The following discussion of our financial condition and results of operations
should be read in conjunction with the unaudited financial statements and the
notes to those statements included elsewhere in this Form 10-Q and with the
audited financial statements and the notes thereto included in our Annual Report
on Form 10-K for the year ended December 31, 2020 (the "2020 Form 10-K"). This
discussion contains forward-looking statements that involve risks and
uncertainties. You should specifically consider the various risk factors
identified in our 2020 Form 10-K, that could cause actual results to differ
materially from those anticipated in these forward-looking statements.
Overview
We market and sell consumer products in China by offering premium-quality
nutritional products. We also provide advertising and marketing services to
clients which engage us to distribute their products. We offer our nutritional
products and those of our clients through our sales offices, exhibition events
we organize and sponsor, and person-to-person marketing. Our marketing business
mainly focuses on proactively approaching customers such as by hosting events
for clients, which we believe is ideally suited to marketing our products and
those of our clients for which we perform advertising services because sales of
nutritional products are strengthened by ongoing personal contact and support,
coaching and education among the Company and our clients towards how to achieve
a healthy and active lifestyle.
In July we completed the acquisition of Aixin Shangyan Hotel. Shangyan Hotel
Company owns and operates a hotel located in the Jinniu District, Chengdu City.
The hotel covers more than 8,000 square meters and has a large restaurant that
can accommodate 600 people, 6 luxury dining rooms, a 200 square meter music tea
house, 13 private tea rooms, 108 guest rooms and other supporting facilities.
completed. We acquired the hotel through an acquisition of the outstanding
equity of Aixin Shangyan Hotel for a purchase price of RMB 7,598,887, or
approximately $1.16 million ("Transfer Price"). The Transfer Price will be
reduced by an amount equal to any amounts paid or distributed by the hotel to
its shareholders after December 31, 2020 and will be increased by an amount
equal to any amounts contributed to the hotel by its equity owners after
December 31, 2020.
In September 2021, we completed the acquisitions of nine pharmacies located in
Chengdu through the acquisition of the outstanding equity of the entities which
owned the pharmacies for an aggregate purchase price of RMB 34,635,845, or
approximately US$5.31 million ("Transfer Price"). The Transfer Price will be
reduced by an amount equal to any amounts paid or distributed by any of the
entities to its shareholders after December 31, 2020 and increased by an amount
contributed to any of the entities by its shareholders after such date.
In March 2020, the World Health Organization announced that infections caused by
the coronavirus disease of 2019 ("COVID-19") had become pandemic and national,
provincial and local authorities, including those whose jurisdictions include
Chengdu, where our offices, hotel and pharmacies are located, adopted various
regulations and orders, including "shelter in place" rules, restrictions on
travel, mandates on the number of people that may gather in one location and
closing non-essential businesses. Many of these measures have been relaxed due
to the decrease in the prevalence of Covid-19 in China. To date, the ongoing
operations of our advertising and marketing business have not been materially
adversely impacted by the measures taken to limit the spread of the disease in
China. Our hotel and pharmacies, however, have experienced adverse impacts due
to travel and work restrictions imposed on a temporary basis in Chengdu to limit
the spread of COVID-19. The Company has implemented procedures to promote
employee and customer safety. These measures will not significantly increase its
operating costs. However, the Company cannot predict with certainty what
measures may be taken by its suppliers and customers and the impact these
measures may have on its financial results for the balance of 2021 and
throughout 2022.
In addition to our ongoing operations, we seek to acquire interests in
additional businesses through opportunities found by our management or presented
by persons or firms which desire to take advantage of the perceived advantages
of an Exchange Act registered corporation. We do not restrict our search to any
specific business, industry, or geographical location and may participate in a
business venture of virtually any kind or nature.
It is the goal of our management, in particular, our Chairman, Quanzhong Lin to
grow our business and to modify its capital structure in order to qualify for a
listing on NASDAQ or the NYSE-American exchange. As part of this effort, we will
continue to seek to acquire more businesses and to modify our capital structure
as necessary to meet the requirements of the exchange to which we apply for a
listing. As part of this effort. on June 8, 2020, Mr. Lin transferred 35,049,685
shares of our common stock to our Company for cancellation.
27
Results of Operations
The following table sets forth the results of our operations for the periods
indicated as a percentage of net revenue, certain columns may not add due to
rounding:
Three Months Ended September 30,
2021 2020
$ % of Revenue $ % of Revenue
Revenue $ 812,910 100 % $ 728,896 100 %
Operating costs and expenses 906,419 112 % 409,619 56 %
Income (loss) from operations (93,509 ) (12 )% 319,277 44 %
Non-operating income, net 21,499 3 % 323,373 44 %
Income tax expense 74,094 9 % 2,319 - %
Net income (loss) $ (146,104 ) (18 )% $ 640,331 88 %
Nine Months Ended September 30,
2021 2020
$ % of Revenue $ % of Revenue
Revenue $ 2,363,836 100 % $ 1,774,139 100 %
Operating costs and expenses 1,766,671 75 % 1,122,248 63 %
Income from operations 597,165 25 % 651,891 37 %
Non-operating income
(expenses), net 17,264 1 % 554,885 31 %
Income tax expense 292,146 12 % 2,319 - %
Net income $ 322,283 14 % $ 1,204,457 68 %
The following table shows our operations by business segment for the three
months ended September 30, 2021 and 2020:
2021 2020
Net revenue
Advertising and products $ 509,861 $ 728,896
Pharmacies 139,947 -
Hotel 163,102 -
Total revenues, net $ 812,910 $ 728,896
Operating costs and expenses
Advertising and products
Cost of goods sold $ 38,461 $ 20,478
Operating expenses 267,331 389,141
Pharmacies
Cost of goods sold 92,477 -
Operating expenses 124,138 -
Hotel
Hotel operating costs 320,305 -
Operating expenses 63,707 -
Total operating costs and expenses $ 906,419 $ 409,619
Income (loss) from operations
Advertising and products $ 204,069 $ 319,277
Pharmacies (76,668 ) -
Hotel (220,910 ) -
Income (loss) from operations $ (93,509 ) $ 319,277
28
The following table shows our operations by business segment for the nine months
ended September 30, 2021 and 2020.
2021 2020
Net revenue
Advertising and products $ 2,060,787 $ 1,774,139
Pharmacies 139,947 -
Hotel 163,102 -
Total revenues, net $ 2,363,836 $ 1,774,139
Operating costs and expenses
Advertising and products
Cost of goods sold $ 199,141 $ 67,379
Operating expenses 966,903 1,054,869
Pharmacies
Cost of goods sold 92,477 -
Operating expenses 124,138 -
Hotel
Hotel operating costs 320,305 -
Operating expenses 63,707 -
Total operating costs and expenses $ 1,766,671 $ 1,122,248
Income (loss) from operations
Advertising and products $ 894,743 $ 651,891
Pharmacies (76,668 ) -
Hotel (220,910 ) -
Income (loss) from operations $ 597,165 $ 651,891
Revenue
Revenue was $812,910 in the three months ended September 30,2021, compared to
$728,896 in the same period of 2020, an increase of $84,014 or 12%. Revenue was
$2,363,836 in the nine months ending September 30 2021, compared to $1,774,139
in the same period of 2020, an increase of $589,697 or 33%. The increase in
revenue was mainly due to increased advertising revenue, and revenue from our
hotel and pharmacies. The results of the operations of the hotel and pharmacies
are included in our financial results since the completion of the acquisitions
from July to September, 2021, respectively. For the third quarter and nine
months ended September 30, 2021, we had advertising and products revenue of
$509,861 and $2,060,787 respectively, pharmacies revenue of $139,947 and
$139,947, and hotel revenue of $163,102 and $163,102. For the third quarter and
nine months ended September 30, 2020, we had $728,896 and $1,774,139 in
advertising and products revenue and no revenues from the hotel and pharmacies
as the acquisitions were not completed until 2021. The increase in advertising
and products revenue reflects an increase in the number of advertising customers
during 2021.
29
Operation Costs and Expenses
Cost of Goods Sold
Cost of goods sold was $130,938 and $291,618 in the three and nine months ended
September 30, 2021, respectively, compared to $20,478 and $67,379 for the
comparable periods of 2020, an increase of $110,460 or 539% for the three months
ended September 30, 2021 compared with same period of 2020, and an increase of
$224,239 or 333% for the nine months ended September 30, 2021 compared with same
period of 2020. The increase in our cost of goods sold is attributable to the
increase in product sales due to the acquisition of the pharmacies as well as an
increase in cost of goods sold from our traditional products. The cost of goods
sold for our nutritional products as a percentage of was 64% and 64% in the
three and nine months ended September 30, 2021, respectively, compared to 37%
and 40% for the three and nine months ended September 30, 2020, respectively.
The cost of goods sold as a percentage of nutritional product sales was higher
in the three and nine months ended September 30, 2021, compared with the same
period of 2020 due to increased sales volume of lower profit margin products in
2021.
Hotel Operating Costs
Hotel Operating costs were $320,305 for the three and nine months ended
September 30, 2021, compared to $0 for the comparable periods of 2020, an
increase of $320,305, or 100%. The increase in hotel operating costs was
primarily due to the inclusion of the hotel operating costs of Aixin Shangyan
Hotel.
Operating Expenses
Operating expenses were $455,176 and $1,154,748 for the three and nine months
ended September 30 2021, respectively, compared to $389,141 and $1,054,869 for
the comparable periods of 2020, an increase of $66,305 or 17% for the three
months ended September 30, 2021 compared with same period of 2020, and an
increase of $99,879 or 9% for the nine months ended September 30, 2021 compared
with same period of 2020. The increase in operating expenses for the three
months ended September 30, 2021 was mainly due to the inclusion of the operating
expenses of the hotel and pharmacies since the dates of their acquisitions and
increased selling expense due to the acquisition of the hotel and pharmacies
which was partly offset by decreased general and administrative expense due to
the decrease in advertising revenue. The increase in operating expenses for the
nine months ended September 30, 2021 was mainly due to the inclusion of the
operating expenses of the hotel and pharmacies since the dates of their
acquisitions and increased selling expenses and general and administrative
expenses resulting from such acquisitions.
Income (loss) from Operations
Income (loss) from operations was $(93,509) and $319,277 in the three and nine
months ended September 30 2021, respectively, compared to $597,165 and $651,891
in the same periods of 2020, a decrease of $412,786 or 129% for the three months
ended September 30, 2021 compared with same period of 2020, and a decrease of
$54,726 or 8% for the nine months ended September 30, 2021 compared with same
period of 2020. The decrease in our income from operations for the three months
ended September 30, 2021 was mainly due to decreased advertising revenue and
increased operating costs and expenses compared with the same period of 2020.
The decrease in our income from operations for the nine months ended September
30, 2021 was mainly due to the increased operating costs and expenses, partially
offset by the increased revenue.
Non-operating Income
Non-operating income was $21,499 and $17,264 for the three and nine months ended
September 30, 2021, respectively, compared to $323,373 and $554,885 for the
comparable periods of 2020. For the three months ended September 30, 2021, we
had interest income $599 and other income $22,067 and other expenses of $1,167.
For the three months ended September 30, 2020, we had interest income $297,895
and other income $25,741. For the nine months ended September 30, 2021, we had
interest income $3,088 and other income $22,228 and other expenses of $8,052.
For the nine months ended September 30, 2020, we had interest income $529,551
and other income $25,783.
30
Income tax expense
Income tax expense were $74,094 and $292,146 for the three and nine months ended
September 30, 2021, compared to $2,319 and $2,319 in the same periods of 2020,
an increase of $289,827 or 12,498% for the nine months ending September 30,
2021; an increase of $71,775 or 3,095% for the three months ending September 30,
2021.
Net Income (Loss)
Our net income (loss) for the three and nine months ended September 30, 2021 was
$(146,104) and $322,283 respectively, compared to net income $640,331 and
$1,204,457 in the same periods of 2020, a decrease in net income of $786,435 or
123% for the three months ended September 30, 2021 compared with same period of
2020, and a decrease of $882,174 or 73% for the nine months ended September 30,
2021 compared with same period of 2020. The decrease in net income in the nine
and three months ended September 30, 2021 was mainly due to an increase in our
income tax expense primarily in the nine months ending September 30, 2021, and a
decrease in interest income and increased operating expenses due to the
acquisition of the hotel and pharmacies.
Liquidity and Capital Resources
During 2020 and 2021, we depended upon advances from our major shareholder and
capital raised in private placements to support our operations. During the nine
months ended of September 30, 2021, we generated $546,069 from operations. As of
September 30, 2021, cash and cash equivalents were $3,297,835, compared to
$7,676,689 as of December 31, 2020. At September 30, 2021, we had working
capital of $820,305 compared to $6,753,486 at December 31, 2020. The reduction
in our cash from December 31, 2020 to September 30, 2021, was the result of the
payments made to acquire Aixin Shangyan Hotel and Aixintang Pharmacies.
The following is a summary of cash provided by or used in each of the indicated
types of activities during the nine months ended September 30, 2021 and 2020,
respectively.
September 30, 2021 September 30, 2020
Net cash provided by operating activities $ 546,069 $ 1,456,421
Net cash (used in) provided by investing activities $ (4,410,524 ) $ 4,033,470
Net cash (used in) provided by financing activities $
(592,814 ) $ 2,227,904
Net cash provided by operating activities
For the nine months ended September 30, 2021, net cash provided by operating
activities was $546,069. This was primarily due to our net income of $322,283,
adjusted by non-cash related expenses including depreciation of $21,910,
provision for bad debt of $17,883 and stock-based compensation of $278,655, and
then decreased by changes in working capital of $94,662. The cash outflow from
changes in working capital mainly resulted from inventory purchases of $18,728,
payments of advances to suppliers of $116,795, and payments of accrued
liabilities $41,986, partly offset by cash inflow from other receivables and
prepaid expenses, unearned revenue and an increase in taxes payable outstanding
of $46,672.
For the nine months ended September 30, 2020, net cash provided by operating
activities was $1,456,421. This was primarily due to our net income of
$1,204,457, adjusted by non-cash related expenses including depreciation of
$34,572, provision for bad debt of $13,451, and stock-based compensation of
$278,655, and then decreased by changes in working capital of $74,714. The
changes in working capital mainly resulted from a decrease in accrued
liabilities and other payables of $99,549, an increase in inventory of $31,830,
and a decrease in taxes payable of $24,966, partly offset by a decrease in
advance to suppliers of $63,235 and a decrease in other receivables and prepaid
expenses of $17,327.
31
Net cash (used in) provided by investing activities
For the nine months ended September 30, 2021, net cash used in investing
activities was $4,410,524, mainly for the acquisition of a hotel and pharmacies
from our major shareholder.
For the nine months ended September 30, 2020, net cash provided by investing
activities was $4,033,470, which was mainly due to the return of a prepayment
for the acquisitions of $4,035,615, partly offset by purchases of property and
equipment of $2,145.
Net cash (used in) provided by financing activities
For the nine months ended September 30, 2021, net cash used in financing
activities were changes in advances from related parties of $592,814.
For the nine months ended September 30, 2020, net cash provided by financing
activities was an advance from our major shareholder of $2,227,904.
Impact of Inflation
Our results of operations may be affected by inflation, particularly rising
prices for products and other operating costs if we cannot pass such increases
along to our customers in the form of higher prices for our products and
services. Generally, our inventory turns multiple times per year and we
anticipate that we will be able to increase prices on products to reflect
increases in the cost of inventory.
Contractual Obligations
We have no long-term fixed contractual obligations or commitments.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to
guarantee the obligations of any third parties. We have not entered into any
derivative contracts that are indexed to our shares and classified as
shareholder's equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any uncombined entity that provides financing, liquidity, market risk or credit
support to us or engages in leasing, hedging or research and development
services with us.
Contingencies
The Company's operations are conducted in the PRC and are subject to specific
considerations and significant risks not typically associated with companies in
North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environments in China and foreign
currency exchange. The Company's results may be adversely affected by changes in
PRC government policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad and rates and methods of
taxation, among other things.
The Company's sales, purchases and expense transactions in China are denominated
in RMB and all of the Company's assets and liabilities in China are also
denominated in RMB. The RMB is not freely convertible into foreign currencies
under the current PRC law. In China, foreign exchange transactions are required
by law to be transacted only by authorized financial institutions. Remittances
in currencies other than RMB may require certain supporting documentation in
order to affect the remittance.
32
Significant Accounting Policies
Our management's discussion and analysis of our financial condition and results
of operations are based on our consolidated financial statements, which were
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported net sales and expenses during the reporting periods. On an ongoing
basis, we evaluate our estimates and assumptions. We base our estimates on
historical experience and various other factors that we believe are reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements, we believe the following accounting
policies are the most critical to assist you in fully understanding and
evaluating this management discussion and analysis.
Basis of Presentation
The accompanying financial statements are prepared in conformity with U.S.
Generally Accepted Accounting Principles ("US GAAP"). The functional currency of
Aixin is Chinese Renminbi (''RMB''). The accompanying financial statements are
translated from RMB and presented in U.S. dollars ("USD").
Use of Estimates
In preparing financial statements in conformity with US GAAP, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period.
Significant estimates, required by management, include the recoverability of
long-lived assets, allowance for doubtful accounts, and the reserve for obsolete
and slow-moving inventories. Actual results could differ from those estimates.
Accounts Receivable
The Company maintains an allowance for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. During the nine months ended in
September 30, 2021 and 2020, bad debt expense was $17,883 and $13,451,
respectively. During the three months ended September 30, 2021 and 2020, bad
debt expense (reversal) was $17,883 and $(75), respectively. As of September 30,
2021 and December 31, 2020, the bad debt allowance was $292,742 and $148,520,
respectively.
Revenue Recognition
ASU No. 2014-09, Revenue from Contracts with Customers ("Topic 606"), became
effective for the Company on January 1, 2018. The Company's revenue recognition
disclosure reflects its updated accounting policies that are affected by this
new standard. The Company applied the "modified retrospective" transition method
for open contracts for the implementation of Topic 606. As revenues are and have
been primarily from the delivery of products and the performance of services,
and the Company has no significant post-delivery obligations, this did not
result in a material recognition of revenue on the Company's accompanying
consolidated financial statements for the cumulative impact of applying this new
standard. The Company made no adjustments to its previously-reported total
revenues, as those periods continue to be presented in accordance with its
historical accounting practices under Topic 605, Revenue Recognition.
Revenue from sale of goods under Topic 606 is recognized in a manner that
reasonably reflects the delivery of the Company's products and services to
customers in return for expected consideration and includes the following
elements:
? executed contract(s) with customers that the Company believes is legally
enforceable;
? identification of performance obligation in the respective contract;
? determination of the transaction price for each performance obligation in the
respective contract;
? allocation of the transaction price to each performance obligation; and
? recognition of revenue only when the Company satisfies each performance
obligation.
33
The Company's revenue recognition policies for its various operating segments
are as follows:
Advertising and Products
Advertising Revenue
Commencing in the third quarter of 2019, AiXin Zhonghong began to provide
advertising services to its clients. Advertising contracts are signed to
establish the price and advertising services to be provided. Pursuant to the
advertising contracts, the Company provides advertising and marketing services
to its clients through exhibition events, conferences, and person-to-person
marketing. The Company performs a credit assessment of the customer to assess
the collectability of the contract price prior to entering into contracts.
Most of the advertisement contracts designated that the Company perform such
advertising services for its clients through exhibition events, conferences, and
person-to-person marketing during the contracted period, regardless of the
number of such events. As such, the Company determined that the performance
obligation is satisfied over time during the contracted period and revenue is
recognized accordingly. Such advertising revenue amounted to $445,215 and
$673,978 for the three months ended September 30, 2021 and 2020, respectively.
Such advertising revenue amounted to $1,742,896 and $1,597,330 for the nine
months ended September 30, 2021 and 2020, respectively.
A smaller proportion of the Company's advertising revenue is generated from
services to its clients through exhibition events, conferences, and
person-to-person marketing, and charges based on the number of promotional
products sold. Such advertising revenue amounted to $0 for the three months
ended September 30, 2021 and 2020. Such advertising revenue amounted to $0 and
$6,476 for the nine months ended September 30, 2021 and 2020, respectively.
All of the advertising revenue is subject to the PRC VAT of 6%. This VAT may be
offset by VAT paid by the Company on raw materials and other materials purchased
in China.
Products Revenue
The Company's revenue from sale of products is recognized when goods are
delivered to the customer and no other obligation exists. The Company does not
provide unconditional return or other concessions to the customer. The Company's
sales policy allows for the return of unopened products for cash after deducting
certain service and transaction fees. As an alternative to the product return
option, the customers have options of asking for an exchange for products with
the same value.
Sales revenue of AiXin Zhonghong represents the invoiced value of goods, net of
value-added taxes ("VAT"). All of the Company's products sold in China are
subject to the PRC VAT of 17% of the gross sales price prior to May 1, 2018, 16%
since May 1, 2018 and 13% since April 1, 2019. This VAT may be offset by VAT
paid by the Company on raw materials and other materials purchased in China. The
Company records VAT payable and VAT receivable net of payments in the financial
statements. The VAT tax return is filed offsetting the payables against the
receivables. Sales and purchases are recorded net of VAT collected and paid as
the Company acts as an agent for the government.
Hotel
Hotel revenues are primarily derived from the rental of rooms, food and beverage
sales and other ancillary goods and services, including but not limited to
souvenir, parking and conference reservation. Each of these products and
services represents a distinct performance obligation and, in exchange for these
services, the Company receives fixed amounts based on published rates or
negotiated contracts. Payment is due in full at the time when the services are
rendered or the goods are provided. Room rental revenue is recognized on a daily
basis when rooms are occupied. Food and beverage revenue and other goods and
services revenue are recognized when they have been delivered or rendered to the
guests as the respective performance obligations are satisfied. All of the
hotel's goods sold in China are subject to the PRC VAT of 6%. This VAT may be
offset by VAT paid by the Company on raw materials and other materials purchased
in China.
Pharmacies
The Company's retail drugstores (Aixintang Pharmacies) recognize revenue at the
time the customer takes possession of the merchandise. For pharmacy sales, each
prescription claim is its own arrangement with the customer and is a performance
obligation. Aixintang Pharmacies generally receives payments from customers as
it satisfies its performance obligations. The Company records a receivable when
it has an unconditional right to receive payment and only the passage of time is
required before payment is due. Sales revenue represents the invoiced value of
goods, net of VAT. All of Aixintang Pharmacies' products sold in China are
subject to the PRC VAT of 0% as it qualifies for small businesses.
34
Foreign Currency Translation and Comprehensive Income (Loss)
The functional currency of the Company is RMB. For financial reporting purposes,
RMB is translated into USD as the reporting currency. Assets and liabilities are
translated at the exchange rate in effect at the balance sheet dates. Revenues
and expenses are translated at the average rate of exchange prevailing during
the reporting period.
Translation adjustments arising from the use of different exchange rates from
period to period are included as a component of stockholders' equity as
"Accumulated other comprehensive income". Gains and losses resulting from
foreign currency transactions are included in income. There was no significant
fluctuation in the exchange rate for the conversion of RMB to USD after the
balance sheet date.
We use FASB ASC Topic 220, "Comprehensive Income". Comprehensive income (loss)
is comprised of net income (loss) and all changes to the statements of
stockholders' equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. Comprehensive loss for
nine and three months ended September 30, 2021 and 2020 consisted of net loss
and foreign currency translation adjustments.
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