SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: March 31, 2000; or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _________ to __________
Commission File Number: 0-24109
SYNTHONICS TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 87-0302620
- ------------------------------ -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31324 Via Colinas, Suite 106, Westlake Village, CA 91362
- ---------------------------------------------------- ------------------------
(Address of principal executive offices) Zip Code)
(818) 707-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
-----------------------------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that a
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On March 31, 2000 there were 28,421,679 shares of the registrant's Common
Stock, $0.01 par value, issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
This Form 10-QSB has 29 pages, the Exhibit Index is located at page 28.
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
- ------------------------------
The financial statements included herein have been prepared by the
Company, without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading.
In the opinion of the Company, all adjustments, consisting of only
normal recurring adjustments, necessary to present fairly the financial position
of the Company as of March 31, 2000 and the results of its operations and
changes in its financial position from inception through March 31, 2000 have
been made. The results of operations for such interim period is not necessarily
indicative of the results to be expected for the entire year.
Index to Financial Statements
-----------------------------
Page
----
Independent Accountants' Review Report ................................... 3
Consolidated Balance Sheets .............................................. 4
Consolidated Statements of Operations .................................... 5
Consolidated Statements of Cash Flows .................................... 6
Notes to the Consolidated Financial Statements ........................... 7
All other schedules are not submitted because they are not applicable or
not required or because the information is included in the financial statements
or notes thereto.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
--------------------------------------
To the Board of Directors
Synthonics Technologies, Inc. and Subusidiaries
La Jolla, California
We have reviewed the accompanying consolidated balance sheet of Synthonics
Technologies, Inc. and Subsidiaries as of March 31,2000 and the related
statements of operations, stockholders' equity and cash flows for the periods
ended March 31, 2000 and 1999. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim consolidated
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States.
HJ & Associates, LLC
Salt Lake City, Utah
May 17, 2000
3
<PAGE>
Synthonics Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 11,946 $ 294,583
Accounts receivable, net 10,452 302
Accounts receivable, related 31,620 31,620
--------------------------------
Total current assets 54,018 326,505
Property and equipment, net 22,208 34,444
Intangibles, net 173,278 181,314
Deferred financing costs 82,441 82,441
Deposits 4,495 4,495
--------------------------------
Total assets $ 336,440 $ 629,199
================================
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable 305,207 215,534
Accounts payable, related 284,578 195,661
Other accrued expenses 14,440 14,440
Notes payable - -
--------------------------------
Total current liabilities 604,225 425,635
Convertible notes payable 500,000 500,000
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock; 550,000 Class A shares authorized of $10.00 par
value, 10,000 shares issued and outstanding; 20,000,000 Class B
shares authorized of $0.01 par value, no shares issued and
outstanding 100,000 100,000
Common stock; 100,000,000 shares authorized of $0.01 par value,
28,421,629 and 19,951,279 shares issued and outstanding in 1999
and 1998, respectively 284,217 284,217
Additional paid-in capital 6,296,725 6,299,725
Accumulated deficit (7,448,727) (6,980,378)
--------------------------------
Total stockholders' equity (deficit) (767,785) (296,436)
--------------------------------
Total liabilities and stockholders' equity (deficit) $ 336,440 $ 629,199
================================
See accompanying notes.
</TABLE>
4
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------------
2000 1999
--------------------------------
(Unaudtied)
<S> <C> <C>
Net sales $ 42,750 $ 62,492
Cost of goods sold 7,408 41,980
--------------------------------
Gross profit 35,342 20,512
Expenses:
Research and development 143,745 43,574
Production costs 12,022 21,370
General and administrative 328,318 111,842
Depreciation and amortization 20,272 21,899
Bad debt expense 0 0
--------------------------------
Total expenses 504,357 198,685
--------------------------------
Loss from operations (469,015) (178,173)
Other income (expense):
Other income 0 0
Interest income 867 951
Interest expense (201) (23,545)
--------------------------------
Total other income (expense) 666 (22,594)
--------------------------------
Loss before provision for income taxes (468,349) (200,767)
Provision for income taxes 0 0
--------------------------------
Net loss (468,349) (200,767)
Dividends on preferred stock 3,000 3,000
--------------------------------
Net loss applicable to common shareholders $ (471,349) $ (203,767)
================================
Net loss per common share - basic and diluted
$ (0.01) $ (0.01)
================================
See accompanying notes.
</TABLE>
5
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------------
2000 1999
--------------------------------
(Unaudited)
<S> <C> <C>
Operating activities
Net loss $ (468,349) $ (200,767)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 20,272 21,899
Stock and non-employee stock options issued for
services 0 0
Changes in assets and liabilities:
Accounts receivable and accounts receivable -
related (10,150) (21,477)
Prepaid expenses and deposits 0 2,080
Accounts payable and accounts payable - related 178,590 (84,366)
Accrued expenses 0 26,500
--------------------------------
Net cash used in operating activities (279,637) (256,131)
Investing activities
Proceeds from disposal of fixed assets 0 211
Purchase of fixed assets 0 0
Patent costs 0 (11,786)
--------------------------------
Net cash used in investing activities 0 (11,575)
Financing activities
Payments on notes payable 0 0
Cash proceeds from the issuance of notes payable 0 0
Deferred financing costs 0 0
Capital contributions 0 0
Dividends paid (3,000) (3,000)
Issuance of common and preferred stock 0 0
--------------------------------
Net cash provided by financing activities (3,000) (3,000)
--------------------------------
Net increase (decrease) in cash (282,637) (270,706)
Cash at beginning of period 294,583 271,665
--------------------------------
Cash at end of period $ 11,946 $ 959
================================
See accompanying notes.
</TABLE>
6
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Cash Flows
Notes to Financial Statements
1. Organization and Description of Operations
------------------------------------------
Synthonics Technologies, Inc. (STI) was incorporated on March 27, 1974 under the
state laws of Utah and was reincorporated in the state of Delaware in December
1999. STI engages in the design, development and marketing of
computer-interactive and computer-automated image analysis software and hardware
products. The consolidated financial statements presented are those of STI and
its wholly-owned subsidiaries, Synthonics Incorporated and Christopher Raphael,
Inc. (CRI). All material intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements to conform to the presentation in 1999.
On October 1, 1997, STI purchased CRI, a general design and print brokerage
company, for $5,200 by issuing 10,000 shares of its common stock in exchange for
100% of the issued and outstanding stock of CRI. The common stock issued was
valued at its trading price on the date of acquisition of $0.52 per share. The
acquisition was accounted for as a purchase. The Company recorded $98,184 as the
excess of the purchase price over the fair value of the net tangible assets of
CRI. The excess was amortized over a two year period resulting in amortization
expense in the amounts of $0, $48,092 and $48,092 for the years ended December
31, 1999, 1998 and 1997, respectively.
Going Concern
-------------
The Company's consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern which contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. The Company has historically incurred significant losses while
accumulating minimal offsetting realizable assets, which raises substantial
doubt about the Company's ability to continue as a going concern. The continued
losses have resulted in an accumulated deficit of $7,448,727 at March 31, 2000.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities resulting from the
outcome of this uncertainty. It is the intent of management to create additional
revenues through the development and sales of its image analysis software and to
obtain additional equity or debt financing, if required, to sustain operations
until revenues are adequate to cover the costs.
2. Summary of Significant Accounting Policies
------------------------------------------
Estimates and Assumptions
-------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
affecting the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
Cash equivalents include short-term, highly liquid investments with maturities
of three months or less at the time of acquisition. Cash and cash equivalents
consist of cash on hand, cash held in money market funds and demand deposit
accounts. The carrying amount reported in the consolidated balance sheet for
cash and cash equivalents approximates its fair value.
The Company maintains its corporate cash balances at various banks. Corporate
cash accounts at banks are insured by the FDIC for up to $100,000. No amounts in
excess of insured limits were maintained in any accounts by the Company as of
March 31, 2000.
7
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Cash Flows
Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Concentration of Credit Risk and Major Customers
------------------------------------------------
Revenues are derived from sales to customers primarily located in the United
States. The Company generally does not require collateral from customers. Credit
losses have been within management's expectations.
Computer Software Development Costs
-----------------------------------
Costs related to the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility of the product has been established, at which time
such costs are capitalized, subject to expected recoverability. To date, the
Company has not capitalized any development costs related to its software
product since the time between technological feasibility and general release of
a product is not significant and related costs during that period have not been
significant. Costs to obtain or maintain patents for the Company's 3-D software
technology are recorded as intangible assets. The costs are principally outside
legal costs and are amortized over 7 years.
Property and Equipment
----------------------
Property and equipment is recorded at costs. Depreciation is computed on a
straight-line basis over a period of five years.
Investments in Affiliates
-------------------------
Investments in affiliates owned more than 20% but not in excess of 50%, where
the Company is not deemed able to exercise controlling influence, are recorded
under the equity method. Under the equity method, investments are carried at
acquisition costs and adjusted for the proportionate share of the affiliates'
earnings or losses.
In 1996, the Company entered into a joint venture agreement with a few
individuals to form Acuscape. Acuscape was formed to combine the proprietary
technologies of the parties involved to develop and offer software products to
the medical and dental professions. Acuscape was started with capital obtained
from outside parties and contributions of proprietary technologies by the
founding parties. Synthonics obtained an approximately 25% interest in Acuscape
for its contributed technologies, which has not been valued by the Company due
to the uncertainty of future benefits. Additionally, Synthonics is to receive a
3% royalty on gross revenues generated by Acuscape if and when such revenues are
generated. The Company has recorded no losses related to its investment in
Acuscape as the Company's investment is already recorded at zero and there are
no future funding requirements. At March 31, 2000 and 1999, the Company has a
receivable recorded from Acuscape in the amount of $31,620 related to research
and development work performed for Acuscape. Management believes this amount
will be collected in fiscal 2000 when Acuscape receives further funding.
Long-Lived Assets
-----------------
Long-lived assets, include, among others, costs in excess of fair value of
assets acquired, intangible assets, investments in affiliates, joint venture
investments and fixed assets. These assets are reviewed periodically to
determine if the related carrying values are impaired. The Company considers the
future undiscounted cash flows of the acquired companies in assessing the
recoverability of these assets. If indicators of impairment are present, or if
long-lived assets are expected to be disposed of, impairment losses are
recorded. Any impairment is charged to expense in the period in which the
impairment is incurred.
8
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Cash Flows
Notes to Financial Statements (Continued)
Revenue Recognition
-------------------
Revenues are derived primarily from the sale of packaged products including the
Company's software. Revenues are recognized when the products are shipped and
collectibility is assured in these instances, as the Company has no further
commitments to support or upgrade the software included in these packaged
products.
Revenues are also derived from software licenses. The Company recognizes
revenues from software licenses upon persuasive evidence of an arrangement,
delivery of software to a customer, determination that there are no significant
post-delivery obligations and collection of a fixed and determinable license fee
is considered probable.
Stock-Based Compensation and Other Equity Instruments
-----------------------------------------------------
The Company accounts for employee and director stock option grants using the
intrinsic value method. Generally, the exercise price of the Company's employee
and director stock option grants equal or exceed the market price of the
underlying stock on the date of grant and no compensation expense is recognized.
If the option price is less than fair value, the Company records compensation
expense over the vesting period of the option. The Company has also awarded
stock options vesting upon the achievement of certain milestones. Such options
are accounted for as variable stock options and as such deferred compensation is
recorded in an amount equal to the difference between the fair market value of
the common stock on the date of determination less the option exercise price and
is adjusted from period to period to reflect changes in the market value of the
common stock until the milestone is achieved (but only after achievement of the
milestone is determined to be probable). No deferred compensation amounts or
expense have been recorded for these variable stock options as of March 31, 2000
as the fair value of the common stock is not significantly different than the
exercise price.
The Company also has granted and continues to grant options and warrants to
various consultants of the Company. These options and warrants are generally in
lieu of cash compensation and, as such, compensation expense is recorded related
to these grants. The compensation for these options and warrants is determined
as the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measured. The compensation expense
is recorded over the period the services are performed, which is generally the
vesting period.
Income Taxes
------------
The Company uses the liability method to record income taxes.
Net Loss Per Common Share
-------------------------
Basic loss per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted loss per share reflects the potential dilution
that would occur if securities or other contracts to issue common stock were
exercised or converted to common stock. Common stock equivalents from all stock
options, warrants and convertible securities for all years presented have been
excluded from this computation as their effect is anti-dilutive.
Basic loss per common share is computed by dividing the net loss by the weighted
average of shares outstanding during the periods presented. Since the effect of
the assumed exercise of common stock options, warrants and other convertible
securities for all periods presented was anti-dilutive, basic and diluted loss
per common share as presented on the consolidated statements of operations are
the same. Dilutive securities amounted to 28,421,679 at March 31, 2000.
9
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Cash Flows
Notes to Financial Statements (Continued)
3. Property and Equipment
----------------------
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited)
--------------------------------
<S> <C> <C>
Computer equipment $ 174,369 $ 174,369
Furniture and fixtures 17,850 17,850
Photographic equipment 56,237 56,237
--------------------------------
248,456 248,456
Less accumulated depreciation (226,248) (214,012)
--------------------------------
Net property and equipment $ 22,208 $ 34,444
================================
</TABLE>
4. Intangibles
------------
Intangible costs incurred are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited)
--------------------------------
<S> <C> <C>
Trademarks $ 1,484 $ 1,484
Patents 304,909 302,598
--------------------------------
306,393 304,082
Less accumulated amortization (133,115) (122,768)
--------------------------------
Total $ 173,278 $ 181,314
================================
</TABLE>
5. Commitments and Contingencies
-----------------------------
Leases
------
The Company is party to leases and other operating commitments, principally for
facilities and equipment. Under the terms of certain of the leases, the Company
is required to pay additional expenses such as maintenance, taxes, insurance,
and other operating costs. Certain leases contain renewal or purchase options
and certain leases provide for rental increases based on defined formulas. Rent
expense under operating leases was approximately $47,456, $80,013 and $89,049
for the years ended December 31, 1999, 1998 and 1997, respectively.
Future minimum payments by year and in the aggregate for non-cancelable
operating leases with initial or remaining terms of one year or more consisted
of the following at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 29,980
2001 3,739
------------
Total minimum lease payments $ 33,719
============
</TABLE>
10
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Cash Flows
Notes to Financial Statements (Continued)
Employment Contracts
--------------------
The Company has entered into employment agreements with certain officers of the
Company. The Company has agreed to pay its Chief Executive Officer and Chief
Technical Officer a base annual salary of $240,000 each, beginning on July 1,
1996 and ending on December 31, 2000. The Company had also agreed to pay its
Vice-President of Marketing and Sales, who resigned in April 1999, a base annual
salary of $60,000 plus commissions. During 1999 and 1998, the Company's Board of
Directors approved a reduction in these salaries for the entire 1999 and 1998
years due to a cash shortage. The Company's Board of Directors may also
authorize bonuses on an ad hoc basis.
Other matters
-------------
On January 8, 1998, a default judgment was granted in favor of the Company for
breach of a license agreement and misappropriation of trade secrets. The Company
was awarded damages from the defendant in the amount of $300,000. It is
unlikely, however, the Company will receive any amount from the judgment due to
the poor financial condition of the other party and no income has been
recognized for this judgment.
6. Related Party Transactions
--------------------------
As of March 31, 2000, the Company owed $146,509 to certain of its officers and
employees. These amounts represent accrued wages. As of December 31, 1999 and
1998, the Company owed $65,000 and $-0-, respectively, to certain of its
officers and shareholders. These amounts represent accrued wages. During 1998,
$99,299 in debt was forgiven by an officer and was recorded as contributed
capital at December 31, 1998. In addition, a previously forgiven debt of $9,290
was paid out during 1998 resulting in a reduction of contributed capital at
December 31, 1998. The Company also owed certain related parties $68,968 and
$47,366 as of December 31, 1999 and 1998, respectively, for costs incurred on
the Company's behalf.
During 1998, the Company obtained operating funds from a related party in
exchange for a $10.71 royalty on future sales of up to 7,000 units on a CD
product. As of December 31, 1999, the Company had completed the sale of the
7,000 CD units and had paid the related party a total of $38,556. At March 31,
2000, the Company has $36,444 in accounts payable - related for the remaining
obligation under this agreement.
During 1998, the Company entered into an agreement with a related party whereby
the related party funded the production of 50,000 CD's in exchange for a royalty
upon future sales of 28,000 CD's. The agreement provides for $3.455 to be paid
to the related party for every CD unit sold for up to 6,000 units and $6.91 to
be paid to the related party for every CD unit for the remaining units. As of
March 31, 2000, the Company had completed the sale of the 10,726 CD units and
had paid the related party a total of $20,730, with a royalty obligation
remaining on 17,274 units at $6.91 per unit. At March 31, 2000, the Company has
$32,657 in accounts payable - related for their obligations under this agreement
on units sold which had not been paid as of that date.
7. Convertible Notes Payable
-------------------------
In December 1999, the Company entered into a Convertible Subordinated Promissory
Note Agreement (Convertible Note) with Future Media Productions, Inc. (Future
Media), a company owned by a related party, in the amount of $500,000. Interest
accrues beginning at the first annual anniversary date of the Convertible Note
at Future Media's borrowing rate. Future Media, at its option, may convert the
Convertible Note into 11,518,096 shares of the Company's common stock within
twelve months of the issuance date; otherwise, the Convertible Note and all
accrued and unpaid interest is due on December 22, 2001. The Convertible Note is
subordinated to any current or future indebtedness, or Senior Indebtedness as
defined in the agreement, of the Company. The Company recorded $82,441 as
deferred financing costs for amounts paid, or to be paid, to an investment
adviser who assisted in obtaining the financing. These deferred financing costs
will be amortized into interest expense over the term of the Convertible Note
or, upon conversion of the note, included as a reduction of paid-in capital.
11
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Cash Flows
Notes to Financial Statements (Continued)
7. Convertible Notes Payable (continued)
-------------------------------------
The Convertible Note agreement also provides the Company with up to 2.0 million
replicated and packaged CDs without charge from Future Media and requires Future
Media to establish, operate and fund a catalog subsidiary or division to develop
and produce 3D interactive digital catalogs licensing the Company's technology.
The Company will retain certain rights from catalog endeavors whereas Future
Media will retain replication and packaging revenues from the catalog business.
The Company has not recorded any amounts for the replication, packaging and
other services to be performed, and will not record any amounts for these
services until such services are rendered or upon conversion of the Convertible
Note. Upon performance of the services or conversion of the Convertible Note,
the Company will account for such services as a contribution to capital for the
fair market value of the services performed or to be performed.
8. Notes Payable
Notes payable consisted of the:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited)
--------------------------------
<S> <C> <C>
Notes payable to various individuals, interest at 13% per annum, principal and
interest due May 1999 (payable in cash or stock at $0.20 per share, at the
option of the lender), unsecured
$ - $ -
Notes payable to various individuals, interest at 10% due semi-annually,
principal due in May 1999 (payable in cash or stock at $0.20 per share, at the
option of the Company), unsecured
- -
--------------------------------
Total notes payable - -
Less current portion - -
--------------------------------
Long-term notes payable $ - $ -
================================
</TABLE>
These notes and the related accrued interest were settled in May 1999 through
the issuance of 5,005,000 shares of common stock at $0.20 per share in lieu of
cash repayment as provided for in the note agreements.
9. Stock Options, Warrants and Rights
----------------------------------
Common Stock Options
--------------------
The Company has two stock-based compensation plans, the 1998 Plan and the 1999
Plan. Under the Company's stock-based compensation plans, employees, outside
directors and consultants are able to participate in the Company's future
performance through the awards of incentive and nonqualified stock options and
stock purchase rights. The total number of shares reserved and available for
grant and issuance pursuant to the 1998 Plan and 1999 Plan is 2,500,000 and
10,000,000, respectively. Each stock option is exercisable pursuant to the
vesting schedule set forth in the stock option agreement granting such stock
option. Unless the Board of Directors or a stock option agreement provides a
shorter period, each stock option may be exercisable until December 31, 2009,
the term of the option. No stock option shall be exercisable after the
expiration of its option term. The exercise price of the option shall be 100% of
the fair market value of a share of the Company's common stock on the date the
stock option is granted, provided the option price granted to any owner of 10%
or more of the total combined voting power of the Company shall be 110% of such
fair market value. The aggregate fair market value of the Company's common stock
with respect to which stock options are exercisable for the first time by an
optionee during any calendar year shall not exceed $100,000.
12
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Cash Flows
Notes to Financial Statements (Continued)
9. Stock Options, Warrants and Rights (Continued)
----------------------------------------------
In June 1999, in accordance with a private placement of common stock to an
investor, the Company granted the investor stock options to purchase 1,448,445
shares of common stock at $0.10 per share. At March 31, 2000, 800,000 of these
options had been exercised and 648,445 remain outstanding, which expire within
ninety days of a $1,000,000 capital raise by the Company.
In September 1999, the Company issued 1,030,298 stock options, which immediately
vested, to certain former employees, founders and officers at an exercise price
of $0.10 per share in recognition of past services. The fair value of these
grants was determined to be $0.07 per share and as a result the Company recorded
compensation expense of $72,000 for the year ended December 31, 1999.
During 1997, certain of the Company's officers were granted stock options to
purchase 588,290 shares of restricted common stock at $1.00 per share in return
for their forgiveness of deferred compensation debt owed to them in the amount
of $279,133. The Company also issued 501,000 shares of common stock during 1997
in exchange for the forfeiture of 750,000 common stock options. Of the stock
options forfeited, 450,000 were valued at $0.22 per option, the market value of
the shares at that time, and the remaining 300,000 were value at $0.50 per
option, the market value of the shares at that time. The amounts are recorded as
contributed capital at December 31, 1997.
The following table summarizes all stock option activity:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Price per Exercise
Shares Share Price
---------------------------------------------
<S> <C> <C> <C>
Balances at January 1, 1997 8,332,355 $0.22 - 1.00 $ 0.42
Options granted 2,486,290 0.75 - 1.00 0.90
Options exercised (1,543,500) 0.22 - 0.50 0.45
Options cancelled (2,939,000) 0.22 - 1.00 0.33
---------------------------------------------
Balances at December 31, 1997 6,336,145 0.22 - 1.00 0.62
Options granted 1,253,885 0.53 - 0.66 0.53
Options exercised - - -
Options cancelled (155,000) 0.75 - 1.00 0.80
---------------------------------------------
Balances at December 31, 1998 7,435,030 $0.22 - 1.00 $ 0.60
Options granted 6,023,960 0.07 - 0.20 0.13
Options exercised (800,000) 0.10 0.10
Options cancelled (2,687,855) 0.22 - 1.00 0.41
---------------------------------------------
Balances at December 31, 1999 9,971,135 $0.07 - 1.00 $ 0.42
Options granted 4,890,000 0.26 - 0.41 0.28
Options exercised - - -
Options cancelled (137,500) 0.20 0.20
---------------------------------------------
Balances at March 31, 2000 14,723,635 $0.07 - 1.00 $ 0.32
=============================================
</TABLE>
13
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Cash Flows
Notes to Financial Statements (Continued)
The following table summarizes information concerning outstanding and
exercisable options as of March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- --------------------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
as of Remaining Average as of Average
Range of March 31, Contractual Exercise March 31, Exercise
Exercise Price 2000 Life (in Years) Price 2000 Price
- ---------------------- ------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C>
$0.07 - 0.10 3,328,020 3.1 $ 0.10 3,328,020 $ 0.10
0.13 - 0.20 1,758,440 4.1 0.19 1,098,440 0.18
0.26 - 0.41 4,890,000 4.1 0.28 4,455,000 0.28
0.50 - 0.66 2,453,885 4.9 0.52 2,153,885 0.52
0.75 - 1.00 2,293,290 2.2 0.91 2,248,290 0.92
------------------------------------------------ --------------------------------
14,723,635 3.7 $ 0.32 13,283,635 $ 0.30
================================================ ================================
</TABLE>
The Company's policy is to disclose the pro-forma effect on operations of using
the fair value method of valuing stock options. The fair value method of valuing
stock options is based on the use of an option-pricing model. This model
considers volatility, a risk free interest rate and an estimated life of the
option. The Company used a zero expected dividend yield, expected stock price
volatility of 266%, a risk free interest rate of 5.5% and estimated lives of two
to five years. These assumptions resulted in a weighted average fair value of
$0.13 for stock options granted in the year ended December 31, 1999. The
pro-forma effect of using the fair value method would be to increase the
consolidated net loss to $1,504,935, or $0.06 per common share, in the year
ended December 31, 1999.
Stock "Rights" and Warrants
- ---------------------------
In connection with the Convertible Note placement and a private placement during
1999, the Company issued a financial adviser warrants to purchase 2,667,349
shares of common stock at $0.11 per share. In accordance with an agreement with
this adviser, the Company committed to continue to issue warrants to purchase
shares of the Company's common stock to this adviser at $0.11 per share to allow
the adviser to maintain a 5% equity interest in the Company on a fully diluted
basis. Future issuances of these warrants are contingent upon the adviser
continuing to find funding for the Company.
In connection with its acquisition of a predecessor company, the Company
acquired from the predecessor company's stockholders, warrants and "rights" to
acquire 1,369,190 shares of the predecessor company's common stock. In exchange,
the Company granted the exchanging stockholders warrants and "rights" to
purchase 6,161,355 shares of the Company's common stock. Of the 2,124,000 stock
purchase warrants granted, 1,950,500 were exercised during 1996 and the
remaining 173,500 warrants expired unexercised in 1996. There were 2,597,355
uncertificated "rights" with an exercise price of $0.11 per share outstanding at
December 31, 1997, of which 562,500 expired January 1, 1998 and 2,034,855
expired May 31, 1999.
During 1996, 337,000 warrants to purchase shares of the Company's common stock
were sold at $1.00 per warrant for $337,000. 168,500 of the warrants were "A"
warrants and 168,500 were "B" warrants. They were redeemable at 50% of the
average price of the Company's common stock during the month before being
exercised. The "A" warrants were exercised during June 1997 and the "B" warrants
were exercised during June 1998.
14
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Cash Flows
Notes to Financial Statements (Continued)
Stock "Rights" and Warrants (continued)
---------------------------
As of March 31, 2000, the total number of warrants outstanding was 2,843,349
with exercise prices ranging from $0.11 to $2.00 per share and expiration dates
from May 2000 through March 2004.
10. Provision for Income Taxes
--------------------------
The provision for income taxes for the years ended December 31, 1999, 1998 and
1997, consists of the following:
1999 1998 1997
-----------------------------------------------
State Franchise Taxes $ 6,665 $ 2,400 $ 1,700
===============================================
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of $5,705,869 which expire in the years 2004 to
2019. The Company also has state net operating loss carryforwards of $2,473,069
which expire in the years 2003 to 2004. No tax benefit has been reported in the
consolidated financial statements because the Company does not have a history of
profitable operations. Accordingly, the potential tax benefits of these net
operating loss carryforwards have been offset by a valuation allowance of the
same amount.
11. Preferred Stock
---------------
At December 31, 1997, the Company had 50,000 outstanding shares of Class A
cumulative convertible preferred stock. During 1998, 40,000 of the shares were
converted early into 615,200 shares of common stock. The early conversion was
15.38 shares of common to 1 share of preferred conversion rate, as an incentive
for the preferred shareholders to give up their future dividends from the
preferred stock. Thus, at December 31, 1999 and 1998, the Company has 10,000
outstanding shares of Class A cumulative convertible preferred stock. The
remaining Class A preferred stock is convertible at the option of the holder
into five shares of the Company's common stock for each share of preferred
stock, are non-voting, and feature a 12% annual dividend, paid quarterly. The
Class A cumulative convertible preferred stock may be redeemed at the option of
the Company after December 31, 1998 at $10.50 per share. The accrued dividends
unpaid as of December 31, 1999 and 1998 were $12,000 and $-0-, respectively.
12. Fair Value of Financial Instruments
-----------------------------------
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Cash and Cash Equivalents: the carrying amount approximates fair value.
Accounts Receivable and Accounts Payable: the carrying amount approximates fair
value.
Debt: The fair value of the Company's convertible notes payable is estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. At December 31,
1999, the fair value of the convertible notes payable was $450,000.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
------------------------------------------------------------------------
The following discussion and analysis should be read together with the
Annual Report of Synthonics, Consolidated Financial Statements of Synthonics and
the notes to the Consolidated Financial Statements included elsewhere in this
Form 10-QSB.
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity and cash flows
of Synthonics for the nine months ended March 31, 2000 and March 31, 1999.
Except for historical information, the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward looking statements that involve risks and uncertainties and are based
upon judgments concerning various factors that are beyond our control. Actual
results could differ materially from those projected in the forward-looking
Statements as a result of, among other things, the factors described below under
the caption "Cautionary Statements and Risk Factors." You should carefully
consider those risks, in addition to the other information in this report and in
our other filings with the SEC, before deciding to invest in our company or to
maintain or increase your investment.
Forward-looking Statements. Forward-looking statements presented in this
Forn 10-Q are based on our current expectations, estimates and projections about
our industry, management's beliefs and certain assumptions made by us. Words
such as "anticipates," "expects," "intends," "plans," "believes," "may," "will"
or similar expressions are intended to identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. Such statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual results could
differ materially and adversely from those expressed in any forward-looking
statements as a result of various factors. We undertake no obligation to revise
or update publicly any forward-looking statements for any reason. The
information contained in this Form 10-Q is not a complete description of our
business or the risks associated with an investment in our common stock. We urge
you to carefully review and consider the various disclosures made by us in this
report and in our other reports filed with the SEC that discuss our business in
greater detail.
Overview
--------
Synthonics Technologies, Inc. has been a pioneer in developing desktop
photogrammetry technology since the inception of Synthonics Incorporated (a
wholly owned subsidiary of Synthonics Technologies, Inc.) in August 1993.
Photogrammetry is the art and science of making measurements from photographs.
The Company's patented technologies are capable of "extracting" real objects
from common photographs and re-creating those objects as dimensionally-accurate,
photorealistic, 3D computer graphic models. The Company's core competency is
related to creating 3D content for computer graphic presentations.
Business Model. Since late 1994, the Company's business model has been
associated with licensing custom implementations of its 3D content-creation
technology to various marketing and sales partners. The Company is a technology
development company, more than it is a marketing and sales company. Management
has long realized that the Company could not cost-effectively develop internal
marketing expertise to address all of the diverse markets available to the
technology. Marketing 3D models and application software to the medical industry
requires personnel with a different background and a different set of skills
than those of personnel marketing 3D products to the apparel industry. The
Company prefers to find qualified marketing partners rather than try to build
expertise within the Company structure.
To date, the Company has formed business alliances with Acuscape, Inc., a
privately held medical imaging company, the Smithsonian Institution in
Washington, DC and Evan & Sutherland, a publicly held corporation that was
instrumental in the early-stage development of modern computer graphics.
16
<PAGE>
The Acuscape alliance is the business relationship preferred by the
Company. (See "Investments in Affiliates" in the "Notes to Consolidated
Financial Statements" section of this Form 10-QSB). In this type of alliance,
the Company licenses certain intellectual properties to a start-up business
partner on a "conditionally exclusive" basis in exchange for an equity position
in the new company and a modest royalty stream from revenues. Successful
performance of the new company is measured in terms of its ability to develop an
adequate royalty stream for the Company. If the new company is not successful,
as measured by royalty payment schedules, then the exclusivity of technology
license lapses and the Company is free to enter into new agreements with other
entities.
Currently, the Company is seeking multiple marketing partners to address
various vertical markets in the rapidly developing e-commerce and Internet
sectors and for the emerging "wireless Internet" market.
In order to better understand commercial potential associated with the
Company's technology and the Company's performance to date, it is first
necessary to understand (a) the broad scope of applications that can be
addressed by the Company's technology and (b) certain limitations imposed by
computer processing and data delivery infrastructure elements.
Commercial Potential. 3D computer graphic models have utility in a broad
range of applications, including science, medicine, education, entertainment and
retail sales. Scientific and medical applications require dimensional accuracy.
Educational and entertainment applications require interactive features with
moving parts. Retail sales applications require photographic realism and small
files sizes. In each case, there is a universal requirement for low production
costs. All of these requirements are met routinely through the use of Company's
technology.
There are virtually no limits to the size, shape, type or complexity of
real life object that can be converted to a 3D computer graphic model using the
Company's technology. Objects ranging in size from ants to aircraft carriers are
easily modeled using the Company's patented techniques. In a grand sense, the
Company's technology is capable of "digitizing the world" for use in computer
graphic presentations. Thus, the Company's business potential may arguably be
viewed as extremely large and limited, in part, by the Company's ability to form
financially successful business alliances that adequately address diverse
markets.
Business Performance. In assessing the Company's business performance, it
is important to understand certain constraints to growth that have been imposed
by PC processing power and data delivery technologies, technologies that are
outside of Company control or influence. 3D graphics require both (a)
high-performance PC processors to view the interactive 3D graphic content and
(b) broadband communication links to distribute the 3D content to remote
computers quickly and efficiently.
Management believes that today's PC processing power is generally adequate
for viewing the Company's 3D graphic content. However, it further believes that
the problem of distribution of 3D graphics over the Internet is just now finding
a viable solution through the use of various data streaming techniques and the
deployment of various high-bandwidth Internet delivery systems, such as
home-based Digital Subscriber Lines (DSL), cable modems and satellite download
links.
In 1993 and 1994, the Company saw a limited demand for 3D content, coming
primarily from scientific and engineering business sectors. During these years
the demand for Computer Aided Design (CAD) wireframe models was low and the
demand for the Company's patented phototextured 3D models for computer animation
was low to modest.
From 1995 to 1998, the Company saw an increase in demand for 3D content,
coming from educational, entertainment, and architectural sectors. The
pioneering work with the Smithsonian Institution (interactive CD tour of
museums), Acuscape (medical imaging) , and Evans & Sutherland (architecture and
urban planning) took place or was initiated during these years. The Company
expanded the use of industry-specific generic primitive structures to lower
production costs and shorten 3D content creation times, thus making 3D graphic
content generation more competitive with traditional CAD techniques. Toward the
end of this period, the Company was beginning to demonstrate the commercially
competitive nature of its technology.
17
<PAGE>
In 1999, the Company experienced the initiation of interest in 3D content
coming from Internet and other e-commerce related sectors. Marketing concepts
demonstrated through the Company's e-commerce apparel initiative has received a
strong positive response from "e-tailers" who wish to market their wares
electronically via the Internet. The primary obstacle to industry acceptance of
the Company's Internet e-commerce concepts has been associated with excessive
file download times over relatively slow modem connections to the Internet. In
the first quarter of year 2000, the Company successfully demonstrated a ten-fold
improvement in download times (from 60 seconds per model to approximately 6
seconds per model) by employing model optimization techniques and utilizing
various data streaming techniques.
In a forward-looking statement (see "Forward-Looking Statements"),
Management believes the demand for 3D content will continue to increase to
commercially viable levels in the years 2000 and beyond, with emphasis shifting
toward "wireless Internet" and "portable appliance" applications.
Continued Business Losses. Since the inception of Synthonics Incorporated,
a wholly-owned subsidiary formed in 1993, the Company has been required to
demonstrate its technological capabilities in addressing various and diverse
markets. This activity has been costly but necessary in order to prove the
viability of the Company's technology. These activities have yielded only modest
revenues to date and have not reached levels that provide the Company with a
self-sustaining revenue stream.
Management has raised and spent over $7M developing and demonstrating the
Company's technology since August 1993. Management believes it may be necessary
to raise and spend up to an addition $4M over the next two years before reaching
a point of sustainable profitability, with some of the projected expenditure
going toward the development of demonstrations for "wireless Internet"
applications.
Even though the business potential for 3D graphic content is great, the
risk of being able to maintain development and growth to exploit the anticipated
potential is equally great.
18
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999.
- --------------------------------------------------------------------------------
NET SALES decreased by 32% for the three months ended March 31, 2000 to
$42,750 from $62,492 for the three months ended March 31, 1999. The majority of
sales during the three months ended March 31, 2000 were from ongoing sales of
the Smithsonian CD-ROM.
GROSS PROFIT increased 72% in the three months ended March 31, 2000 to
$35,342 from $20,512 in the three months ended March 31, 1999. This increase in
the gross profit can be attributed to an 82% reduction in cost of sales for the
same time period.
OPERATING EXPENSES increased by 154% to $504,357 for the three months ended
March 31, 2000 from $198,685 for the three months ended March 31, 1999. The
increase in operating expense is primarily due to an increase in staffing and
consultants used to demonstrate the Company's e-commerce capabilities in the
area of apparel sales.
PRODUCTION COSTS for the three months ended March 31, 2000 decreased by 44%
to $12,022 or 28% of sales as compared to $21,370 or 34% of sales for the three
months ended March 31, 1999. Production costs decreased due to the fact that
during the first three months of 2000, the Company had fewer additional costs
related to 3D content creation services.
GENERAL AND ADMINISTRATIVE EXPENSES increase by 197% for the three months
ended March 31, 2000 to $332,544, from $111,842 for the three months ended March
31, 1999. The increase in expense reflects a temporary ramp up of personnel
required to address development and demonstrations of Internet e-commerce
solutions for the apparel industry.
RESEARCH AND DEVELOPMENT EXPENSES increase by 230% for the three months
ended March 31, 2000 to $143,745, from $43,574 for the three months ended March
31, 1999. The increase is primarily the result of a temporary increase in
programming development that reduced production costs for apparel industry
objects by more than an order of magnitude. Expenditures on research and
development are expected to fluctuate in future periods, as techniques are
refined to lower production costs for other target market segments of
e-commerce.
There were no write-offs for uncollectible receivables for the three months
ended March 31, 2000.
As a result of the foregoing factors, we had a net loss increase of 163%
for the three months ended March 31, 2000 to $471,349 from $203,767 for the
three months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary needs for funds are to provide working capital
associated with forecasted growth in licensing activities. Specifically, funds
are required to complete technology demonstrations and maintain personnel that
are necessary to promote the Company's Internet e-commerce initiatives.
Working capital for the three months ended March 31, 2000 was funded
primarily through a $500,000 cash element of a a previously issued,
three-component-consideration debt instrument that has conversion rights to
equity under favorable terms to the creditor (see "Notes to Consolidated
Financial Statements; 7. Convertible Notes Payable"). No asset or capital input
value has been ascribed to or booked for the non-cash elements of the
consideration provided in that debt instrument.
In a forward-looking statement bearing considerable speculation, Company
management believes the CD replication rights for up to 2,000,000 CDs pledged as
non-cash consideration under a previously mentioned debt instrument ( see "Notes
to Consolidated Financial Statements; 7. Convertible Notes Payable"). could have
a future value to the Company ranging from
(a) $0, if the replication rights are never used, to
(b) $700,000, if CDs are replicated in large volume production runs of
500,000 CDs or more (a value consistent with the value ascribed by
FUTURE MEDIA PRODUCTIONS is SEC Form S-1/A filed with the SEC on
05/08/2000, or
19
<PAGE>
(c) a maximum probable value of $2,000,000 if the replication rights are
exercised in production runs of 50,000 units or less.
Management may attempt to extract some near-term value from the replication
rights consideration, via discounting and factoring, to sustain operations and
growth in the second quarter of year 2000, but it can give no assurances that it
will be successful in that endeavor if it attempts to do so.
Net cash used in operating activities during the three months ended March
31, 2000 increased by 8% to $282,637 from $270,706 for the three months ended
March 31, 1999. The cash was used primarily to develop technology demonstrations
related to the Company's e-commerce apparel initiative.
Operating Cash Shortfall Warning. At present, our anticipated capital
commitments are primarily for the expenditures associated with creating
marketing demonstrations for new e-commerce applications, pursuing strategic
alliances, and pursuing capital funding. We estimate that our current cash
balance is not sufficient to meet our needs through the second quarter of fiscal
2000. We anticipate that further capital will be required during the next twelve
months to satisfy our expected working capital and research and development
requirements for the new e-commerce initiatives. We are currently exploring
alternatives to fulfill our financing requirements. No assurance can be given
that additional financing will be available when needed or that, if available,
it will be on terms favorable to our stock holders and us. If needed funds are
not available, we may be required to continue to curtail our operations, which
could have a material adverse effect on our business, operating results and
financial condition. There can be no assurance that our working capital
requirements during this period will not exceed its available resources or that
these funds will be sufficient to meet the Company's longer-term cash
requirements for operations.
CAUTIONARY FORWARD - LOOKING STATEMENT
- --------------------------------------
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) the extremely competitive conditions that
currently exist in the three dimensional software development marketplace are
expected to continue, placing further pressure on pricing which could adversely
impact sales and erode profit margins; (ii) many of the Company's major
competitors in its channels of distribution have significantly greater financial
resources than the Company; and (iii) the inability to carry out marketing and
sales plans would have a materially adverse impact on the Company's projections.
The foregoing list should not be construed as exhaustive and the Company
disclaims any obligation subsequently to revise any forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
YEAR 2000 ISSUES
- ----------------
Synthonics products have successfully transitioned to the year 2000. We did
not incur any significant expenses during 1999 in conjunction with remediating
our systems. We are not aware of any material problems resulting from Year 2000
issues, either with our products, internal systems, or the products and services
of third parties. We will continue to monitor our mission critical computer
applications and those of our suppliers and vendors throughout the year 2000 to
ensure any latent Year 2000 matters arising are addressed promptly.
Effective March 31, 2000 the Company may decide to permanently discontinue
its public web pages containing Year 2000 Readiness information regarding
Synthonics and its products.
20
<PAGE>
RISK FACTORS
- ------------
Several of the matters discussed in this document contain forward-looking
statements that involve risks and uncertainties. Factors associated with the
forward-looking statements that could cause actual results to differ materially
from those projected or forecast appear in the statements below. In addition to
other information contained in this document, readers should carefully consider
the following cautionary statements and risk factors:
IF WE ARE UNABLE TO RAISE SUFFICIENT CAPITAL. Our future success depends
largely on the ability to secure outside capital funding. Required product
concept demos, product development, technology advancement, employee recruitment
and hiring, and related essential operating expenses are all dependent on new
and substantial capital funding being secured. We cannot be certain that
additional financing will be available at the time we need additional funds or
that, if available, it can be obtained on terms that we deem favorable. If
adequate capital funding cannot be secured, we will have to curtail operations
and our business will be adversely affected. Additionally, the sale of stock to
raise additional funds may dilute our stockholders.
WE HAVE A LIMITED RELEVANT OPERATING HISTORY UPON WHICH TO EVALUATE THE
LIKELIHOOD OF OUR SUCCESS. Factors such as the risks, expenses and difficulties
frequently encountered in the operation and expansion of a relatively new
business and the development and marketing of new products must be considered in
evaluating the likelihood of success of our company.
SUBSTANTIAL DOUBT THAT THE COMPANY CAN CONTINUE AS A GOING CONCERN. The
Company expects to continue to incur significant capital expenses in pursuing
its plans to increase sales volume, the expansion of its product line and to
obtain additional financing through stock offerings or other feasible financing
alternatives. In order for the Company to continue its operations at its
existing levels, the Company will require $1,500,000 of additional funds over
the next twelve months. While the Company can generate funds necessary to
maintain its operations, without additional funds there will be a reduction in
the number of new projects that the Company could take on which may have an
effect on the Company's ability to maintain its operations. Therefore the
Company is dependent on funds raised through equity or debt offerings.
Additional financing may not be available on terms favorable to the Company, or
at all. If adequate funds are not available or are not available on acceptable
terms, the Company may not be able to execute its business plan or take
advantage of business opportunities. The ability of the Company to obtain such
additional financing and to achieve its operating goals is uncertain. In the
event that the Company does not obtain additional capital or is not able to
increase cash flow through the increase of sales, there is a substantial doubt
of its being able to continue as a going concern.
Additionally, it should be noted that the Company's independent auditors
have included a going concern opinion in the note to financial statements.
WE HAVE A HISTORY OF LOSSES AND ACCUMULATED DEFICIT AND THIS TREND OF
LOSSES MAY CONTINUE IN THE FUTURE. For the period January 1, 2000 to March 31,
2000 we incurred a net loss of $468,349. For the fiscal year ended December 31,
1999 we had a net accumulated loss of $6,980,378. At March 31, 2000 our
accumulated deficit was $7,448,727. Our ability to obtain and then sustain
profitability will depend, in part, upon the successful development of license
and marketing agreements and our ablility to introduce new product variations in
a timely and cost effective manner.
OUR PROPRIETARY TECHNOLOGY MAY NOT BE ADEQUATELY PROTECTED FROM COPYING BY
OTHERS. Our future success and ability to compete depends in part upon our
proprietary technology. We rely on trademark, trade secret, patent laws, and
copyright laws to protect our technology, and require all employees and
third-party developers to sign nondisclosure agreements. We cannot be certain,
however, that these precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or superior
technology independently. We do not copy-protect our software, so it may be
possible for unauthorized third parties to copy our products or to reverse
engineer or otherwise obtain and use information that we regard as proprietary.
Our customers may take inadequate precautions to protect our proprietary
information. If we must pursue litigation in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others, we may not prevail and
will likely make substantial expenditures and divert valuable resources. In
addition, many foreign countries' laws may not protect us from improper use of
our proprietary technologies overseas. We may not have adequate remedies if our
proprietary rights are breached or our trade secrets are disclosed.
21
<PAGE>
IF WE DO NOT ACHIEVE COMMERCIAL ACCEPTANCE OF OUR INTERNET 3D E-COMMERCE
SOLUTION PRODUCTS. We are currently focusing the Company's resources to provide
3D e-commerce solutions for the Internet that take advantage of our patented 3D
technology. We believe both consumers and businesses participating in e-commerce
on the Internet, will benefit substantially from the products that we develop,
thereby creating market demand for these products. In designing our products for
e-commerce on the Internet, we will have to make certain assumptions about
consumer preferences, retailers needs, and the availability of anticipated
Internet related technology advances. Inaccurate assumptions on our behalf, for
any of these categories, will likely downgrade market acceptance of our Internet
3D e-commerce solution products. If market acceptance of these products is less
than we have forecasted, future results of the company will be adversely
affected.
IF EMERGING TECHNOLOGIES PROVIDE ALTERNATIVES WITH EQUAL OR BETTER BENEFITS
OF OUR TECHNOLOGY. We believe that our current level of 3D technology for the
creation of 3D content provides businesses and consumers with benefits that are
unavailable from competitive technologies. We can only make this evaluation
against other products that have been released and available for public
consumption. Our competitive analysis cannot evaluate products that are
currently under development by other companies. The explosive growth of
e-commerce over the Internet is sufficient incentive for many companies to
invest in technologies that may provide products that offer similar or better
consumer and business benefits than will our products. It is essential that we
execute our Internet e-commerce solution strategy very quickly in order to stay
ahead of the competition's product offerings in this marketplace. Our time to
market with our future products is dependent on our ability to raise adequate
capital funding, as described above.
IF WE ARE UNABLE TO IDENTIFY AND SECURE REQUIRED RESOURCES. Our future
results depend largely on our ability to identify and secure resources that will
lead to building license relationships with successful marketing organizations.
We anticipate continued need for technical staff, business development staff,
strategic partners and outside contractors. We may have to rapidly expand our
capabilities, once capital funding is secured, in order to successfully pursue
Internet e-commerce solutions. Our capabilities will be expanded by combining
internal staffing with the formation of strategic partnerships and with the
selection of outside contractors such as software program developers. If we are
either unable to identify or to secure these resources in a timely fashion, our
future results may be adversely affected.
IF WE ARE UNABLE TO RETAIN AND UTILIZED KEY PERSONNEL. As an early stage
company, we are particularly dependent on a limited number of individuals to
execute our business plan. At present, all our officers and directors fall in to
the category of key individuals as each is counted upon for contributions to our
success. We have been unable to pay certain key employees the compensation
amounts called for in their employment contracts during the past several fiscal
quarters. If any of these individuals were to terminate employment in the near
future, it may have an adverse affect on our ability to perform. Our directors
are all individuals who are employed full time by other, non-competing,
companies. As such, involvement of these directors in the day-to-day running of
the business is not practical due to a lack of available time in their daily
schedules. At any given time, any of our directors may be unavailable to us due
to the demands of their employers and this may have an adverse affect on certain
aspects of our business.
IF WE ARE UNABLE TO MANAGE OUR EXPANSION AND GROWTH. We are planning to
expand the business very rapidly in order to entrench ourselves in, what we
believe is a very lucrative e-commerce market. Effectively managing this
expansion will be very complex and may require the addition of key management
personnel as well as the incorporation of management support systems. The
failure to identify and attract key managers or the delayed incorporation of
required management support systems may adversely affect our future financial
results. The successful recruitment of key managers and the timely installation
of management support systems are both largely dependent on our efforts to
secure adequate capital funding, as discussed above.
22
<PAGE>
IF WE ARE UNABLE TO ADEQUATELY ADDRESS INTERNET DOWNLOAD ISSUES. We will be
supplying 3D e-commerce solutions over the Internet. A major element of these
future product solutions will be to require downloads of 3D data files from
servers to consumer sites. In order to be successful in this regard, we must be
able to offer download times that do not detract from the e-commerce experience.
We believe that our technology offers the best alternative available in terms of
3D file sizes. However, we have no assurances that this advantage will be
adequate in the eyes of a consumer. We have no control over the modem type used
by a consumer, the time of day a consumer will be accessing the Internet, the
capacity of the consumer's Internet Service Provider (ISP), or the rate to which
expanded bandwidth solutions will be made available to consumers. Low bandwidth
data delivery conduits to consumers will generally lead to long download times
and have a negative affect on consumer acceptance. We are attempting to consider
all these issues in the design of our 3D e-commerce solution products but we
cannot assure that they will be adequately addressed. If consumers conclude that
the download times are not sufficiently offset by the benefits provided, our
future financial results may be adversely affected.
PART II - OTHER INFORMATION.
- ----------------------------
Item 1. Legal Proceedings.
-----------------
During the period covered by this report there are no legal proceedings
against the Company and the Company is unaware of any unasserted claim or
assessment which will have a material effect on the financial position or future
operations of the Company.
Item 2. Changes in Securities.
---------------------
None.
Item 3. Defaults Upon Senior Securities.
--------------------------------
For the last five quarters ended March 31, 1999, June 30, 1999, September
30, 1999, December 31, 1999 and March 31, 2000, the Company has failed to pay
the quarterly dividends on the Preferred Stock in the amount of total $3,000 per
quarter bringing the total amount in arrears to $15,000.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None
Item 5. Other Information.
-----------------
Patents Issued. Two additional patents were issued to the Company by the US
Patent and Trademark Office during the month of March 2000, bring the total
number of patents assigned to the Company to nine (9).
Patent 6,037,971 was issued on March 14, 2000 and deals with methods for
recovering lost full-depth, stereoscopic 3D viewing details due to poor image
exposure at the time of image capture. Management feels this patent will not
have any significant financial benefit to the Company until after "home theater"
systems and "Internet movie-on-demand" infrastructures are more fully developed.
Patent 6,041,140 was issued on March 21, 2000 and deals with methods for
utilizing field-programmable gate arrays to provide hardware acceleration in the
creation of 3D models from photographs. Hardware acceleration of the Company's
patented processes shortens the time required to build 3D models from
photographs by a factor of approximately 2,400 and would make 3D model and
virtual world content creation almost instantaneous in some situations. The
application of this technology is aimed at (a) real-time processing of camcorder
video frames to build virtual world content during a walk-through or fly-through
of a real space, and (b) "wireless Internet" and "portable analytical
appliances" for use in real-time on-site applications. The patent may have no
commercial benefit to the Company if commercially available PC processors
continue to improve in performance over time.
23
<PAGE>
Changes to the Board of Directors. During the three months ended March 31,
2000, there were several changes made in Board membership. Chronologically, the
changes occurred as follows.
On March 1, 2000, Director Alex Sandel resigned from the Board after
serving in that capacity since December 22, 1999. Mr. Sandel remains a major
shareholder affiliate through investments made in the Company through the
Argoquest 7. Mr. Sandel remains a strategic business partner via multiple
contracts between the Company and privately held Future Media Productions, Inc.,
a CD and DVD disk replication company in which Mr. Sandel is a principal.
On March 2, 2000, Director David Stewart, Esq. resigned from the Board
after serving in that capacity for nearly five years. Mr. Stewart is currently a
partner in the law firm McDermott, Will and Emery in Washington, DC, a minor
shareholder in the Company and remains the Company's lead patent counsel.
On March 8, 2000, Director Diana Maranon resigned from the Board after
serving in that capacity since June 18 1999. Ms. Maranon is principal in Averil
Capital Markets Group, Inc., a company that has had a contractual relationship
with the Company since April 1, 1999. Ms. Maranon maintains a continued interest
in the Company, its development and growth , via Warrants issued to her and
affiliate organizations, some of which are vested and exercisable based on a
successful performance in securing growth capital for the Company.
On March 20, 2000, Director Vera Campbell resigned from the Board after
serving in that capacity since June 18, 1999. Ms. Campbell still serves the
Company as Executive Vice President for Apparel Initiative and maintains a
continued interest in the Company, its development and growth, via stock options
issued to her, some of which are vested as a function of performance in
developing strategic alliances and establishing a customer base in the apparel
industry.
All of the above former Directors are principals in large, successful firms
with continuous demands on their time. It is always difficult for such
successful business people to find sufficient time to devote to the needs of a
high-tech start-up, such as the Company, especially in light of the significant
fiduciary responsibilities that accompany a Directors position. It is not known
what effect, if any, the fact that the Company has been unable to afford
adequate ($10M to $15M) Directors and Officers insurance might have had on any
of the decisions to voluntarily resign from Board membership. Valuable past
services provided by these former Directors and their continued interest in the
Company is greatly appreciated by the remaining Board and the management of the
Company.
Change in Legal Counsel. On March 17, 2000 the law firm of TROOP STEUBER
PASICH REDDICK & TOBEY, LLP, informed the Company that it would no longer be
providing legal service to the Company, a service they had provided since June
3, 1999. The Company has not formally dis-engaged with TROOP STEUBER PASICH
REDDICK & TOBEY, LLP, but does not anticipate using their services to support
future transactions. The Company re-engaged with the law firm of Wenthur &
Chachas of La Jolla, CA in order to comply with SEC filing deadlines associated
with the filing of the Annual Report on Form 10-KSB for calendar year 1999.
Subsequent events. Numerous events occurred subsequent to the close of the
reporting period for this Form 10-QSB submission, March 31, 2000. Some of these
events may have a bearing on investor interest in the Company and are therefore
disclosed to the public.
(a) Scheduling Delays in performing 1999 year-end independent audit of
Company's books. At a special shareholders meeting held on December
03, 1999 the Company's shareholders voted to re-incorporate in the
State of Delaware and to engage Ernst & Young (EY) as independent
auditors of the Company's books. Since EY had no familiarity with the
Company's books and bookkeeping procedures, the independent audit of
the Company's books took longer than anticipated. The audited
financial statements were released for submission as part of the Form
10K filing on April 15, 2000.
(b) Delay in Scheduling the Annual Shareholders Meeting. Several events,
disclosed above, and the advanced notice to shareholders requirement
caused the Board of Directors to delay in setting a date for the
Annual Shareholder's Meeting that is normally held in April or May of
each calendar year. The event most responsible for causing the delay
in meeting was the late completion of the independent audit of the
Company's financial statements.
24
<PAGE>
(c) Director Resigns from Company. On April 17, 2000, Director Tom
Carpenter, who was scheduled to retire from Board service coincident
with the Annual Shareholders Meeting, resigned from the Board of
Directors after learning of the indeterminant delay in holding the
Annual Shareholders Meeting. Mr. Carpenter is a principal in a
high-tech start-up company based in San Diego, CA and found it
difficult to devote sufficient time and energy to the Company's
business in light of the associated significant fiduciary
responsibilities. Mr. Carpenter had served as a Director for several
years.
(d) Director and Officer Resigns from Company. On April 25, 2000,
Director, President and CEO F. Michael Budd resigned, simultaneously,
from all three positions. Mr. Budd is one of the original cofounders
of the Synthonics Incorporated, a wholly owned subsidiary of the
Company, and had served as a Director since the August 1993. He had
served as President and CEO since July 1, 1996. Mr. Budd was most
directly responsible for the successful production of the "Smithsonian
Museum Collection" CD that continues to generate revenues for the
Company. He was also the lead influence in the successful initiation
of the Company's e-commerce apparel initiative. Mr. Budd maintains an
interest in the successful growth of the Company while remaining a
major shareholder and holder of significant options to acquire Company
common stock.
(e) Interim President and CEO Appointed by the Board. On April 26, 2000,
Dr. Charles Palm was appointed to serve as President, CEO and Chairman
of the Board, on an interim basis. Dr. Palm currently serves as a
Director and Chief Technical Officer of the Company and was one of the
original co-founders of Synthonics Incorporated, a wholly-owned
subsidiary of the Company.
(f) Cutback in Technical Staff. During first two weeks in May, 2000,
Interim President and CEO, Dr. Charles Palm, began layoffs of recently
appointed technical staff, and began terminating consulting agreements
in a effort to cut operating costs and reduce debt accumulation until
additional operational funds are secured. Those laid off were
associated with the successful development of a apparel content and a
custom OpenGL 3D rendering engine that was the basis of an Internet
browser 3D viewer used to demonstrate the use of Company 3D apparel
content over the Internet. Dr. Palm felt the existence of a custom
Internet viewer was not critical to the Company's e-commerce apparel
initiative because the Company's 3D models are also compatible with
several other commercially available 3D rendering engines, such as the
Virtue3D Virtuoso Player and Metacreation's Metastream viewer, that
have already established a marketing presence on the Internet.
(g) Termination of Averil Contract. On May 10, 2000, by the mutual consent
of both parties, notice was given to terminate a fund raising
agreement that exists between the Company and Averil Capital Markets
Group, Inc. Termination of the agreement will reduce debt accumulation
and allow the Company to use other financial consultants for
subsequent fund raising activities.
25
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) List of Exhibits attached or incorporated by referenced pursuant to
Item 601 of Regulation S-B.
(3) Articles of Incorporation and By-Laws.
3.1 Articles of Incorporation of the Registrant filed on March
27, 1994, (incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form 10-SB dated
April 28, 1998; Commission File No. 0-24109).
3.2 Restated Articles of Incorporation of the Registrant dated
May 18, 1995, (incorporated by reference to Exhibit 3.2 of
the Registrant's Registration Statement on Form 10-SB dated
April 28, 1998; Commission File No. 0-24109).
3.3 Articles of Amendment to Articles of Incorporation of the
Registrant, filed on September 16, 1996, (incorporated by
reference to Exhibit 3.3 of the Registrant's Registration
Statement on Form 10-SB dated April 28, 1998; Commission
File No. 0-24109).
3.4 Statement of Designation of Foreign Corporation in
California filed November 4, 1996, (incorporated by
reference to Exhibit 3.4 of the Registrant's Registration
Statement on Form 10-SB dated April 28, 1998; Commission
File No. 0-24109).
3.5 Certificate of Amendment to Articles of Incorporation filed
September 6, 1997, (incorporated by reference to Exhibit 3.5
of the Registrant's Registration Statement on Form 10-SB
dated April 28, 1998; Commission File No. 0-24109).
3.6 Amended and Restated Articles of Incorporation filed April
23, 1998, (incorporated by reference to Exhibit 3.6 of the
Registrant's Registration Statement on Form 10-SB dated
April 28, 1998; Commission File No. 0-24109).
3.6(a) Restated Articles of Incorporation dated effective as of
April 22, 1999, (incorporated by reference to Exhibit 10.20
of the Quarterly Report on Form 10-QSB filed on May 13,
1999.
3.7 By-Laws of the Registrant (incorporated by reference to
Exhibit 3.7 of the Registrant's Registration Statement on
Form 10-SB dated April 28, 1998; Commission File No.
0-24109).
(4) Instruments defining the rights of holders.
4.1 Statement of Rights, Preferences and Privileges of Common
and Preferred Stock of the Registrant as of September 6,
1997, (incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form 10-SB dated
April 28, 1998; Commission File No. 0-24109).
(10) Material Contracts
10.1 Management Cash Incentive Plan (incorporated by reference to
Exhibit 10.1 of the Registrant's Registration Statement on
Form 10-SB dated April 28, 1998; Commission File No.
0-24109).
10.2 1998 Stock Option Plan (incorporated by reference to Exhibit
10.2 of the Registrant's Registration Statement on Form
10-SB dated April 28, 1998; Commission File No. 0-24109).
10.3 Acuscape License Agreement (incorporated by reference to
Exhibit 10.3 of the Registrant's Amendment No. 1 to the
Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
26
<PAGE>
10.4 Smithsonian License Agreement dated October 2, 1997
(incorporated by reference to Exhibit 10.4 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.5 Amendment No. 1 to Smithsonian License Agreement
(incorporated by reference to Exhibit 10.5 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.6 Centro Alameda Inc. Contract Agreement dated December 19,
1997 (incorporated by reference to Exhibit 10.6 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.7 Knowledge LINK Strategic Alliance Agreement (incorporated by
reference to Exhibit 10.7 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.8 Synthonics Technologies - Industrial Lease Agreement
(incorporated by reference to Exhibit 10.8 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.9 Joseph Maher - Industrial Lease Agreement (incorporated by
reference to Exhibit 10.9 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.10 Dell Financial Lease No. 004591649-001 (incorporated by
reference to Exhibit 10.10 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.11 Dell Financial Lease No. 004591649-002 (incorporated by
reference to Exhibit 10.11 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.12 Americorp Financial Inc. - Lease 6976-2 (incorporated by
reference to Exhibit 10.12 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.13 Sanwa Leasing Corporation - Lease Agreement (incorporated
by reference to Exhibit 10.13 of the Registrant's Amendment
No. 1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.14 AT & T Equipment Lease - 003866952 (incorporated by
reference to Exhibit 10.14 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.15 AT & T Equipment Lease - 003871854 (incorporated by
reference to Exhibit 10.15 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.16 F. Michael Budd Employment Agreement (incorporated by
reference to Exhibit 10.16 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.17 Charles S. Palm Employment Agreement (incorporated by
reference to Exhibit 10.3 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
27
<PAGE>
10.18 First Colony Life Insurance Policy (incorporated by
reference to Exhibit 10.18 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.19 Software Remarketing Agreement between Synhonics
Technologies, Inc. and Evans & Sutherland Computer
Corporation (incorporated by reference to Exhibit 10.19 of
the Annual Report on Form 10-KSB filed on March 11, 1999.
10.20 Engagement Letter between the Company and Averil &
Associates dated April 1, 1999, (incorporated by reference
to Exhibit 10.20 of the Quarterly Report on Form 10-QSB
filed on August 13, 1999.
10.21 Equity Agreement between the Company and Alex Sandel dated
June 2, 1999, (incorporated by reference to Exhibit 10.21 of
the Quarterly Report on Form 10-QSB filed on August 13,
1999.
10.22 Subscription Agreement for Convertible Note of Synthonics
Technologies, Inc., dated December 22, 1999. (incorporated
by reference to Exhibit 10.22 of the Annual Report on Form
10-KSB for the year ended December 31, 1999.
10.23 Convertible Subordinated Promissory Note of Synthonics
Technologies, Inc., dated December 22, 1999. (incorporated
by reference to Exhibit 10.22 of the Annual Report on Form
10-KSB for the year ended December 31, 1999.
(27) Financial Data Schedule
27.1.Financial Data Schedule (submitted electronically for
SEC information only).
(b) The Registrant filed a Form 8-K on February 1, 2000. There were no
other reports on Form 8-K filed during the quarter of the period covered.
The following Exhibit Index sets forth the Exhibits attached hereto
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
None
28
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the Undersigned, thereunto duly authorized.
SYNTHONICS TECHNOLOGIES, INC.
A Delaware Corporation
Dated: May 18, 2000 /s/ Charles S. Palm
---------------------
By: Charles S.Palm
Its: President and Chief Executive Officer
29
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