory note. The fair value of the common stock issued was determined to be $41,349 based its fair value relative to the fair value of the debt issued.

 

On April 14, 2015, the Company issued 100,000 shares of common stock to Hallmark Investments, Inc. for consulting services. The stock was issued at the closing price on the date of grant of $1.00 for total non-cash expense of $100,000. The expense is being recognized over the six month term of the agreement. As of May 31, 2015, $25,000 has been expensed with the balance debited to prepaid stock for services.

 

On May 11, 2015, the Company issued 14,495 shares of common stock to Union Capital, LLC in connection with the issuance of a convertible promissory note. The stock was issued at the closing price on the date of grant of $1.25 for total non-cash expense of $18,119. The expense has been recognized as a loan fee.

 

On May 12, 2015, the Company issued 14,495 shares of common stock to Adar Bays, LLC in connection with the issuance of a convertible promissory note. The stock was issued at the closing price on the date of grant of $1.10 for total non-cash expense of $15,930. The expense has been recognized as a loan fee.

 

On May 29, 2015, the Company issued 15,000 shares of common stock to Typenex Co-Investment, LLC in connection with the issuance of a convertible promissory note. The stock was issued at the closing price on the date of grant of $1.08 for total non-cash expense of $16,185. The expense has been recognized as a loan fee.

 

NOTE 8 - PREFERRED STOCK

 

The Company is authorized to issue 10,000,000 preferred shares with a par value of $0.001 per share.

 

On July 31, 2014, the Board of Directors designated a series of preferred stock titled Class A Convertible Preferred Stock consisting of 50,000 shares. Each share of Class A Convertible Preferred Stock (“preferred stock”) has a stated value of $5.00 per share. The holders of 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 liquidation or dissolution of the Company each holder of preferred stock shall be entitled to be paid in cash $5 per share,

 

At any time after August 31, 2015, a holder of preferred stock may, at their option, convert all or a portion of their outstanding shares into common stock on a one for one basis. On February 1, 2016, all issued and outstanding preferred stock shall be automatically converted into shares of common stock.

 

On January 30, 2015, the Company issued 15,380 shares of preferred stock at a price of $5.00 per share for total cash proceeds of $76,900 to Finiks Capital, LLC.

 

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NOTE 9 – CONSOLIDATION

 

The consolidated financial statements include the accounts of Avalanche International, Corp. and its wholly-owned subsidiary Smith and Ramsay Brands, LLC. A separate presentation of each Company as of May 31, 2015 and for the six months ended May 31, 2015 is as follows.

 

  Avalanche International, Corp.  Smith and Ramsay Brands, LLC  Elimination  Consolidated
Current Assets:                   
Cash $546   $1,001   $—     $1,547 
Accounts receivable  —      16,919    —      16,919 
Prepaids  6,395    —      —      6,395 
Prepaid stock for services  188,417    —      —      188,417 
Loan receivable  150,000    —      —      150,000 
Intercompany  284,728    —      284,728    —   
Total current assets  630,086    17,920    284,728    363,278 
Other assets  —      705    —      705 
Product license  —      54,000    —      54,000 
     Total assets $630,086   $72,625   $284,728   $417,983 
                    
Current Liabilities                   
Accounts payable and accrued expenses $75,420   $8,848   $—     $84,268 
Accounts payable, related party  —      37,901    —      37,901 
Accrued interest  6,271    727    —      6,998 
Accrued compensation  1,000    2,647    —      3,647 
Due to related parties  3,532    1,360    —      4,892 
Derivative liability  444,783    —      —      444,783 
Convertible note payable, net of discount  84,178    —      —      84,178 
Loans payable  12,500    15,000    —      27,500 
Intercompany  —      284,728    284,728    —   
Total current liabilities  627,684    351,211    284,728    694,167 
     Total liabilities  627,684    351,211    284,728    694,167 
                    
Stockholders' Equity (Deficit)                   
      Preferred stock  29    —      —      29 
Common stock  5,553    —      —      5,553 
Additional paid-in capital  872,435    —      —      872,435 
Accumulated deficit  (875,615)   (278,586)   —      (1,154,201)
Total stockholders’ equity (deficit)  2,402    (278,586)   —      (276,184)
      Total liabilities and stockholders’ equity $630,086   $72,625   $284,728   $417,983 

  

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  Avalanche
International, Corp
  Smith and Ramsay Brands, LLC  Consolidated
Revenue $—     $38,662   $38,662 
Cost of revenue  —      29,292    29,292 
Gross margin  —      9,370    9,370 
               
Operating Expenses:              
Advertising and marketing  1,750    4,614    6,364 
Salary expense  13,400    23,335    36,735 
Professional fees  56,493    —      56,493 
Stock for services  251,833    —      251,833 
General and administrative  22,853    169,821    192,674 
  Total operating expense  346,329    197,770    544,099 
               
Net loss from operations  (346,329)   (188,400)   (534,729)
               
Other income (expense):              
      Interest expense  (10,141)   (714)   (10,855)
Interest expense – debt discount  (84,178)   —      (84,178)
Derivative expense  (301,309)   —      (301,309)
 Gain on derivative  182,776    —      182,776 
Total other expense  (212,852)   (714)   (213,566)
Loss before income tax  (559,181)   (189,114)   (748,295)
Provision for income taxes  —      —      —   
Net Loss $(559,181)  $(189,114)  $(748,295)

 

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NOTE 10 - SUBSEQUENT EVENTS

 

In accordance with FASB ASC 855-10, the Company has analyzed its operations subsequent to May 31, 2015 through July 14, 2015 and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements except for the following.

 

On May 29, 2015, the Company executed a secured Convertible Promissory Note for $252,500 with Typenex Co-Investment, LLC. The Note includes an OID of $22,500 and is to be received in multiple tranches as determined by the lender. The note bears interest at 10% per annum and individual loans mature thirteen months from the effective date of each payment. The first tranche for $87,500 (includes an OID of $7,500) was funded on June 2, 2015. The Note is convertible at a $1.30 per share.

 

On June 2, 2015, the Company executed a Convertible Promissory Note for $8,000 with Lord Abstract, LLC. The terms if this note are still being finalized.

 

On June 4, 2015, the Company executed a Convertible Promissory Note for $55,000 (includes an OID of $5,000) with Black Mountain Equities, Inc. The note has a one-time 10% interest charge and is due on or before June 4, 2016. The Note is convertible at a 30% discount of the average of the three lowest closing prices prior to the twenty trading days preceding conversion. The Company issued 5,000 shares of common stock as a loan fee in connection with the execution of this convertible promissory note. The stock was issued at the closing price on the date of grant of $1.15 for total non-cash expense of $5,750.

 

On June 12, 2015, the Company entered into a binding Letter of Intent (the “LOI”) for the purchase of all of the issued and outstanding capital stock of J.S. Technologies, Inc., a California corporation (“JS”).  JS is the manufacturer of Suhr brand guitars and related electronics and accessories.  Under the LOI, the Company has agreed to purchase all of the issued and outstanding capital stock in JS for a total purchase price of $11,000,000.  The purchase price will be paid, at the option of the individual JS stockholders, in either cash, new convertible preferred stock, or a combination of both.  The new convertible preferred stock to be issued as payment toward the purchase price will have a stated value of $4.00 per share, will accrue dividends at a rate of six percent per year, and will be convertible to common stock at a price of $1.00 per share of common stock.  All shares of the new preferred stock issued and outstanding at thirty-six months after closing will be automatically converted to common stock.  For additional details refer to the Company’s Form 8-K filed on June 16, 2015.

 

On June 15, 2015, the Company issued 100,000 shares of common stock to Hallmark Investments, Inc. for consulting services. The stock was issued at the closing price on the date of grant of $1.20 for total non-cash expense of $120,000.

 

On June 30, 2015, we entered into a $250,000 Convertible Promissory Note (the “Note”) with GCEF Opportunity Fund, LLC (“GCEF”). The face amount of the Note includes an original issue discount of $25,000. The initial advance to be made under the Note by GCEF is $25,000. GCEF may, after making this initial advance, lend us additional sums under the terms of the Note in such amounts and at such dates as it chooses. Individual loans mature one year from the effective date of each payment. Interest will be 10% compounded monthly. GCEF may convert all or part of the Note, at its discretion, into shares of our common stock. The conversion price is the lesser of $1.00 or sixty percent (60%) of the lowest closing price for our common stock in the twenty trading days immediately preceding the conversion date.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

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

 

Company Overview and Description of Business

 

Avalanche International Corp., a Nevada corporation, is a holding company with one subsidiary, Smith and Ramsay Brands, LLC. We have acquired certain intellectual property, knowhow, product and capability from Smith and Ramsay, LLC, a Nevada company. Smith and Ramsay Brands, LLC (SRB) is a manufacturer and distributor of flavored liquids for electronic vaporizers and eCigarettes and accessories. SRB currently has a single brand of premium vape liquid, its signature brand Smith and Ramsay, which began a targeted rollout mid-Fall of 2014 following its pre-launch phase. The Smith and Ramsay line was manufactured, packaged and strategically distributed on a limited basis to generate revenue in test markets. Due to the feedback we received during our test marketing, from our observations of the changing consumer demand in the marketplace and our direct experience with our customers, the Company sought and received Board approval to establish Puff Systems. Puff Systems is a new business unit focused on the manufacturing and distribution of vape devices including pens and vape accessories. Puff Systems was launched as a department of Smith and Ramsay Brands so it could minimize costs while developing its business model and proving concept. The efforts and success of Puff Systems are being evaluated by the Company’s management to determine the unit’s future path. While the Company has chosen to focus primarily on its subsidiary’s business model, it reserves the right to explore other opportunities that either may leverage its current activities, expand organically into new revenue streams or enter new industries that will provide added value for its shareholders. This includes the pursuit of a merger or acquisition of existing businesses from other industries with proceeds from new capital raised.

 

“Vape” is the common term used to refer to the use of vaporizers by consumers which has grown out of the increasing popular use of electronic cigarettes as an alternative to traditional cigarette and other tobacco uses.  The use of electronic cigarettes and vaporizers has been accelerated by state and local legislation outlawing the smoking of tobacco products in public places. In 2012, Goldman Sachs declared electronic cigarettes one of the top 10 disruptive technologies to watch.

 

This highly competitive and innovative marketplace has made its mark and set a consumer standard by offering a wide and colorful array of varying flavors, nicotine levels and other attributes to produce a truly unique and customized experience. We believe that, as this market matures, there will be a natural rising demand for better quality products and wider range of varying flavors that is appetizing to an even more diverse consumer base. Through Smith and Ramsay Brands, we plan to provide a wide variety of high quality vapor liquids to anticipate and lead this demand in a commercial manner to assure product integrity and consistency.

 

It is the plan of SRB to move into the market place during 2015 and over the next twenty four (24) months following its launch of its Smith and Ramsay signature brand upon threshold funding being reached. Management’s goal is to expand aggressively with additional flavors in the signature brand, and expanding through additional new brands and the acquisition and distribution of signature and non-signature accessories. The signature line of premium vape liquid will focus on the Vape store and traditional smoke shop markets, while another brand product line and offerings will focus on the convenience store and gas station marketplace, and other lines will target ethnic-specific markets, etc. Additional products within these brand lines as well as external to these lines will focus on combination hardware/liquid market that includes disposable devices with preloaded liquid, and/or preloaded cartridges for use in specific types of devices.

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The Company’s management consists of Phil Mansour, Chief Executive Officer and Director and Rachel Boulds, Chief Financial Officer.

 

The Company's principal offices are located at 5940 S. Rainbow Blvd., Las Vegas, Nevada 89118. The Company’s web domain is www.AvalancheInternationalCorp.com. The signature brand of SRB has a web site: www.SmithAndRamsay.com.

 

The Marketplace and Competition

 

The Vape marketplace over the past eight years has grown to $2.5 billion, according to VapeNewsMagazine.com and to over $3.5 billion at the turn of 2015 according to Bonnie Herzog, managing director, Beverage, Tobacco & Convenience Store Research, for Wells Fargo Securities LLC in New York. Herzog was cited as stating, “We have increased conviction that consumption of e-Cigs could surpass consumption of conventional cigs within the next decade [by 2023],” according to an article published on VirginiaBusiness.com. In September of 2013, Forbes Magazine estimated that by 2015 the market for eCigarettes would hold a $3.0 Billion share. Forbes Magazine at the beginning of 2014 reported that market share is now closer to $3.5 Billion thus eclipsing its original projection. In fact, on a health issue perspective, we believe it is noteworthy that Forbes Magazine has issued several positive opinions supporting the Vaping industry and its potential ability to help those desiring to quit or reduce traditional smoking products.

 

A March 24, 2014 Wells Fargo Equity Research report bifurcated the market into eCigarettes and secondary and tertiary markets, referred to as Vapors/Tanks or eVapor. At that time, the report estimated the overall U.S. market was about $2.0 billion dollars with approximately a 65%/35% split between eCigarettes to eVapor. Over 2014, that split was narrowing closer with some recent 2014 year-end estimates at a 40/60 split, with eVapor likely to grow to surpass eCigarettes’ market share within the current decade.

 

A VapeNewsMagazine.com report supports this theory and suggests that the growth of the eVapor segment is increasing faster that the overall sales of the eCigarette market. It appears that the drivers behind this growth are: 1) natural progression from eCigarettes; 2) affordability, with eVapor costing 20% less than rechargeable eCigarettes, and 40% less than disposable eCigarettes; and 3) the ability to personalize devices, and receive better nicotine delivery and overall product performance. The report states, “Our view that vapor/tank growth is accelerating and taking share from eCigarettes, making vapor/tank an increasing threat was substantiated by our survey as respondents expect vapors/tanks to grow at 2x the rate of the eVapor category in 2014 with attractive margins that rival combustible cigs. Therefore, if the robust growth of the vapor/tank category continues and is not hindered by FDA regulation, we expect big tobacco has no choice but to enter this category either organically or via acquisition.” This prediction was realized with every major tobacco brand having an entry already launched in the eCigarette sector by the close of 2014.

 

This was further validated by Pamela Gorman, Director of Government Relations at NJOY (a prominent player in the eCigarettespace) when she recently announced at the Vape World Expo in June 2014, that NJOY would be making a strategic shift and enter the eVapor space. By the close of 2014, NJOY’s products were conveniently distributed in Plexiglas displays located at thousands of stores across the United States.

 

Our observations include a perspective that the eVapor market is a fragmented space that can be segmented into the following categories: Home Brew, Cottage, Regionals, Tier 2, and Tier 1.

 

Home Brew

 

This segment consists of tiny entrepreneurs, usually with one or two stores, making their own vape liquids and selling them primarily in their shop and online. Typically, these entrepreneurs only carry their own liquids and maybe one or two Tier 2 brands.

 

Cottage

 

This segment includes small businesses, usually with one to four stores that make their own vape liquids and distribute their liquids in their stores and in their local city or community. Their brand of liquid is limited to about two dozen or so flavors and have roughly no more than 2,000 bottles sold per month.

 

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Regionals

 

These companies typically have expanded beyond their city boundaries up to four states and have 25 to 250 stores carrying their brand. This category ranges in product quality and offerings. Most of these companies range from six months old to less than 30 months old while producing less than 15,000 units a month. There appears to be hundreds of these players in this category and it is growing every day. The major challenge for these businesses is to have the necessary resources, knowledge and experience or expertise available to expand their current customer reach. This category includes FuzionVapor.com, Hurricane Vapor, Nikki’s Vapor Bar, and Virgin Vapor to name a few.

 

Tier 2

 

The Tier 2 manufacturers have reached significant regional acceptance and/or national recognition within three of the four continental time zones in the United States. Typically, these groups are in more than 300 stores and have annual gross sales estimated at between five to fifteen million dollars. Companies included in this category are Five Pawns, Cosmic Fog, eLiquid Solutions, Space Jam Juice, ECBlend, Suicide Bunny and Vapor Corporation, which has been publicly traded on the OTC and upgraded to the NASDAQ (VPCO). Vapor Corporation is primarily a manufacturer of smokeless equipment and produces its own line of liquids.

 

Tier 1

 

Top players in this market have sales reaching $25+ million and are often but not always recognized nationally which includes NicQuid, and Johnsons Creek, two leaders in the eVapor space.

 

The Wells Fargo Report suggests that the large discrepancy between Nielsen data which captures only $750MM in annual eVapor sales and the $2.2 billion its survey suggests, is due to the fact that 60% of eVapor sales go untracked through channels of online and Vape Shop sales which are below the Tier 2 level.

 

Given the current wide-open nature of the market landscape with no clearly dominant market leaders despite the presence of the top five domestic tobacco manufacturers, we feel the barriers to entry and success for our organization to move in with quality products, marketing, distribution and strategic acquisition strategies are minimal compared to where they will be as the market matures over the next 18 months.

 

Plan of Operations

 

Our objective is to provide manufacturing options to support the organic growth begun during our test-marketing phase while continuing to support key wholesale and retail distributors and our strategic partners. These manufacturing options encompass the expanding variety of brands of flavoured eLiquids manufactured by Smith and Ramsay Brands and the innovative devices and accessories that the marketplace will find distinctive in design, quality and value that the Puff Systems brand will build its reputation on. The operations for each business line will need to continue to be progressively scalable and supply the needed amount of product in accordance with their sales and marketing plan as each unit has established.

 

Operational expansion and adjustment in personnel and capacity needs will be addressed through the increase of internal and/or, contract, sales, marketing, and manufacturing capabilities or through strategic acquisition of such capabilities. Decisions on the direction and strategy associated with business and product expansion goals will continue to be made while the business and market place continue to evolve during formative stages of the industry.

 

Marketing Strategies

 

Domestically, our plan was to outsource sales and marketing to a best of breed sales and marketing firm, to drive initial development of national branding, packaging, social media and full web presence. This initial 180-day plan included the development of a competitive landscape report and full launch and ongoing marketing plan and budget. During this initial startup campaign, the Company was developing its overall national marketing strategy with the anticipation of its national launch of its premium signature brand, Smith and Ramsay. The firm test marketed Smith and Ramsay in select localities, employing a variety of different regional and select small-scale national campaigns using a combination of direct sales, call center and business-to-business sales efforts. Data was gathered and analyzed to coordinate with the marketing strategy to insure a successful launch and solid development of an initial installed base. The market research is now driving our decisions and a scheduled calendar of Smith and Ramsay Brands events nationwide that should drive the expansion of its signature brand along with a mixed addition of proprietary brands through R&D, partnerships, and/or acquisitions, along with additions of non-liquid offerings.

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International

 

Internationally, Smith and Ramsay Brands continues its efforts internally to understand and map out the international eLiquid space in an effort to follow the same data driven decision making that has been utilized to develop and implemented its domestic marketing plan. Within months, an initial international strategy will be outlined with a timeline and budget for Board approval.

 

Research and Development

 

Research and development will be focused on expanding the number of brands offered by SRB and within each brand line expanding the lines themselves to include new flavors and different configurations.

 

Intellectual Property

 

We have purchased the following intellectual property from Smith and Ramsay, LLC:

 

Patent / Trademark/knowhow Patent Title / Trademark
Recipe for Toasty Monkey Trademark currently in filing process
Recipe for Tricky Trademark currently in filing process
Recipe for Java Hopper Trademark currently in filing process
Recipe for Peaches and Mango Trademark currently in filing process
Recipe for Berries and Cream Trademark currently in filing process
Smith and Ramsay Trademark currently in filing process
Smith and Ramsay Brands Trademark currently in filing process

 

Domain Names

 

www.AvalancheInternationalCorp.com

www.Smith AndRamsay.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 May 31, 2015, 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.

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Letter of Intent for Acquisition of J.S. Technologies, Inc.

 

On June 12, 2015, we entered into a binding Letter of Intent (the “LOI”) for the purchase of all of the issued and outstanding capital stock of J.S. Technologies, Inc., a California corporation (“JS”).  JS is the manufacturer of Suhr brand guitars and related electronics and accessories.  Under the LOI, we have agreed to purchase all of the issued and outstanding capital stock in JS for a total purchase price of $11,000,000.  The purchase price will be paid, at the option of the individual JS stockholders, in either cash, new convertible preferred stock, or a combination of both.  The new convertible preferred stock to be issued as payment toward the purchase price will have a stated value of $4.00 per share, will accrue dividends at a rate of six percent per year, and will be convertible to common stock at a price of $1.00 per share of common stock.  All shares of the new preferred stock issued and outstanding at thirty-six months after closing will be automatically converted to common stock.  

 

The anticipated closing date of the acquisition will be in in 120 days from the date of the LOI and will be documented by a definitive agreement to be prepared by the parties.  The transaction must close by the later of: (i) 120 days from the date of the LOI, or (ii) 60 days after delivery of audited financial statements for JS, which is a condition to closing.  There are numerous additional conditions to closing of the acquisition, including, but not limited to: (i) execution of the definitive agreement by not less than 65% of JS’s stockholders and compliance with JS’s bylaws and a buy/sell agreement governing its common stock, (ii) our readiness and ability to pay the required portion of the purchase price to each JS stockholder who is ready and willing to sell its shares, and (iii) concurrent closing of an additional agreement under which we will purchase S&J Design Labs, LLC, the affiliated company which owns the building and equipment used in JS’s operations.  

 

The LOI also contains a “no-shop” provision for the time between the date of the LOI and the defined closing date.  In addition, if we or any of the JS stockholders signing the LOI fail and refuse to close the acquisition on the defined closing date, and the other parties are ready and able to close, the breaching party will be assessed a $250,000 break-up fee.  Extensive additional covenants, conditions, representations, and warranties between the parties are included in the LOI. The foregoing is a brief summary of the material terms of the LOI, which should be reviewed in its entirety for additional information.

 

Our ability to close the acquisition of JS as contemplated by the LOI will be dependent upon us obtaining additional financing through debt and/or equity financing arrangements.  Although management is working to secure the additional capital required to close the transaction, there is a risk that such additional financing will not be available to us on acceptable terms or in the amounts required to close the planned acquisition.

 

Results of Operations for the three months ended May 31, 2015 compared to the three months ended May 31, 2014.

 

Revenue

For the three months ended May 31, 2015, revenue was $23,667 compared to $3,741 for the three months ended May 31, 2014. For the three months ended May 31, 2014 we had just started to sell our new vape liquid. Revenue in the current period consists of sales of our vape liquid as well as vape pens and accessories.

 

Operating Expenses

Compensation expense – for the three months ended May 31, 2015, compensation expense for our CFO and CEO totaled $13,815. There was no compensation expense incurred in the prior period.

 

Professional fees – Professional fees for the three months ended May 31, 2015 were $51,043 compared to $8,375 for the three months ended May 31, 2014. The increase is due to increased legal and audit fees associated with compliance and filing obligations.

 

Stock for services – Stock is issued for various services by the company in lieu of cash compensation. For the three months ended May 31, 2015 the Company incurred $195,125 of total non-cash expense as a result of issuing stock for services. No stock was issued for services in the prior period.

 

General and administrative – General and administrative expense for the three months ended May 31, 2015 was $103,786 compared to $23,931 for the three months ended May 31, 2014. The increase is due to the increased activities of the Company, including approximately $69,000 of loan fee expense.

 

Other income and expense

During the three months ended May 31, 2015 we incurred $84,178 of expense for amortization of debt discount, derivative expense of $301,309 and had a gain on the change in fair market value of our derivative liability of $182,776, none of which we had in the prior year. These new revenues and expenses are a result of the convertible debt acquired.

 

Net loss

The Company had a net loss of $570,226 for the three months ended May 31, 2015 compared to a net loss of $30,746 for the three months ended May 31, 2014. The increase in net loss was due to a net increase in operating and other expenses as described above.

 

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Results of Operations for the six months ended May 31, 2015 compared to the six months ended May 31, 2014.

 

Revenue

For the six months ended May 31, 2015, revenue was $38,662 compared to $3,741 for the six months ended May 31, 2014. For the six months ended May 31, 2014 we had just started to sell our new vape liquid. Revenue in the current period consists of sales of our vape liquid as well as vape pens and accessories.

 

Operating Expenses

Advertising and marketing – while there were no costs incurred in the prior period for advertising and marketing, in the current period for the six months ended May 31, 2015, we incurred $6,364 of advertising and marketing costs in connection with the promotion of our new line of business and products.

 

Compensation expense – for the six months ended May 31, 2015, compensation expense for our CFO and CEO totaled $36,735. There was no compensation expense incurred in the prior period.

 

Professional fees – Professional fees for the six months ended May 31, 2015 were $56,493 compared to $12,193 for the six months ended May 31, 2014. The increase is due to increased legal and audit fees associated with compliance and filing obligations.

 

Stock for services – Stock is issued for various services by the company in lieu of cash compensation. For the six months ended May 31, 2015 the Company incurred $251,833 of total non-cash expense as a result of issuing stock for services. No stock was issued for services in the prior period.

 

General and administrative – General and administrative expense for the six months ended May 31, 2015 was $192,674 compared to $24,689 for the six months ended May 31, 2014. The increase is due to the increased activities of the Company, including approximately $69,000 of loan fee expense.

 

Other income and expense

During the six months ended May 31, 2015 we incurred $84,178 of expense for amortization of debt discount, derivative expense of $301,309 and had a gain on the change in fair market value of our derivative liability of $182,776, none of which we had in the prior year. These new revenues and expenses are a result of the convertible debt acquired.

 

Net loss

The Company had a net loss of $748,295 for the six months ended May 31, 2015 compared to a net loss of $35,322 for the six months ended May 31, 2014. The increase in net loss was due to a net increase in operating and other expenses as described above.

 

Liquidity and Capital Resources

 

Our management currently believes that we may not have sufficient working capital needed to meet our current fiscal obligations. In order to continue to meet our fiscal obligations beyond the next twelve months, we plan to pursue various financing alternatives including, but not limited to, raising capital through the equity markets and debt financing.

 

Should we not be successful at raising capital through the issuance of capital stock, we may consider raising capital by the issuance of debt. However, unless the appropriate features, such as convertible options, are attached to the debt instruments, this form of financing is less desirable until such time as we may be in a position to reasonably foresee the generation of cash flow to service and repay debt.

 

As of May 31, 2015, we had an accumulated deficit of $1,154,201 and a net loss for the six months ended May 31, 2015 of $748,295. For the six months ended May 31, 2015, net cash used in operating activities was $408,765 and we had net cash from financing activities of $408,065.

 

On November 3, 2014, we executed a Convertible Promissory Note for $63,250 with LG Capital Funding, LLC. The note bears interest at 8% per annum and is due on or before November 3, 2015. The note includes a 15% original issue discount and is convertible at a 40% discount any time during the period beginning 180 days following the date of the note. Accrued interest on the note as of November 30, 2014 is $1,939.

 

On November 26, 2014, we executed a Promissory Note with Argent Offset, LLC for $12,500. The note included a $500 loan fee, accrued interest at 10%, compounded monthly, and was due December 5, 2014. A late payment fee of $500 per day was to be incurred from December 6, 2014 through December 7, 2014 and then increases to $1,000 per day. On February 1, 2015, we entered into a Temporary Forbearance Agreement with Argent. Under the forbearance agreement, we agreed to pay a forbearance fee of $7,500. The new loan will bear interest at an annual rate of 10% until due on August 1, 2015. Further, we have agreed to pay 12.5% of any new funds invested in the company until the amount due is paid in full. As of May 31, 2015, $5,000 has been repaid on this loan leaving a balance of $15,000 and accrued interest of $727.

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On March 17, 2015, we executed a convertible Promissory Note for $10,750 with Strategic IR, Inc. The note bears interest at 10% per annum and is due on or before April 16, 2015. The note includes a one-time loan fee of $1,750 for a total due of $12,500. This note was not repaid by April 16, 2015 resulting in an increase of the interest rate to 21%. This note is currently past due.

 

On March 27, 2015, we executed a Convertible Promissory Note for $100,000 with Dr. Gary Gelbfish. The note bears interest at 10% per annum and is due on or before September 23, 2015.  If not paid by the due date the note and any accrued interest is convertible at the lesser of $0.50 per share or a 50% discount of the average closing price for the twenty days preceding the conversion. In addition, the loan requires a one-time loan fee of $10,000 and the issuance of 50,000 shares of common stock.

 

On April 29, 2015, we entered into a $300,000 Promissory Note (the “Note”) with JMJ Financial (“JMJ”). The face amount of the Note includes an original issue discount of $30,000. The initial advance to be made under the Note by JMJ is $30,000. JMJ may, after making this initial advance, lend us additional sums under the terms of the Note in such amounts and at such dates as it chooses. Individual loans mature two years from the effective date of each payment. If repaid within ninety (90) days from the date of issue, the loan will not bear interest. Upon ninety (90) days after the date of issue, a one-time interest charge of twelve percent (12%) of the principal amount will be applied. JMJ may convert all or part of the Note, at its discretion, into shares of our common stock. The conversion price is the lesser of $1.06 or sixty percent (60%) of the lowest trading price for our common stock in the twenty-five trading days immediately preceding the conversion date. The initial advance was in the amount of $33,000 (payment plus 10% original discount). This note is presented net of debt discount of $31,553.

 

On May 11, 2015, we issued a Convertible Promissory Note to Union Capital, LLC in the amount of $115,000. The note bears interest at a rate of 8% per annum, is unsecured and matures on May 12, 2016. The Note is convertible into common stock in whole or in part at a variable conversion price equal to a 40% discount to the lowest trading price in the 20-day trading days prior to the conversion date. This note is presented net of debt discount of $109,014 and has accrued interest of $681.

 

On May 12, 2015, we issued a Convertible Promissory Note to Adar Bays, LLC in the amount of $115,000. The note bears interest at a rate of 8% per annum, is unsecured and matures on May 12, 2016. The Note is convertible into common stock in whole or in part at a variable conversion price equal to a 40% discount to the lowest trading price in the 20-day trading days prior to the conversion date. This note is presented net of debt discount of $109,329 and has accrued interest of $655.

 

On May 29, 2015, we executed a secured Convertible Promissory Note for $252,500 with Typenex Co-Investment, LLC. The Note includes an OID of $22,500 and is to be received in multiple tranches as determined by the lender. The note bears interest at 10% per annum and individual loans mature thirteen months from the effective date of each payment. The first tranche for $87,500 (includes an OID of $7,500) was funded on June 2, 2015. The Note is convertible at a $1.30 per share.

 

On June 2, 2015, the Company executed a Convertible Promissory Note for $8,000 with Lord Abstract, LLC. The terms if this note are still being finalized.

 

On June 4, 2015, we executed a Convertible Promissory Note for $55,000 (includes an OID of $5,000) with Black Mountain Equities, Inc. The note has a one-time 10% interest charge and is due on or before June 4, 2016. The Note is convertible at a 30% discount of the average of the three lowest closing prices prior to the twenty trading days preceding conversion.

 

On June 30, 2015, we entered into a $250,000 Convertible Promissory Note (the “Note”) with GCEF Opportunity Fund, LLC (“GCEF”). The face amount of the Note includes an original issue discount of $25,000. The initial advance to be made under the Note by GCEF is $25,000. GCEF may, after making this initial advance, lend us additional sums under the terms of the Note in such amounts and at such dates as it chooses. Individual loans mature one year from the effective date of each payment. Interest will be 10% compounded monthly. GCEF may convert all or part of the Note, at its discretion, into shares of our common stock. The conversion price is the lesser of $1.00 or sixty percent (60%) of the lowest closing price for our common stock in the twenty trading days immediately preceding the conversion date.

 

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Going Concern

 

These interim unaudited consolidated financial statements have been prepared on the going concern basis which assumes that adequate sources of financing will be obtained as required and that ourassets will be realized and liabilities settled in the ordinary course of business.  Accordingly, the interim unaudited consolidated financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should we not be unable to continue as a going concern.

 

Off Balance Sheet Arrangements

 

As of May 31, 2015, there were no off balance sheet arrangements.

 

Critical Accounting Policies

 

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Currently, we do not believe that any accounting policies fit this definition.

 

Recently Issued Accounting Pronouncements

 

We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Management has evaluated the effectiveness of our internal control over financial reporting as of May 31, 2015 based on the control criteria established in a report entitled Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO. Based on our assessment and those criteria, our management has concluded that the Company has inadequate controls and procedures over financial reporting due to the lack of segregation of duties and lack of a formal review process that includes multiple levels of review. Management believes that the material weakness in its controls and procedures did not have an effect on our financial results.

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. It is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. It also can be circumvented by collusion or improper management override.

 

Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process certain safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over our financial reporting.

 

This report does not include an attestation of our registered public accounting firm regarding internal control over financial reporting, pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of FY 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

We have not had any changes or disagreements with our accountants required to be disclosed pursuant to Item 304 of Regulation S-K.

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

 

Item 1A. Risk Factors

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following sets forth certain information concerning securities, which were sold or issued by us without the registration of the securities under the Securities Act of 1933 in reliance on exemptions from such registration requirements. All proceeds are being used to fund operating activities.

 

On December 15, 2015, we issued 1,600 shares of common stock at a price of $1.25 per share for total cash proceeds of $2,000. Proceeds were used to fund general operating expenses.

 

On January 28, 2015, we issued 200,000 shares of common stock to Hallmark Investments, Inc. for consulting services. The stock was issued at the closing price on the date of grant of $1.60 for total non-cash expense of $320,000. The expense is being recognized over the six month term of the agreement.

 

On January 30, 2015, we issued 15,380 shares of preferred stock at a price of $5.00 per share for total cash proceeds of $76,900 to Finiks Capital, LLC. Proceeds were used to pay loans and accounts payable.

 

On January 30, 2015, we issued 12,500 shares of common stock to Scott Messier for consulting services. The stock was issued at the closing price on the date of grant of $1.62 for total non-cash expense of $20,250. The expense is being recognized over the six month term of the agreement.

 

On March 27, 2015, we issued 50,000 shares of common stock to Dr. Gary Gelbfish in connection with the issuance of a convertible promissory note. The fair value of the common stock issued was determined to be $41,349 based its fair value relative to the fair value of the debt issued.

 

On April 14, 2015, we issued 100,000 shares of common stock for to Hallmark Investments, Inc. consulting services. The stock was issued at the closing price on the date of grant of $1.00 for total non-cash expense of $100,000. The expense is being recognized over the six month term of the agreement.

 

On May 11, 2015, we issued 14,495 shares of common stock to Union Capital, LLC in connection with the issuance of a convertible promissory note. The stock was issued at the closing price on the date of grant of $1.25 for total non-cash expense of $18,119. The expense has been recognized as a loan fee.

 

On May 12, 2015, we issued 14,495 shares of common stock to Adar Bays, LLC in connection with the issuance of a convertible promissory note. The stock was issued at the closing price on the date of grant of $1.10 for total non-cash expense of $15,930. The expense has been recognized as a loan fee.

 

On May 29, 2015, we issued 15,000 shares of common stock to Typenex Co-Investment, LLC in connection with the issuance of a convertible promissory note. The stock was issued at the closing price on the date of grant of $1.08 for total non-cash expense of $16,185. The expense has been recognized as a loan fee.

 

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On June 4, 2015, we issued 5,000 shares of common stock to for a loan fee in connection with the execution of the convertible promissory note with Black Mountain Equities, Inc. The stock was issued at the closing price on the date of grant of $1.15 for total non-cash expense of $5,750.

 

On June 15, 2015, we issued 100,000 shares of common stock to Hallmark Investments, LLC for consulting services. The stock was issued at the closing price on the date of grant of $1.20 for total non-cash expense of $120,000.

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

On June 16, 2015, Harris & Gillespie CPA’S, PLLC was deregistered per PCAOB Release No. 105-2015-011. As a result of the transaction, on June 16, 2015, the Former Accountant effectively resigned as the Company’s independent registered public accounting firm and the Company engaged Michael Gillespie & Associates, PLLC as the Company’s independent registered public accounting firm. The engagement of the New Accountant was approved by the Company’s Board of Directors.

 

Item 6. Exhibits

 

Exhibit Number Description of Exhibit
10.1 Convertible Note issued to JMJ Financial dated April 29, 2015  
10.2 Secured Convertible Promissory Note issued to Typenex Co-Investment, LLC dated May 29, 2015
10.3 Securities Purchase Agreement with Typenex Co-Investment, LLC dated May 29, 2015
10.4 Security Agreement with Typenex Co-Investment, LLC dated May 29, 2015
10.5 Investor Note #1 from Typenex Co-Investment, LLC dated May 29, 2015
10.6 Investor Note #2 from Typenex Co-Investment, LLC dated May 29, 2015
10.7 Investor Note #3 from Typenex Co-Investment, LLC dated May 29, 2015
10.8 Convertible Note issued to Black Mountain Equities, Inc. dated June 4, 2015
10.9 Convertible Promissory Note issued to GCEF Opportunity Fund, LLC dated June 30, 2015
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2015 formatted in Extensible Business Reporting Language (XBRL).

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Avalanche International, Corp.
Date: July 16, 2015
   
By:

/s/ Philip Mansour

Philip Mansour

Title: Chief Executive Officer and Director

 

Date: July 16, 2015
   
By:

/s/ Rachel Boulds

Rachel Boulds

Title: Chief Financial Officer
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