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[August 18, 2014]
NUTRA PHARMA CORP - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Introduction Our business during the second quarter of 2014 has focused upon marketing our homeopathic drugs for the treatment of pain: · Nyloxin® (Stage 2 Pain) · Nyloxin® Extra Strength (Stage 3 Pain).
We will continue this focus during the remainder of 2014.
During our second quarter of 2014 and thereafter, the following has occurred: On April 3, we announced that MyNyloxin.com had signed an agreement that creates the MyNyloxin Telemarketing Division (MTD). MTD would began their telemarketing campaign on April 7 to identify customers for Nyloxin® as well as potential Distributors for MyNyloxin.com.
On April 22, 2014, we announced that we are seeking GSA (Government Services Administration) Certification in order to supply a specially formulated Military Strength Nyloxin® to the Department of Defense (DoD) and Veterans Affairs Hospitals (VA).
On May 28, 2014 we announced that MyNyloxin.com had completed their work on a series of commercials to start airing in the month of June. The advertisements focused on the benefits of Nyloxin® and include 30 second, 60 second and 120 second spots. The commercials can be viewed at www.tinyurl.com/Nyloxinads.
On June 25, 2014 we announced that MyNyloxin.com begun airing television commercials as of Monday, June 23rd, 2014. The advertisements focus on the benefits of Nyloxin®. The first contract had already begun and included over 30,000 spots to run throughout the Southeast Region from Comcast and AT&T U-Verse Cable providers. The ads were scheduled to run on the following channels: GOLF, LMN, CNBC, FOXN, MSNBC, NBCS, ESPN, ESPN2, TNT, FOXS, TWC, CNN, HALL, HGTV, TLC, HLN and LIFE. Starting June 30, 2014, the commercials began airing in the New York and New Jersey markets with a rollout to the national stage over the coming weeks.
On July 24, 2014 we announced that we were in the process of completing critical capital improvements to our warehouse and fulfillment center in order to meet increased demand and shipments of our over-the-counter (OTC) pain reliever, Nyloxin®. These improvements include: new rack systems throughout the facility, the purchase of a forklift, new management software as well as hiring additional staff.
21 -------------------------------------------------------------------------------- Cobroxin® We offered Cobroxin®, our over-the-counter pain reliever that has been clinically proven to treat moderate to severe (Stage 2) chronic pain. Cobroxin® was developed by ReceptoPharm, our drug discovery arm and wholly owned subsidiary. Cobroxin® is not currently being marketed. In August 2009, we completed an agreement with XenaCare Holdings ("XenaCare") granting it the exclusive license to market and distribute Cobroxin® within the United States.
In mid-October 2009, XenaCare began selling Cobroxin® online through its product website, www.Cobroxin.com.
In November 2009, XenaCare began selling Cobroxin® to brick-and-mortar retailers, including distribution to CVS in March 2010 and Walgreens in May 2010. On April 1, 2011, we notified our Cobroxin® Distributor, XenaCare that they were in breach of our agreement. As a result of this, the distribution agreement was terminated effective April 10, 2011. XenaCare had a large stock of the product that they had ordered from us and we have allowed them to continue to market their existing inventory of Cobroxin®. In October, 2011 we discontinued their website at www.Cobroxin.com. All current traffic to that website is now redirected to www.Nyloxin.com. On June 10, 2013, we announced a new licensing agreement for the distribution of Cobroxin® with Cobra Pharmaceuticals, LLC. They had expected to begin a direct response campaign by the first quarter of 2014, but have not yet started and have not yet ordered any product for production. If Cobra Pharmaceuticals does not meet minimum orders by first quarter of 2015, they will lose their rights to the product and we may seek other potential distributors for Cobroxin®.
Cobroxin® was available as a two ounce topical gel for treating joint pain and pain associated with arthritis and repetitive stress, and as a one ounce oral spray for treating lower back pain, migraines, neck aches, shoulder pain, cramps, and neuropathic pain. Both the topical gel and oral spray are packaged and sold as a one-month supply.
Cobroxin® offers several benefits as a pain reliever. With increasing concern about consumers using opioid and acetaminophen-based pain relievers, Cobroxin® provides an alternative that does not rely on opiates or non-steroidal anti-inflammatory drugs, otherwise known as NSAIDs, for its pain relieving effects. Cobroxin® also has a well-defined safety profile. Since the early 1930s, the active pharmaceutical ingredient (API) of Cobroxin®, Asian cobra venom, has been studied in more than 46 human clinical studies. The data from these studies provide clinical evidence that cobra venom provides an effective treatment for pain with few side effects and has the following benefits: · safe and effective; · all natural; · long-acting; · easy to use; · non-narcotic; · non-addictive; and · analgesic and anti-inflammatory.
Potential side effects from the use of Cobroxin® are rare, but may include headache, nausea, vomiting, sore throat, allergic rhinitis and coughing.
Nyloxin®/Nyloxin® Extra Strength Nyloxin® and Nyloxin® Extra Strength are similar to Cobroxin® in that they both contain the same active ingredient as Cobroxin®, Asian cobra venom. The primary difference between Nyloxin®, Nyloxin® Extra Strength and Cobroxin® is the dilution level of the venom. The approximate dilution levels for Nyloxin®, Nyloxin® Extra Strength and Cobroxin® are as follows: 22 -------------------------------------------------------------------------------- Nyloxin® · Topical Gel: 30 mcg/mL · Oral Spray: 70 mcg/mL Nyloxin® Extra Strength · Topical Gel: 60 mcg/mL · Oral Spray: 140 mcg/mL Cobroxin® · Topical Gel: 20 mcg/mL · Oral Spray: 35 mcg/mL In December 2009, we began marketing Nyloxin® and Nyloxin® Extra Strength at www.Nyloxin.com. Both Nyloxin® and Nyloxin® Extra Strength are packaged in a roll-on container, squeeze bottle and as an oral spray. Additionally, Nyloxin® topical gel is available in an 8oz pump bottle.
In September of 2012 we began distributing Nyloxin® through TCN International, a Network Marketing Company. TCN distributes products and software applications to approximately 400,000 independent agents in more than 30 countries, including more than 40,000 agents in the United States.
In December of 2013, we announced an agreement with MyNyloxin.com for the exclusive rights to market and distribute Nyloxin® in the Network Marketing channel. MyNyloxin.com provides a business opportunity to their Distributors to earn commissions on the sale of our products through their Distributor groups.
In January of 2014, we announced the first product shipments to the MyNyloxin Independent Entrepreneurs (MIEs). MyNyloxin conducts webinars, conference calls and live meetings to support recruitment of new MIEs as well as to provide product and business education. In April of 2014, we announced that MyNyloxin.com had signed an agreement that creates the MyNyloxin Telemarketing Division (MTD). MTD began their telemarketing campaign on April 7 to identify customers for Nyloxin® as well as potential Distributors for MyNyloxin.com. In June of 2014, we announced that MyNyloxin had begun rolling out a national television campaign to support Nyloxin branding and sales.
We are currently marketing Nyloxin® and Nyloxin® Extra Strength as treatments for moderate to severe chronic pain. Nyloxin® is available as an oral spray for treating back pain, neck pain, headaches, joint pain, migraines, and neuralgia and as a topical gel for treating joint pain, neck pain, arthritis pain, and pain associated with repetitive stress. Nyloxin® Extra Strength is available as an oral spray and gel application for treating the same physical indications, but is aimed at treating the most severe (Stage 3) pain that inhibits one's ability to function fully.
Nyloxin® Military Strength In December 2012, we announced the availability of Nyloxin® Military Strength for sale to the United States Military and Veteran's Administration. Over the past few years, the U.S. Department of Defense has been reporting an increase in the use and abuse of prescription medications, particularly opiates. In 2009, close to 3.8 million prescriptions for pain relievers were written in the military. This staggering number was more than a 400% increase from the number of prescriptions written in the military in 2001. But prescription drugs are not the only issue. The most common and seemingly harmless way to treat pain is with non steroidal, anti-inflammatory drugs (NSAIDS). But there are risks. Overuse can cause nausea, vomiting, diarrhea, heartburn, ulcers and internal bleeding.
In severe cases chest pain, heart failure, kidney dysfunction and life-threatening allergic reactions can occur. It is reported that approximately 7,600 people in America die from NSAID use and some 78,000 are hospitalized.
Ibuprofen, also an 23 -------------------------------------------------------------------------------- NSAID has been of particular concern in the military. The terms "Ranger Candy" and "Military Candy" refer to the service men and women who are said to use 800mg doses of Ibuprofen to control their pain. But when taking anti-inflammatory Ibuprofen in high doses for chronic pain, there is potential for critical health risks; abuse can lead to serious stomach problems, internal bleeding and even kidney failure. There are significantly greater health risks when abuse of this drug is combined with alcohol intake. Our goal is that with Nyloxin, we can greatly reduce the instances of opiate abuse and overuse of NSAIDS in high risk groups like the US military. The Nyloxin® Military Strength represents the strongest version of Nyloxin® available and is approximately twice as strong as Nyloxin® Extra Strength. We are working with outside consultants to register Nyloxin® Military Strength and the other Nyloxin® products for sale to the US government and the various arms of the military as well as the Veteran's Administration. On April 22, 2014, we announced that we are seeking GSA (Government Services Administration) Certification in order to supply Military Strength Nyloxin® to the Department of Defense (DoD) and Veterans Affairs Hospitals (VA). We have completed the registration process and are awaiting final approval through the GSA. We expect to be able to actively market through these channels by the end of 2014.
We are pursuing international drug registrations in Canada, Mexico, India, Central and South America and Europe. Since European rules for homeopathic drugs are different than the rules in the US, we cannot estimate when this process will be completed. Additionally, we plan to complete two human clinical studies aimed at comparing the ability of Nyloxin Extra Strength to replace prescription pain relievers. We originally believed that these studies would begin during the second quarter of 2010; however, these studies have been delayed because of lack of funding. We cannot provide any timeline for these studies until adequate financing is available.
To date, our marketing efforts have been limited due to lack of funding. As sales increase, we plan to begin marketing more aggressively to increase the sales and awareness of our products.
Pet Pain-Away During June of 2013, we announced the launch of our new homeopathic formula for the treatment of chronic pain in companion animals, Pet Pain-Away. Pet Pain-Away is a homeopathic, non-narcotic, non-addictive, over-the-counter pain reliever, primarily aimed at treating moderate to severe chronic pain in companion animals. It is specifically indicated to treat pain from hip dysplasia, arthritis pain, joint pain, and general chronic pain in dogs, cats and horses.
We are seeking distributors for the product now as we begin manufacturing for eventual sales in the third quarter of 2014.
Equine Nyloxin® In October of 2013, we announced that we were in the process of launching the newest addition to our line of homeopathic treatments for chronic pain, Equine Nyloxin®, a topical therapy for horses that is packaged as a two piece kit: Nyloxin® Topical Gel comprises Step 1 and a solution of DMSO (dimethylsulfoxide) comprises Step 2. We have been working with trainers and veterinarians in the equine industry and have already identified distributors for the product. The Equine Nyloxin® represents the Company's first topical solution for the animal market. The product is now undergoing market evaluation and is expected to be commercially available by the end of 2014.
Critical Accounting Policies and Estimates Our condensed consolidated unaudited financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our condensed consolidated financial statements. In general, management's estimates are based on historical experience, information from third party professionals, and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management under different and/or future circumstances.
24 -------------------------------------------------------------------------------- We believe that our critical accounting policies and estimates include our ability to continue as a going concern, revenue recognition, accounts receivable and allowance for doubtful accounts, inventory obsolescence, accounting for long-lived assets and accounting for stock based compensation.
Ability to Continue as a Going Concern: Our ability to continue as a going concern is contingent upon our ability to secure additional financing, increase ownership equity, and attain profitable operations. In addition, our ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered in established markets and the competitive environment in which we operate.
Revenue Recognition: In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Provision for sales returns will be estimated based on the Company's historical return experience.
Accounts Receivable and Allowance for Doubtful Accounts: Our accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances.
Inventory Obsolescence: Inventories are valued at the lower of average cost or market value. We periodically perform an evaluation of inventory for excess, impairments and obsolete items.
Long-Lived Assets: The carrying value of long-lived assets is reviewed annually and on a regular basis for the existence of facts and circumstances that may suggest impairment. If indicators of impairment are present, we determine whether the sum of the estimated undiscounted future cash flows attributable to the long-lived asset in question is less than its carrying amount. If less, we measure the amount of the impairment based on the amount that the carrying value of the impaired asset exceeds the discounted cash flows expected to result from the use and eventual disposal of the impaired assets.
Derivative Financial Instrument: We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Management evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based simple derivative financial instruments, we use the Black-Scholes option pricing model to value the derivative instruments at inception and subsequent valuation dates. For complex embedded derivatives, we use a Dilution-Adjusted Black-Scholes method to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Share-Based Compensation: We record share-based compensation in accordance with FASB ASC 718, Stock Compensation. FASB ASC 718 requires that the cost resulting from all share-based transactions are recorded in the financial statements over the respective service periods. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. FASB ASC 718 also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.
Results of Operations - Comparison of Three Months Periods Ended June 30, 2014 and June 30, 2013 Net sales for the three-month period ended June 30, 2014 are $98,905 compared to $20,304 for the three months period ended June 30, 2013. The increase in net sales is primarily attributable to the increase in Nyloxin® sales.
25 -------------------------------------------------------------------------------- Cost of sales for the three-month period ended June 30, 2014 is $16,956 compared to $16,352 for the three-month period ended June 30, 2013. Our cost of sales includes the direct costs associated with Nyloxin® manufacturing. Our gross profit margin for the three-month period ended June 30, 2014 is $81,949 or 82.9% compared to $3,952 or 19% for the three-month period ended June 30, 2013. The increase in our profit margin is due primarily to the decrease in the shipping cost and fulfillment services.
Selling, general and administrative expenses ("SG&A") increased $360,304 or 99.4% from $362.391 for the quarter ended June 30, 2013 to $722,695 for the quarter ended June 30, 2014, generally due to the increase in selling expense of $494,000 related to distributors, offset by decrease in stock based compensation of $63,144 or 70.8% from $89,141 for the three months period ending June 30, 2013 to $25,997 for the three months period ending June 30, 2014, and the decrease of $ 70,552 in consulting, legal and professional fees.
Interest expense decreased $13,738 or 33.6%, from $40,946 for the quarter ended June 30, 2013 to $27,208 for the comparable 2014 period. This decrease was due to an overall decrease in short term indebtedness in the quarter ended June 30, 2014 compared to the quarter ended June 30, 2013.
We carry certain of our debentures and common stock warrants at fair value. For the three months ended June 30, 2014 and 2013, the liability related to these hybrid instruments fluctuated, resulting in a loss of $642,844 and $212,869, respectively.
Loss on settlement of debt and accounts payable decreased $11,283 or 363.4%, from the gain of $3,105 for the three months ended June 30, 2013 to the loss of $8,178 for the comparable 2014 period. This decrease was due to an overall decrease in settlement of debts and accounts payable through issuance of stocks for the three months ended June 30, 2014 compared to the comparable 2013 period.
As a result of the foregoing, our net loss increased by $709,827 or 116.5%, from $609,149 for the quarter ended June 30, 2013 to $1,318,976 for the comparable 2014 period.
Comparison of Six Months Ended June 30, 2014 and June 30, 2013 Net sales for the six months ended June 30, 2014 are $153,658 compared to $42,860 for the six months ended June 30, 2013. The increase in sales is primarily attributable to an overall increase in sales of Nyloxin®.
Cost of sales for the six months ended June 30, 2014 is $24,967 compared to $23,606 for the six months ended June 30, 2013. Our cost of sales includes the direct costs associated with Nyloxin® manufacturing. Our gross profit margin for the six months ended June 30, 2014 is $128,691 or 83.8% compared to $19,254 or 44.9% for the six months ended June 30, 2013. The increase in our profit margin is due primarily to decrease in the shipping cost and fulfillment services.
Selling, general and administrative expenses ("SG&A") increased $287,842 or 40.6% from $709,541 for the six months ended June 30, 2013 to $997,383 for the six months ended June 30, 2014, generally due to the increase in selling expense of $494,000 related to distributors, and slight increase of $ 7,761 in consulting, legal and professional fees. These increases were offset by the decrease in stock based compensation of $213,919 or 75.2% from $284,468 for the six months ended June 30, 2013 to $70,549 for the six months ended June 30, 2014.
Interest expense decreased $22,443 or 28.0%, from $80,159 for the six months ended June 30, 2013 to $57,716 for the comparable 2014 period. This decrease was due to an overall decrease in short term indebtedness for the six months ended June 30, 2014 compared to the comparable period in 2013.
We carry certain of our debentures and common stock warrants at fair value. For the six months ended June 30, 2014 and 2013, the liability related to these hybrid instruments fluctuated, resulting in a loss of $591,299 and $250,068, respectively.
Loss on settlement of debt and accounts payable decreased $53,756 or 86.6%, from the loss of $61,934 for the three months ended June 30, 2013 to the loss of $8,178 for the comparable 2014 period. This decrease was due to an overall decrease in settlement of debts and accounts payable through issuance of stocks for the three months ended June 30, 2014 compared to the comparable 2013 period.
26 -------------------------------------------------------------------------------- Our net loss increased by $443,437 or 41.0%, from $1,082,448 for the six months ended June 30, 2013 to $1,525,885 for the comparable 2014 period.
Liquidity and Capital Resources We have incurred significant losses from operations and working capital and stockholders' deficits raise substantial doubt about our ability to continue as a going concern. Further, as stated in Note 1 to our condensed consolidated unaudited financial statements for the period ended June 30, 2014, we have an accumulated deficit of $43,512,705 and working capital and stockholders' deficits of $3,967,164 and $3,964,165, respectively.
Our ability to continue as a going concern is contingent upon our ability to secure additional financing, increase ownership equity, and attain profitable operations. In addition, our ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered in established markets and the competitive environment in which we operate. As of June 30, 2014, we do not believe that our source of cash is adequate for the next 12 months of operation and there is substantial doubt about our ability to continue as a going concern.
Historically, we have relied upon loans from our Chief Executive Officer, Rik Deitsch, to fund our operations. These loans are unsecured, accrue interest at a rate of 4.0% per annum and are due on demand. During the six months ended June 30, 2014, we borrowed $60,161 and repaid $52,220 to Mr. Deitsch. On April 10, 2014, Mr. Deitsch accepted a total of 50,000,000 shares of the Company's restricted common stock as a repayment to discharge $100,000 of his outstanding loan. As of June 30, 2014, we owe Mr. Deitsch $485,236, included in this amount is $360,362 of accrued interest.
Subsequent to June 30, 2014 and through August 14, 2014, the Company received additional advances from its President, Rik Deitsch in the amount of $943 and repaid $500. The amount owed to Mr. Deitsch at August 14, 2014 was $488,167, which includes $362,850 of accrued interest.
As of August 14, 2014, we raised $75,000 through issuance of promissory note, $50,000 through the issuance of convertible notes, and $60,000 through sales of common stocks.
We expect to utilize the proceeds from these funds and additional capital to manufacture Nyloxin® and Pet Pain-Away and reduce our debt level. We estimate that we will require approximately $300,000 to fund our existing operations and ReceptoPharm's operations through December 31st, 2014, and approximately $300,000 for legal settlement. These costs include: (i) compensation for two (2) full-time employees; (ii) compensation for various consultants who we deem critical to our business; (iii) general office expenses including rent and utilities; (iv) product liability insurance; and (v) outside legal and accounting services. These costs reflected in (i) - (v) do not include research and development costs or other costs associated with clinical studies.
We began generating revenues from the sale of Cobroxin® in the fourth quarter of 2009 and from the sale of Nyloxin® during the first quarter of 2011. Our ability to meet our future operating expenses is highly dependent on the amount of such future revenues. To the extent that future revenues from the sales of Cobroxin® and Nyloxin® are insufficient to cover our operating expenses we may need to raise additional equity capital, which could result in substantial dilution to existing shareholders. There can be no assurance that we will be able to raise sufficient equity capital to fund our working capital requirements on terms acceptable to us, or at all. We may also seek additional loans from our officers and directors; however, there can be no assurance that we will be successful in securing such additional loans.
27 -------------------------------------------------------------------------------- Uncertainties and Trends Our operations and possible revenues are dependent now and in the future upon the following factors: ¨ whether Cobroxin®, Nyloxin®, and Nyloxin® Extra Strength will be accepted by retail establishments where they are sold; ¨ because Nyloxin® is a novel approach to the over-the-counter pain market, whether it will be accepted by consumers over conventional over-the-counter pain products; ¨ whether Nyloxin® Military Strength, Pet Pain-Away and/or Equine Nyloxin® will be successfully launched and be accepted in the marketplace; ¨ whether our international drug applications will be approved and in how many countries; ¨ whether we will be successful in marketing Cobroxin®, Nyloxin® and Nyloxin® Extra Strength in our target markets and create nationwide and international visibility for our products; ¨ whether our drug delivery system, i.e. oral spray and gel, will be accepted by consumers who may prefer a pain pill delivery system; ¨ whether competitors' pain products will be found to be more attractive to consumers; ¨ whether we successfully develop and commercialize products from our research and development activities; ¨ whether we compete effectively in the intensely competitive biotechnology area; ¨ whether we successfully execute our planned partnering and out-licensing products or technologies; ¨ whether the current economic downturn and related credit and financial market crisis will adversely affect our ability to obtain financing, conduct our operations and realize opportunities to successfully bring our technologies to market; ¨ whether we are subject to litigation and related costs in connection with use of products; ¨ whether we will successfully contract with domestic distributor(s)/advertiser(s) for our products and whether that will cause interruptions in our operations; ¨ whether we comply with FDA and other extensive legal/regulatory requirements affecting the healthcare industry.
28-------------------------------------------------------------------------------- Off-Balance Sheet Arrangements We have not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated with us under whom we have: ¨ An obligation under a guarantee contract.
¨ A retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets.
¨ Any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument.
¨ Any obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by us and material to us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us.
We do not have any off-balance sheet arrangements or commitments other than those disclosed in this report that have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material.
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