SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 205249
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FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended June 30, 2002.
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from ________________
to ___________________.
Commission File Number 000-27592
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TECH LABORATORIES, INC.
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(Exact name of Small Business issuer in its charter)
New Jersey 22-1436279
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
955 Belmont Avenue, North Haledon, NJ 07508
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (973) 427-5333
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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.
Yes [X] No [_]
The number of shares of Common Stock, par value $.01 per share,
outstanding as of the latest practicable date: As of August 15, 2002, there were
5,389,029 shares outstanding.
Tech Laboratories, Inc.
FORM 10-QSB
Table of Contents
PART I. FINANCIAL INFORMATION................................................ 1
Item 1. Financial Statements........................................ 1
June 30, 2001 and 2002 Balance Sheet (unaudited)............ 1
Statement of Operations June 30, 2001 and 2002 (unaudited).. 3
Statements of Cash Flow For the Six Months Ended June 30,
2001 and 2002............................................... 4
Notes to Financial Statements............................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8
PART II. OTHER INFORMATION................................................... 9
Item 3. Defaults Upon Senior Securities............................ 9
Item 6. Exhibits and Reports on Form 8-K............................ 9
SIGNATURES........................................................... 10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TECH LABORATORIES, INC.
June 30, 2001 and 2002
Balance Sheet
(unaudited)
ASSETS
2001 2002
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Current Assets:
Cash $ 2,016,546 $ 200,334
Marketable Securities 79,116 40,000
Accounts Receivable, Net of Allowance
for Doubtful Accounts of $25,000 154,467 191,694
Inventories 1,532,319 2,178,496
Prepaid Expenses 4,055 6,303
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Total Current Assets $ 3,786,503 $ 2,616,827
Property, Plant, and Equipment, at Cost
Leasehold Improvements 2,247 2,247
Machinery, Equipment, and Instruments 534,440 599,975
Furniture and Fixtures 91,851 98,979
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Total Property, Plant, and Equipment $ 628,583 $ 701,201
Less: Accumulated Depreciation & Amortization (358,670) (389,573)
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Net Property, Plant, and Equipment $ 269,868 $ 311,628
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Other Assets $ 12,059 $ 12,059
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Total Assets $ 4,068,430 $ 2,940,514
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The accompanying notes are an integral part of these financial statements.
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TECH LABORATORIES, INC.
June 30, 2001 and 2002
Balance Sheet
(unaudited)
LIABILITIES AND STOCKHOLDERS' INVESTMENTS
2001* 2002
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Current Liabilities:
Defaulted Convertible Notes $ 0 $ 1,115,217
Current Portion of Long-Term Debt 34,444 32,661
Short-Term Loans Payable 73,593 49,872
Accounts Payable 57,100 64,093
Other Liabilities 71,077 1,960
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Total Current Liabilities $ 236,214 $ 1,263,803
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Long-Term Convertible Notes $ 1,228,774 0
Stockholders' Investment:
Common Stock, $.01 Par Value; 10,000,000 Shares Authorized
in 2001, 25,000,000 Shares Authorized in 2002 $ 48,060 $ 49,886
Less: 15,191 Shares Reacquired and Held in Treasury (113) (151)
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$ 47,947 $ 49,735
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Capital Contributed in Excess of Par Value $ 4,480,718 $ 4,567,916
Retained Earnings/(Accum. Deficit) (1,925,223) (2,940,940)
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$ 2,603,442 $ 1,676,711
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Total Liabilities and Stockholders' Equity $ 4,068,430 $ 2,940,514
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* Restated for prior period adjustment. See Note 13.
The accompanying notes are an integral part of these financial statements.
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TECH LABORATORIES, INC.
Statement of Operations
June 30, 2001 and 2002
(unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001* 2002 2001* 2002
------------ ------------ ------------ ------------
Sales $ 154,278 $ 171,859 $ 360,478 $ 294,689
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of Sales 65,914 113,427 226,864 195,723
Selling, General, and
Administrative Expense 157,450 262,112 509,485 426,774
------------ ------------ ------------ ------------
223,364 375,539 736,349 622,497
------------ ------------ ------------ ------------
Income/(Loss) from Operations $ (69,086) $ (203,680) (375,871) (327,808)
------------ ------------ ------------ ------------
Other Income (Expenses):
Interest Income 21,317 1,854 50,212 3,375
Interest Expense $ (26,129) $ (21,173) $ (50,504) $ (41,015)
------------ ------------ ------------ ------------
$ (4,812) $ (19,319) $ (282) $ (37,640)
Income/(Loss) Before Income Taxes $ (73,898) $ (222,999) $ (376,163) $ (365,448)
Provision for Income Taxes 0 0 0 0
------------ ------------ ------------ ------------
Net Income/(Loss) $ (73,898) $ (222,999) $ (376,163) $ (365,448)
Retained Earnings/(Accum. Deficit), Beg. (1,851,325) (2,717,941) (1,549,060) (2,575,492)
------------ ------------ ------------ ------------
Retained Earnings/(Accum. Deficit), End. (1,925,223) (2,940,940) (1,925,223) (2,940,940)
------------ ------------ ------------ ------------
Earnings Per Share $ (0.02) $ (0.04) $ (0.08) $ (0.07)
------------ ------------ ------------ ------------
* Restated for prior period adjustment. See Note 13.
The accompanying notes are an integral part of these financial statements.
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TECH LABORATORIES, INC.
Statements of Cash Flow
For the Six Months Ended
June 30, 2001 and 2002
(unaudited)
2001* 2002
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Cash Flow From (For) Operating Activities:
Net Income/(Loss) From Operations $ (376,163) $ (365,448)
Add/(Deduct) Items Not Affecting Cash:
Depreciation/Amortization 16,099 15,673
Stock Compensation 130,450 --
Changes in Operating Assets and Liabilities
Marketable Securities (14,783) --
Accounts Receivable (60,515) (79,494)
Inventories (245,481) (103,017)
Accounts Payable 24,139 (18,131)
Other Assets/Liabilities 89,918 (5,602)
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Net Cash Flow From (For) Operating Activities (436,316) (556,019)
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Cash Flows From (For) Investing Activities
Addition of Machinery and Equipment (77,588) (78,562)
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Net Cash Flow From (For) Investing Activities: (77,588) (78,562)
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Cash Flow From (For) Financing Activities
Acquisition/(Repayment) of Short/Long Term Debt (86,660) (58,588)
Issuance of Common Stock 93,664 1,500
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Net Cash Flow From (For) Financing Activities 7,004 (57,088)
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Net Increase/(Decrease) in Cash $ (506,900) $ (691,668)
Cash Balance Beginning of Year 2,523,446 892,003
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Cash Balance End of Second Quarter $ 2,016,546 $ 200,334
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Significant Non-Cash Financing Activities:
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o As of June 30, 2001, $204,884 of Convertible Long-Term Debt was converted
into common stock.
o As of June 30, 2002, $369,625 of Convertible Long-Term Debt was converted
into common stock on a cumulative basis.
* Restated for prior period adjustment. See Note 13.
The accompanying notes are an integral part of these financial statements.
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TECH LABORATORIES, INC.
Notes to Financial Statements
For the Quarter Ended June 30, 2002
(unaudited)
(1) Summary of Significant Accounting Policies for Tech Laboratories, Inc.
(the "Company" or "Tech Labs").
CASH -- Includes Tech Labs' checking account at Hudson United Bank and
money market accounts at Prudential Securities and Bear Stearns.
REVENUE RECOGNITION -- Tech Labs recognizes all revenues when orders
are shipped.
ACCOUNTS RECEIVABLE -- Tech Labs recognizes sales when orders are
shipped to customers. The allowance for bad debts is accrued based on a review
of customer accounts receivables aging.
INVENTORIES -- Inventories are valued at cost or market, whichever is
lower. The FIFO cost method is generally used to determine the cost of the
inventories. At December 31, 2001 a physical inventory was taken and tested. No
physical inventory was taken on June 30, 2002.
PROPERTY AND DEPRECIATION -- Additions to property and equipment are
recorded at cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets as follows:
ASSETS ESTIMATED USEFUL LIVES
Machinery 5 to 7 years
Furniture & Fixtures 5 to 7 years
Maintenance and repairs are charged to expenses as incurred. The cost of
betterments is capitalized and depreciated at appropriate rates. Upon retirement
or other disposition of property items, cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in the statement of
income.
INCOME TAXES -- Income tax expense is based on reported income, and
deferred tax credit is provided for temporary differences between book and
taxable income.
MARKETABLE SECURITIES -- The marketable securities are a time deposit
at Hudson United Bank. The amount of this deposit was $40,000 at December 31,
2001, and $40,000 at June 30, 2002.
(2) Inventories. Inventories at December 31, 2001, and June 30, 2002, were
as follows:
2001 2002
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Raw Materials & Finished Components $ 993,666 $1,044,830
Work in Process & Finished Goods 1,081,813 1,133,666
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$2,075,479 $2,178,496
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(3) Income/(Loss) Per Share.
Pursuant to the provisions of SFAS No. 128, "Earnings Per Share," the
Net Income/(Loss) per share was calculated on the weighted average number of
shares outstanding for the first six months and the second quarter of 2002.
Fully Diluted Earnings per share would be based on the assumed
conversion of all convertible notes and all outstanding options and warrants.
However, due to Anti-Dilution, these assumed conversions have been excluded.
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
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Net Income for the Calculation of Basic EPS (222,999) (365,448)
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Shares for Computation of Basic EPS 5,213,055 5,213,055
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(4) Income Taxes.
Since the Company has an operating loss carryforward of $3,150,073 as
of December 31, 2001, no interperiod tax allocation was made.
(5) Current Portion of Long-Term Debt.
Loans payable to banks were as follows for the periods indicated:
INTEREST CURRENT NON-CURRENT
PERIOD ENDED PAYEE RATE AMOUNT AMOUNT
- ------------ ----- ---- ------ ------
2001 Hudson United Bank Prime +1.5% $33,347 ---
March 31, 2002 Hudson United Bank Prime +1.5% $33,074 ---
June 30, 2002 Hudson United Bank Prime +1.5% $32,661 ---
Marketable securities are pledged as collateral on the above loan.
(6) Short-Term Loans Payable.
Demand loans payable include loans from third parties. The outstanding
loan balance due as of December 31, 2001, was $63,789, $53,427 as of March 31,
2002, and $4,9872 as of June 30, 2002. The annual interest rate for these loans
ranged between six percent (6%) and ten percent (10%). In October of 1999, three
short-term loans for a total of $200,000 at ten percent (10%) annual interest
were completed. Certain contractual revenues were pledged to secure these loans.
As of December 31, 2000, $150,000 of such loans were repaid; the balance remains
outstanding and is due December 31, 2002.
(7) Common Stock.
In 1999, Tech Labs filed a registration statement with respect to a
self-underwritten public offering to raise between $2,000,000 (minimum) and
$3,500,000 (maximum). This offering was completed on May 3, 2000, for total
proceeds of $2,273,723.
(8) Commitments and Contingencies.
In 1997, the Company entered into an exclusive agreement with
Elektronik Apparatebau (EAG), FUA Safety Equipment, and Double T Sports, LTD.,
whereby it received exclusive rights to manufacture and market IDS products
until September 30, 2007, in the US, Canada, and South America. Gross profits
will be calculated according to GAAP and distributed quarterly 70% to the
Company and 30% to FUA until March 2001. Thereafter, until 2007, quarterly
distribution will be based on pretax profits in excess of 15% being shared 70%
to the Company and 30% to FUA. In addition, FUA will receive a 5% royalty based
on the cost of any IDS products the Company manufactures and sells. Since 1997,
sales to FUA have been $1.4 million and commissions have been $219,324.
(9) Long-Term Convertible Debt.
On October 13, 2000, the Company completed a $1.5 million financing of
6.5% convertible promissory notes (the "Convertible Notes") due October 15,
2002. Interest is payable quarterly in cash or in shares of common stock at the
option of the noteholders. The Company disclosed all terms of this financing in
Form 8-K filed on October 18, 2000. As of June 30, 2002, $369,625 of principal
on the Convertible Notes has been converted into shares of the Company's common
stock.
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(10) Additional Convertible Note Disclosure.
On January 11, 2002, the Company entered into a redemption and
conversion agreement concerning the Long-Term Debt referenced in Note (9). An
Event of Default, as defined in the Convertible Notes occurred on January 25,
2002, when the Company was unable to make the first payment of $750,000 to the
holders of the Notes.
On April 19, 2002, the Company successfully negotiated a cure of the
default referenced above. This cure required that the Company's registration
statement, filed with the Securities and Exchange Commission on April 5, 2002,
covering the shares underlying the Convertible Notes, be declared effective on
or before June 29, 2002. If the registration statement had been declared
effective by such date and the Company made certain payments described in the
Company's report on Form 8-K filed April 25, 2002, the maturity date of the
Convertible Notes would have been extended from October 13, 2002, to December
30, 2002.
(11) Subsequent Event.
On August 2, 2002, the Company announced that an Event of Default
occurred on the Convertible Notes. The Company was unable to have its
registration statement filed April 5, 2002 declared effective by June 29, 2002,
and was unable to reach a new agreement with the holders of the Convertible
Notes prior to the expiration of the waiver the Company had been granted by the
noteholders, which had been granted in order to permit the parties time to
negotiate a new agreement. The Company continues to seek a cure for the default
with the holders of the Convertible Notes.
(12) Going Concern.
As a result of operating losses and negative cash flows experienced
during 2001, Tech Labs has a tenuous liquidity position. If sales do not improve
or alternate financing is not obtained, substantial doubt exists about the
Company's ability to continue as a going concern.
(13) Prior Period Adjustment.
Over the course of 2001, Tech Labs issued and distributed 170,000
shares of common stock to Mr. Barry Bendett pursuant to the terms of a
consulting agreement the Company entered into with Mr. Bendett on November 13,
2000. Valuing these shares at their market value on their respective dates of
issuance and distribution, Tech Labs should have expensed $168,950. This
compensation was never expensed. This error is corrected as follows:
Full Year 2001
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Closing Balance Retained Earnings as reported $(2,406,542)
Adjustment referenced above (168,950)
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Revised December 31, 2001, Closing Balance of Retained Earnings $(2,575,492)
Net Loss first six months 2002 (365,448)
------------
June 30, 2002, Retained Earnings after Prior Period Adjustment $(2,940,940)
============
The effect of this re-statement will be to increase selling, general,
and administrative expenses, and reduce Net Income by ($130,450) for the first
half of 2001, and by ($24,500) for the second quarter of 2001.
For comparative purposes, the six months ended June 30, 2001, have been
re-stated and are so noted in the Company's financial statement presentation for
June 30, 2002.
-7-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information contained in this section should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing in this
report Form 10-QSB and the Company's Annual Report for the year ended December
31, 2001.
Quarter ending June 30, 2002, compared to quarter ending June 30, 2001.
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Sales were $171,859 for the second quarter of 2002 as compared to
$154,278 for the similar period of 2001. This increase is minor and the Company
is still suffering the effects of the economic downturn which began in 2001.
Cost of sales of $113,427 for the second quarter of 2002 have increased
by $47,513 compared to the same period of 2001, primarily due to increased sales
of IDS Sensors in 2002 versus DynaTraX(TM) in 2001. IDS Sensors have a higher
cost than DynaTraX(TM).
Selling, administrative, and general expenses increased by $104,662
compared to the same period of 2001 due to increased professional fees, which
were the result of the Company's efforts to raise additional capital, the Event
of Default occurring under the terms of the Convertible Notes and the subsequent
attempted negotiations to cure the Event of Default.
Income from operations of ($222,999) declined $149,101 compared to a
loss of ($73,898) for the prior period as a direct result of increases in cost
of sales due to Product net Change and higher professional fees.
Six months ending June 30, 2002, compared to year ending December 31, 2001.
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SIGNIFICANT CHANGES
During the first half of 2002, the Company continues to suffer from the
current economic downturn.
Cash Flow for the first half of 2002 was negative ($690,169) as a
result of the economic downturn.
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PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
On August 2, 2002, the Company announced that an Event of Default
occurred under the terms of the Convertible Notes. The Company was unable to
have its registration statement, filed April 5, 2002, declared effective by June
29, 2002, as required by the terms of the amended redemption and conversion
agreement the Company entered into with the noteholders on April 19, 2002 (the
"Amended Redemption Agreement"), and was unable to reach a new agreement with
the noteholders of the Convertible Notes prior to the expiration of the waiver
the Company had been granted by the noteholders, which had been granted in order
to permit the parties time to negotiate a new agreement.
Under the terms of the Convertible Notes, the Company is required to
maintain an effective registration statement covering the shares of the
Company's common stock underlying the Convertible Notes. Under the terms of the
Amended Redemption Agreement, the Company had until June 29, 2002 in order to
have its registration statement declared effective.
As of July 31, 2002, the outstanding principal and interest under the
Convertible Notes was $1,221,611.
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K.
On July 8, 2002, the Company filed a current report on Form 8-K
reporting under Item V (Other Events) that the Company issued a press release on
July 2, 2002, announcing that it had entered into an agreement pursuant to which
the holders of its 6.5% convertible promissory notes agreed to waive any
defaults until July 15, 2002, that may otherwise have occurred under the Amended
Redemption Agreement dated April 19, 2002, in order to allow the parties time to
negotiate revised terms of their agreement.
On July 18, 2002, the Company filed a current report on Form 8-K
reporting under Item V (Other Events) that the Company had issued a press
release announcing that it had entered into an agreement pursuant to which the
holders of its 6.5% convertible promissory notes agreed to waive any defaults
until July 30, 2002, that may otherwise have occurred under the Amended
Redemption Agreement, in order to allow the parties time to negotiate revised
terms of their agreement.
On August 6, 2002, the Company filed a current report on Form 8-K
reporting under Item V (Other Events) that the Company had issued a press
release announcing that an Event of Default occurred under its outstanding 6.5%
convertible promissory notes. As of July 31, 2002, the outstanding principal and
interest under the notes was $1,221,611. The Event of Default occurred due to
the fact that the waiver the Company had been granted by the noteholders waiving
any event of default under the notes, including the requirement to have declared
effective on or before June 29, 2002, the registration statement covering the
shares underlying the notes had expired without the Company and the noteholders
having reached a new agreement.
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TECH LABORATORIES, INC.
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.
Date: August 19, 2002
TECH LABORATORIES, INC.
By: /s/ Bernard Ciongoli
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Bernard Ciongoli
Chief Financial Officer
(Principal Financial Officer and Chief
Accounting Officer)
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