Harris & Harris Group, Inc. - Shareholder/Analyst Call

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Harris&Harris Group (TINY) May 2, 2013 4:00 PM ET


Douglas W. Jamison - Chairman, Chief Executive Officer, Managing Director and Chairman of Executive Committee

Richard Shanley

Alexei A. Andreev - Managing Director and Executive Vice President

Misti Ushio - Managing Director and Executive Vice President

Daniel B. Wolfe - President, Chief Operating Officer and Managing Director

Douglas W. Jamison

Good afternoon, ladies and gentlemen. I'm Doug Jamison, Chairman of the Board and Chief Executive Officer of Harris & Harris Group. I'll be chairing the meeting here today.

I now call this meeting to order, and welcome our shareholders and guests to the Harris & Harris Group, Inc. 2013 Annual Meeting of Shareholders.

Before making introductions, I would like to review the program for the meeting. We will begin by covering the business of the meeting, as outlined in the proxy. The formal business of the meeting will be followed by an informal question-and-answer session, while we wait for the votes to be counted.

We're very happy to be able to include in the informal portion of the meeting, a presentation from 3 of our managing directors, on 3 of the companies in our portfolio. We would like to ask that you hold all questions and comments to the designated question and comment period, of which there will be 2. One will take place during the formal part of the meeting, prior to voting on the 3 proposals in the agenda, please restrict questions and comments, at that time, to those 3 proposals only. A second question and comment period will follow the presentation and, at that time, it's appropriate to ask questions not related to the agenda items.

We ask that all questions and comments be directed to me for response or referral to the appropriate officer or director, and that you be as brief as possible, to allow everyone who wishes an opportunity to participate. Also, please identify yourself before speaking, and tell us if you're shareholder or a proxy for a shareholder. If you are a proxy for a shareholder, please identify the shareholder.

I'd like to introduce you to our directors and officers who are present today. Please stand when I call your name. First, I'd like to introduce Jim Roberts. Jim Roberts is actually retiring from the board, he served the board for a long time at Harris & Harris Group. He served, most recently, as lead Independent Director. We will miss Jim, we wish him well. He will be in Bermuda during our board meetings going forward, and during this period of time, so he might have the better end of that stick. But we appreciate his service and, certainly, recognize him today. Thank you, Jim.

Dill Ayres, Dr. Phillip Bauman, Lucio Lanza, Charles Ramsey, Rich Shanley, Bruce Shewmaker, and our officers:Daniel Wolfe, Alexei Andreev, Misti Ushio, Sandra Forman, Rob Burns, Patricia Egan, Mary Brady, and Ian Chia. Zend Albert [ph] has been designated the Inspector of Elections and is present today. The inspector has signed his oath, and the Secretary has been instructed to file the oath with the records of this meeting.

Now I would like to introduce, Rich Shanley, who's been the Chairman of our Audit Committee since 2008. If elected today, will become our next lead Independent Director, who will speak on behalf of the Board of Directors.

Richard Shanley

Thanks, Doug. I am Rich Shanley and, as of today, I'll be the incoming lead Independent Director for your company. I want to reiterate that my first point, personally, to thank Jim Roberts for an incredible term on our board. He's been on the board for 18 years, and just given a tremendous service to Harris & Harris Group the last couple of years, as lead Independent Director. All of the board members will really miss his input and his clear reasoning that we've had the opportunity to hear.

Second point I want to make is, I want to just give a bit of a perspective on the governance structure of the board. As lead Independent Director, I'll now chair the independent directors committee, which meets, face-to-face, in sessions with management during the course of the year, and discusses long-term strategy and continually discusses management's approach to overall long range planning. I will tell you our meetings are frank and generate real discussions and analysis of management's plans and approaches. They're not pro forma.

As lead Independent Director, Doug Jamison and I plan to be in regular touch through a series of planned phone calls and meetings, as well as ad hoc contact, as any issues might arise, which need immediate attention.

To be very clear, one of the most important functions of the board of a company structured as a business development company is, such as Harris & Harris, is that the Valuation Committee of the board, which is composed of all the independent directors, that means everyone, except Doug Jamison, we meet on a quarterly basis and we take an in-depth look at the valuation of each of the 30-plus companies in the portfolio of Harris & Harris Group.

And at the end of that meeting, we've been through very in-depth discussions of each of those portfolio of companies with a special attention given to those that are drivers in the portfolio. And at the end of that meeting, we're able to conclude that the valuations that we agreed to are appropriate, under the Investment Company Act and under U.S. Generally Accepted Accounting Principles.

My third point, really relates to the value of TINY's stock. Of course, we have no control, as a board, over the value of the stock, that's given by the market. But I want the stockholders to all know that all of the independent directors on the board are investors in Harris & Harris stock, and we are ongoing buyers of Harris & Harris stock, utilizing, at least, half of the cash compensation we would, otherwise, get from the company, every year, to purchase additional shares of Harris & Harris stock. Some of the people on the board are doing more than half of their compensation to buy additional stock. And it's done through an automatic buying plan.

The nature of Harris & Harris investments is such, in the various early stage of companies that we invest in, that there's, very often, material nonpublic information that we, as a board, are privy to, that might relate to financings, buyouts, mergers and, when the stock market allows, initial public offerings. So much of the time, we, as directors, are not free to make open market purchases of the stock due to blackout periods that are in effect when these types of transactions are in the offing. So that's why we use the methodology that we're using. Oftentimes we might like to buy additional stock in the open market, we're prevented from doing so by the rules that govern what we're allowed to do as directors.

Personally, based on what I've learned about Harris & Harris' portfolio through my work on the board, I'm excited personally by the prospects of your company's portfolio and the diversity of cutting edge technologies it encompasses.

Now presently, the stock market does not seem to be rewarding those prospects and that's, obviously, a challenge that we'll continue to address. Thank you very much.

Douglas W. Jamison

Thank you, Rich. I appreciate you taking the opportunity. I'm informed that a quorum is present for the transaction of business. Proper notice of this meeting was duly mailed, on or about March 28, 2013, to all holders of record as of March 13, 2013, and the affidavit of the transfer agent confirms such mailing.

Secretary will please file the affidavit with the records of the company and a copy of the minutes of this meeting. March 13, 2013 is the record date for the voting of shares at this meeting. As of the record date, there were outstanding entitled to vote 31,116,881 shares of common stock of Harris & Harris Group.

We will now proceed with the formal business of the meeting. At this meeting, shareholders are voting to elect 7 directors of the Board of Directors to serve until the next Annual Meeting or until their respective successors are elected. The 7 persons nominated by the Board of Directors are:W. Dillaway Ayres, Jr; Dr. Phillip A Bauman; Douglas W. Jamison; Lucio L. Lanza; Charles E. Ramsey; Richard P. Shanley; and Bruce W. Shewmaker. The Board of Directors recommend that the shareholders vote for the election of the board's 7 nominees as directors of the company.

The second item of business is the approval of the Audit Committee's selection of PricewaterhouseCoopers LLP, as the independent registered public accountant for the fiscal year ending December 31, 2013. The Board of Directors recommend that the shareholders vote for this proposal.

The third item of business is the approval, on advisory basis, of the executive compensation, as described in the compensation discussion and analysis, and the accompanying tabular and narrative disclosures set forth in the proxy statement for this Annual Meeting.

The Board of Directors recommend that the shareholders vote for this proposal.

We will now take any questions or comment relating to the specific agenda items.

Proposal 1, the election of Directors. Proposal 2, the authorization for the Audit Committee's selection of PricewaterhouseCoopers LLP, as the independent registered public accountant. Although representatives of PWC are not present, they are available for questions via phone. Proposal 3, the advisory vote on the executive compensation. I ask that you please hold any general questions or comment until the designated question and comment period later in the proceedings.

When you are recognized, please address your question or comments to me, and either I or another officer of the company will respond. Also, when you are recognized, please state your name and whether you are Harris & Harris Group shareholder or a proxy for a shareholder.

The floor is now open for questions. Are there any questions on Proposal 1? Any questions on Proposal 2? Any questions on Proposal 3? The question and comment period has concluded.

The polls are now open. The Inspector of Elections will distribute forms of proxy to those who wish to vote here at the meeting. Remember, if you previously have voted by proxy, you do not need to vote again, unless you wish to change your vote. Submission of a proxy at this meeting revokes any prior proxies you may have submitted.

If any shareholder desires a form of proxy, please raise your hand, and it will be distributed to you. Anyone in need of form of proxy?

Those of you who are voting at this meeting should do so now. I don't believe anybody is voting here at this meeting. Any proxies? Okay, I declare the polls closed for the matters voted on.

The agenda items, now having been voted on, I will adjourn the formal portion of this meeting.

While the votes are being counted, we will begin a presentation about 3 of the portfolio companies. I'll say a few words, first, and then we're going to introduce D-Wave, Metabolon and SiOnyx.

And note that, during the presentation, we'll be showing videos, made by our portfolio companies. We're providing the videos for informational purposes, and since we did not create the videos, have no independently -- have not independently verified their contents.

Harris & Harris Group is an early-stage active investor in transformative companies. These companies now are taking 5 to 10 years and beyond, to build and exit successfully. According to recent data, over the past couple of years, we are now probably one of only 100 firms actively making new investments, and we're probably one of the few groups active in early-stage investing in transformative companies, enabled by real deep science.

I believe we are doing the proverbial god's work, enabling true American innovation. Our startup companies create significantly more jobs than established companies. Our companies create innovations that enable society to develop new cures for diseases that kill our loved ones, that increase computing power, so we can enjoy more and more of what the digital world provides, and that develop new ways to provide energy and food for the future.

We provide the infrastructure and the plumbing that is important for competitiveness of this country and for the economic control of our future. In some companies like Solazyme, before it went public, you can see the value increase as it executes on each milestone, on each part of its business. Over time, it's much easier as an investor when this happens.

In others, such as a BioVex, and now perhaps, Solazyme, as a public company, you see no reward for the progress you're making until the execution of that strategy is complete. Such as the acquisition of BioVex by Amgen.

It is difficult to believe, through the ups and downs of these intervening years, but when you are successful, the value is finally reflected.

Apparently, it's not going to let me get through the Safe Harbor statement.

Priorities remain the same for 2013 and beyond. We're organizing the company to manage third-party capital. This is a process that requires us to develop deep relationships of the highest levels of corporations and investors that we are working with.

We're devoting substantial time and resources to this effort. Our shareholders should expect it to take 12 to 18 months to consummate this strategic initiative. Our future, 5 to 15 years out, will be influenced by our success managing third-party capital. But this initiative is not a significant driver of our value over the next few years. Our portfolio is.

We've also identified investment sectors that we believe have the opportunity to provide outsized returns. And we are and will continue to make new investments in these areas.

In the 2012 10-K, I recommended you read our discussion in the MD&A on Life Sciences. And looking forward, you will hear us discuss the concept, we referred to as biology plus. Our work at the nanoscale has put us at the intersection of important interdisciplinary technologies, where biology plus electronics, biology plus physics, biology plus chemistry, biology plus engineering, enables important breakthroughs in the Life Sciences. Look for us to continue to invest in exciting companies at these intersections.

We're also working closely with our best portfolio companies to provide meaningful returns upon exit. Our portfolio's reporting -- is performing. As reported in our 2012 10-K, revenue is approximately $532 million, in aggregate, for our portfolio of companies in 2012. That's up 25% from 2011, that's up almost 100% from year ending 2009. These companies are growing, they're performing, they're putting commercial products on the market.

There's a subset of probably 11 companies, currently, that are the most meaningful to our growth and our future cash position in Harris & Harris Group. We believe investors should focus on these companies and their progress. These companies are exciting, these companies are transformative. We've begun to highlight these companies in our discussion, and 3 of these companies will be highlighted by our managing directors today.

We believe this sums [ph] up why these are companies are successful. Investors will be properly and competitively awarded with growth and value for Harris & Harris Group over time.

We believe you'll see indications, in 2013 and into 2014, that we continue to execute on our strategy of building great companies and realizing exits and cash from them.

That said, currently believe that the real impact to our cash position through exits will play out over the next 3 to 5 years.

We have and will continue to manage our cash, such that we don't have to raise additional capital in the public market before the real value of our portfolio is recognized.

Primary and secondary liquidity will fluctuate from quarter-to-quarter, but we believe it will be adequate over the next few years, even with downside scenarios, and with us making new investments and follow-on investments. This doesn't mean that we wouldn't benefit significantly from having access to more capital. But it means that we have a path to manage the company prudently and to not require us to raise capital at price that is imprudent to us and for our long-term shareholders.

I would now like to turn your attention to what I believe is the promise of our portfolio. And the reason why I believe long-term shareholders hold our stock and why we enjoy coming to work each day.

We'll begin with a video made by Lockheed Martin, discussing D-Wave's quantum computer, then Alexei will briefly discuss -- one second. And I believe -- I will start -- so much for my one second.


Douglas W. Jamison

Before you're actually allowed to ask a question today, we're going to ask you some quantum physics questions. If you pass, you get to ask a question. If not, sorry. What we'd like to do now is bring up Alexei Andreev to give you a little more of a description of D-Wave. He'll be followed by Misti Ushio, discussing Metabolon and then Daniel Wolfe, discussing SiOnyx.

Alexei A. Andreev

And so what I would try to do is [indiscernible] Lockheed Martin movie was pretty self-sufficient and, I think, they explained what I was trying to do in a couple of PowerPoint slides, substantially better. Okay. Cool.

So, D-Wave. D-Wave, as a nutshell [indiscernible] Okay. So it's the investment we made in 2006 and we were the lead investor in Series B round of financing. To date, we invested around $5 million of the company, alongside with many other venture capital, private equity and strategic groups. The most recent round of funding was led by Jeff Bezos fund and the venture capital arm of intelligence community. We have one announced customer, Lockheed Martin, and we have -- the company has many more collaborations, which have not been announced yet. We're shipping products. We -- the company's on the market with 500 qubit machines today. And the goal and the business plan is to become the first company, on the face of Earth, making, designing, producing and shipping those machines to the customers, with a potential expansion from the hardware business model to middleware and where you can sell computation cycles, all the way to the product company where you sell results of your computation. Why it's important. Again, Lockheed Martin made an excellent case trying to explain why getting computational power in this novel, unusual, nonclassical way can dramatically accelerate time-to-solution for many solvable, but very hard problems, as well as to allow us address and find solutions for the type of problems we cannot solve today. And there are multiple classes which Lockheed Martin mentioned in this video. I would probably add, unsupervised machine learning, to this list. It's the ability for the computers to learn without human intervention in the process.

I would add, very fast, image recognition. So if somebody passes by a video camera in an airport, this machine seems to be able to recognize faces extremely fast and do it in realtime. People are seriously interested in application of quantum computing for Natural Language Processing and various sorts of pattern recognition which is, today, available only to human needs [ph].

So developments. There have been quite a few developments over the last several quarters and, again, we're cautiously optimistic that the news will keep coming. At least, I am, as a board director of D-Wave and all other investors in D-Wave, we're working hard to build and realize the value for all the investors and management of the company.

So fourth quarter 2012, we closed a $30 million-plus round, again, with Jeff Bezos and In-Q-Tel leading the financing. First quarter 2013, Steve Cakebread joined as the CFO, and Steve is an interesting and well-known gentleman. I think, he's most qualified CFO candidate today. He brought Salesforce public, he brought Pandora public. He was the -- as the CFO, he was the CFO of AutoDesk. He was the CFO -- divisional CFO of Hewlett Packard in charge of their supercomputing business. And today, you can find it in Newswire, Bo Ewald joined the company as Chief Revenue Officer. In my language, it's VP of Sales. But in the previous slide, Bo was the CEO of Cray Supercomputers and he was the CEO Silicon Graphics. And so, I think, for him, it goes well beyond than just VP of Sales. I think, Chief Revenue Officer is the right title for Bo, and announcement hitting Newswire this morning. So another interesting thing is, this quarter, we shipped our first machine to Lockheed Martin. And if you ask me what's next, I would say stay tuned.

First, we have this little graph and I think there might be a video in the end of the shareholder meeting, maybe not. But you can find a very insightful and exciting video in YouTube, where, essentially, D-wave is showing how they scale a number of qubits, a number of qubits contributes to the performance of the machine. Essentially, more qubits you have, the more powerful the machine is. Although scaling is somewhat unusual. So they demonstrated and they showed -- I cannot talk why [ph] -- a different generation of chips as a function of time, and they are doubling the number of chips faster than most, or they're doubling the number of qubits. And so the power of this processor grows pretty dramatically, with number of qubits you can deploy and utilize for computation purposes. The second graph is also interesting which demonstrate simulation to publish this. So again, public information. What you will see, you'll see 2 curves. And one of them is the problem and, again, it's a probabilistic machine so the outcomes are somewhat unspecific. So I cannot give you predictions, how fast the machine is going, in every particular instance of a problem. But for multiple problem classes, that's what the simulation of D-Wave machine predicts. So if you compare us with a high-end server, Intel server, run by -- and you will see some, it's i5 ALX machine, I'm not sure what it is, but it's kind of characteristics of a very particular enterprise-class server. And if you compare with time-to-answer for this server versus D-Wave machine, depending as a function of number of qubits, you will see that, again, for certain instances, in 512 qubits, a machine will get 10 billion times faster to the answer comparing to a conventional server. And this number expands very fast, as what you see on the screen, it's exponential scale. So doubling number of qubits have profound impact on acceleration of this computation. So please, stay tuned. We're cautiously optimistic about what the company is doing and we are working hard to build and turn dreams into reality. Thank you.

Douglas W. Jamison


Misti Ushio

I'm Misti Ushio, thanks for coming. I'm going to tell you a little bit about Metabolon. Metabolon is a company in our Life Science portfolio. Metabolon is a leader in metabolomics, and what is that? It allows you to profile your entire biochemical makeup. Why is that interesting? Why is that important? It's important because it allows you to monitor and measure how your body responds to change. So, for instance, if you change your diet. If you -- how do you respond to a new medicine? How you respond to disease? And you can track that using metabolites, because it's a very realtime manifestation of what's happening to your body.

Metabolon has 2 businesses, what they call their metabolomics business, which is a solid foundational business where they work with over 100 customers to solve their problems. So for instance, they work with pharmaceutical companies to elucidate how their medicines will work. $20 million in 2012 and I'll expand on that in a little bit. But the real growth opportunity for Matabolon is in the diagnostics business. So really, understanding how to, again, measure and monitor a certain subset of metabolites to predict disease or to provide additional information to monitor and manage health better. So the metabolomics business, again, it's a solid business, consistent 60% margins, it's been growing year-over-year. And what this has allowed Metabolon to do is twofold, minimum. One is, it's given Metabolon the opportunity to have a very large perspective on all the different applications that its technology can provide. And it's also allowed them to develop their high-value diagnostic product while generating revenue. And that's been really important to Metabolon and will likely be important to the success and in an investment return. But what I really want to talk about is 2 of their diagnostic products, because this is where we think the real value, going forward, in Metabolon will really lie. So the first product is Quantose, and it measures what we call prediabetes or insulin resistance. And so, what's the problem? The problem is, if you look at the lower blue curve here, most diagnostics in the market today diagnose type 2 diabetes after it's too late, after your pancreas has already stopped producing insulin. And that's just not very helpful. And where the need is, we need a tool, we need a test to know years in advance that you're heading down this road. And that's what Quantose does. So Metabolon developed panels that kind of like [ph] -- that really tackles and is able to monitor insulin resistance, so that you could intervene and really slow down or prevent, really, the onset of the crash of insulin production which causes diabetes. So it is a big market. This is actually launched this month through Hope Diagnostics [ph] lab, which is a great partner for Metabolon. And we're really excited about seeing this product move through the market and it certainly wins a lot.

Their second product is Prostarix, and this really tackles the screening and monitoring and management of prostate cancer. So again, what's the problem? And most of you, I'm sure, know about PSA, in theory, testing. But the problem is PSA, within the range of PSA results, there's a sub range, between 4 and 10, where there's a very gray area. Should you go to biopsy? Are you fine? What do you do? And what the need is, is to have an additional test, or additional information to help stratify those cases in that gray area. And that's what Prostarix does. It gives you another measure, that complements PSA, to tell you how aggressive is the cancer. So if you have PSA in this 4 to 10 range, with the Prostarix, indication that you have an aggressive cancer, it helps build confidence for the patients and the doctors to say, yes, this requires a biopsy. And maybe, in the case where it indicates it's not very aggressive, maybe you go towards the sentinel [ph] monitoring. And this is their second product and we are -- that will be the next one that goes to market. And as you sort of look and combine these 2 businesses, again, the core metabolomics business, combined with the diagnostics business, why we're excited and why this is interesting and one to watch, because we're right at this point, sort of mid-2003, with the launch of Hope Diagnostics, [ph] where we see the opportunity for Matabolon revenue to really grow. So again, stay tuned, one to watch. And I'm happy to answer questions after the meeting's over. Thanks.

Daniel B. Wolfe

I'm Danny Wolfe and I'll talk a little bit about our portfolio, the company [ph] SiOnyx. We were the first institutional investor in SiOnyx, back in 2006, and helped bring the technology out of Harvard, which is an approach to changing how silicon absorbs light. And why that's important is because any image sensor, in your camera or in your phone, the image sensor in your phone, in your digital camera, and a variety of other applications, with it -- you have a chip in there that's actually looking to absorb light and convert it into electricity, so that it can be measured and create an image, detect movement, a variety of other applications. And SiOnyx's technology allows a company that's integrating these chips into their own designs, or using designs from SiOnyx, to be able to detect light, not only in the visible range of the spectrum, what we normally are looking at every day, but also in the infrared region of the spectrum. And so -- and where silicon is normally transparent, they figured out a way to, still using silicon, which is the most ubiquitous material in semiconductor industry, absorb infrared as well and expand the opportunities and uses for these silicon-based image sensors.

Where would you find these? You find these image sensors in almost every device that you, and also light detection systems, in almost every device that you use today. But there's new applications that are becoming pervasive. Where the ability to image and detect infrared light are the enabling features for the experience that the user has. And one of those that's most relevant today, that you may have heard of, is Xbox, the Kinect-based system, which is a gesture-based system for being able to interface with a video game without having to touch, hold or, actually, physically be interacting with the game itself. So you can stand up, you can swing your arms like you're swinging a golf club, you're not holding anything and it will show up on the screen. You can run in place, and interact with those video gaming systems. Gesture user interface is becoming a very interesting space for expansion of the way that the electronic companies want to have their users interact with their devices. So beyond Xbox and the Kinect, there are companies that are actually using a Kinect-based system as they approach -- in surgical facilities, being able to manipulate x-rays and other types of images, while -- during surgery, without having to actually scrub in and scrub out, or scrub out and scrub back in, from the surgical room itself. There are other -- you may have read from the Samsung Galaxy 4, which is coming out shortly, it has the ability to detect your eyes, and also other motions, to allow you to control how it screens -- how the information on screens scroll, just by looking at it. Or looking at a telephone and it detects that your eyes are actually looking at it, so it won't go to sleep, instead of you having to continuously press a button on it.

In the automotive sector, this is starting to become more pervasive, where not just rearview cameras, but also front facing cameras, that you can now look out forward and be able to see, for example, deer in the middle of the night. So SiOnyx's technology is a foundational technology where the secret sauce, have you, is applicable to all different designs from the individual companies that are interested in using that approach. SiOnyx also makes its own image sensors, but it doesn't have to only be used on its own. It can actually be incorporated into a partner's designs as well. I'm going to show a quick video that demonstrates SiOnyx's technology in action, where it compares the ability for the image sensor to see at night, in the moonless night sky, which, as you'll hear, is one of the most difficult imaging and visualization conditions because of the very limited light that's actually around.


Daniel B. Wolfe

So what you're seeing is one application for SiOnyx's technology in the night vision, security, surveillance, military sectors. In-Q-Tel is an investor in -- as in the venture capital group for the defense and intelligence agencies. It's an investor in SiOnyx, alongside us and other top-tier investment groups. And, as I said, the platform is applicable to all of these other applications, which we believe have exciting opportunities in the future. Thank you.

Douglas W. Jamison

Can we do questions at the end?

Unknown Attendee

Just wanted to know if SiOnyx's signal...

Daniel B. Wolfe

Unfortunately, no [indiscernible].

Douglas W. Jamison

So thank you, Alexei. Thank you, Misti. Thank you, Daniel. Before taking questions and comments, I will ask the inspector if the voting report is available?

I've now received the preliminary voting report, the results of which will be confirmed later by the inspector.

The preliminary report indicates that all of the board's 7 nominees have been elected as directors. The company has authorization to retain PricewaterhouseCoopers, the independent registered public accountant, for the fiscal year ending December 31, 2013. And the executive compensation of the named executive officers has been approved on advisory basis. We're going to end the webcast now.

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