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XL TechGroup, Inc. (XLT)

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Monday 30 June, 2008

XL TechGroup, Inc.

Final Results

RNS Number : 8723X
XL TechGroup, Inc.
30 June 2008
 




Press Release

30 June 2008


XL TechGroup, Inc.

('XL TechGroup' or 'the Company')


Final results for the year ended 31 December 2007


XL TechGroup (AIM: XLT), the creator of companies that solve identified, global unmet market needs, announces its final results for the year ended 31 December 2007. XL TechGroup's 2007 annual report and accounts will be posted on the Company's website (www.xltechgroup.com) at approximately 4.00pm UK time today and will also be mailed to shareholders today.


Dr. John Scott, CEO of XL TechGroup, said: '2007 was a positive year for XL TechGroup, with the exception of developments at AgCert which recently reached their conclusion.  Significant progress has been made at PetroAlgae, DxTech and QuoNova, while TyraTech has followed its successful IPO with further encouraging news on milestones achieved and new products launched.


Management and staff of XL TechGroup are the largest shareholders and we have also been significantly impacted by the fall in our share price.  Nevertheless, we retain full confidence not only in our underlying business model but also in the considerable value that we believe is being built in our companies.  While our accounts include a going concern disclosure and we had no alternative but to request a suspension of trading in our shares following the unexpected last minute withdrawal of negotiated heads-of-terms by a funding party, we are continuing discussions with potential funding partners.  Subject to reaching a satisfactory agreement, we are optimistic that we will be able to demonstrate over the coming months that these are temporary short-term issues, with future news flow anticipated to include licensing deals, strategic investments and a non-core asset sale.'


- ends -

  CHAIRMAN'S STATEMENT


We ended 2006 with the launch of QuoNova, our fifth company, and this exciting new business has subsequently developed ahead of our expectations. It has already announced promising early stage results and has had two key new patents issued. Several collaborative development programs are underway, and the first licensing agreement is anticipated in 2008.


PetroAlgae has made significant progress and is now working on the last few engineering issues to confirm the optimum extraction process and the system's modular scalability. Specific negotiations are underway with potential customers around the world, the first non-binding MOUs are in place and PetroAlgae continues to anticipate signing its first licensing agreement before the end of 2008. 


DxTech is focused on the remaining work needed to achieve a targeted 510k clearance from the FDA in 2009, which would enable a US product launch before the end of next year. DxTech has also already achieved a notable success outside its main US target market with the recent signing of a licensing and joint venture agreement with Nicholas Piramal, one of India's largest healthcare groups.


TyraTech was successfully listed on AIM in 2007. All debt owed to XL TechGroup was repaid and we own 45.5% of a company with a market value of US$85.6 million as at May 30, 2008, representing a return of 12x on our total investment. During 2007 and subsequently, TyraTech has achieved initial milestones with key partners, made its first product sales, and launched its Sustainable Solutions business in the US.


AgCert has been a significant disappointment. Despite our best efforts to preserve value during the creditor negotiations, the examinership process has resulted in all AgCert shareholders, including XL TechGroup, receiving nothing for their shares. We have however taken ownership of AgCert's key IP and we are optimistic that we will be able to monetize this asset in due course. 


Turning to working capital, we have continued to focus on reducing our overall cash burn without adversely impacting the development of our companies. The Board has also been reviewing a range of potential cash generating measures to ensure that XL TechGroup has sufficient resources to realize the considerable value which we are confident lies in our companies.


In addition to the anticipated cash generating events that we outlined in our February 2008 Operating Update, we have been looking at measures that include refinancing our current debt obligations; the managed sale of part of our holding in TyraTech; and the accelerated sale of one or more of our unlisted companies. We have also deferred the launch of our next company, and our first distribution to shareholders is now unlikely to happen until 2009.


The timing issue that has caused our accounts to include a going concern disclosure is disappointing, as is the need to request that trading in our shares be suspended following the unexpected last minute withdrawal of negotiated heads-of-terms by a potential financial investor. Nevertheless, DxTech has signed its first licensing deal and we remain confident that both PetroAlgae and QuoNova will follow suit during 2008. Negotiations with potential investors in PetroAlgae and DxTech are continuing, and considerable progress has been made towards the sale of one of our non-core assets.


DR GEOFFREY VERNON

Non-Executive Chairman

27 June 2008


  OPERATIONAL REVIEW


PETROALGAE LLC (94.6% owned by XL TechGroup)

Global consumption of petroleum diesel fuel exceeds 200 billion gallons annually and continues to grow at a rate that exceeds improvements in production, while the gap between supply and demand is widening and has driven prices to historically high levels. Beyond the economic issues associated with petroleum, there are also significant environmental challenges - petroleum fuels are non-renewable, produce many pollutants and release large quantities of carbon dioxide into the atmosphere when burned. 


The need for an alternative to petroleum oil is both large and immediate. PetroAlgae specifically addresses this need through the commercial-scale production of feedstock oil used to produce biodiesel, an entirely renewable biofuel. 


XL TechGroup created PetroAlgae in September 2006 to develop a commercial, scalable solution comprising a proprietary library of algae that combines the unique characteristics of rapid growth rate and high oil content. The algae are cultivated in modular bioreactors that can be operated cost-effectively at commercial scale. Harvest occurs on a continuous basis, and could produce up to 200 times more feedstock oil per acre than traditional crops like soybeans. This is the equivalent of being able to grow enough feedstock oil to meet the entire USA and EU needs for biodiesel fuel on less than 2% of the arable land in those regions. 


Algae is superior to alternatives 

Algae farms do not need to be sited on agricultural land. There is therefore no competition with food crops like soybean or corn that are used today as biofuel feedstock and there is no impact on rainforests in the way that palm and jatropha oil plantations do. Furthermore, algae production facilities can be constructed and operating at full capacity in a matter of months. By contrast, palm and jatropha plantations take several years to reach full production. 


economics are attractive 

Demand for affordable biodiesel feedstock is overwhelming and cannot be met through more traditional oils such as rapeseed or soya. These oils are currently priced at between US$4.50 - 5.00 per gallon whereas, for biodiesel refineries to breakeven (zero operating profit), feedstock oil needs to be cheaper, at approximately US$4.10 - 4.60 per gallon. The economics of the PetroAlgae business model are designed so that both PetroAlgae and biodiesel refiners are profitable without any subsidies and do not compete with food sources worldwide. 


technology and ip

PetroAlgae's technology platform is founded upon two broad categories of patents, the first being six patent applications encompassing various strains of algae capable of producing oil, which were obtained through an exclusive, worldwide license from Arizona State University with broad rights to all fields of use. The second category of two patent applications is based upon PetroAlgae's internally developed modular algae cultivation bioreactor system that can be built and operated on a massive commercial scale using low-cost growth methods. PetroAlgae is also able to identify genetic markers for its algae, which effectively 'fingerprint' them, allowing identification and theft prevention.


optimization and engineering

PetroAlgae's optimization facility in Florida has been operational since February 2007. A comprehensive scientific framework has been developed to both explain and predict biomass growth and lipid production, based on identifying and specifying each combination of operating parameters that will maximize oil yields across a wide range of geographies and climate conditions. Initial test oil samples are already being tested by some potential licensees and partners, while the residual biomass (i.e. the algae husks or meal after lipid extraction) is now undergoing the same evaluation and optimization process as the algae has gone through.


Economic optimization is also ongoing at this site. Because of the 'oil shock' (dramatic oil price changes over a short period of time), PetroAlgae's system design has been refined to incorporate much higher prices for all major cost components, such as plastic, PVC and power, as well as significantly higher selling prices for PetroAlgae's produced oils. The net conclusion of the new studies is that the projected profit per pound of oil produced has increased significantly, while the projected capital expenditure per unit of land has decreased, thus yielding significant commercial improvements for potential licensees. The ability to accomplish this redesign in response to macro-economic changes is a unique feature of PetroAlgae's 'Unified Growth Theory' for algal growth, ripening, and harvest, and the detailed computer design and costing model associated therewith.


Interestingly, the updated studies and redesign have also demonstrated that the optimum economic yield (profit) does not occur at the point of maximum oil yield per hectare based on the new economics, rather it occurs at a significantly lower oil yield point. This work on re-optimizing the system design has changed PetroAlgae's development schedule such that the new system proof-of-principle (demonstrating system with economic yield) will be complete by the end of summer 2008, with construction of the pilot manufacturing facility (in Florida) beginning immediately thereafter. The previously anticipated co-location facility in the US is now unlikely to happen as PetroAlgae's early customers plan on building co-location systems at their own sites. However, given the improvements in project economic yield, which potential licensees have been shown, the redesign time is not expected to negatively impact the timing of the first anticipated commercial licensing deals. 


business model driven by global opportunity 

PetroAlgae has developed a multi-track business model that will allow it to maximize potential revenues while limiting oil commodity risk, total capital expenditures and funding required. One result of this model is that it gives XL TechGroup the possible option of splitting PetroAlgae into two distinct companies, one focusing on the United States and the other on the Rest of the World. This in turn produces a range of future possibilities in terms of potential IPO and/or trade sale of either or both of the two businesses, which XL TechGroup is starting to examine. 


Outside the USA, PetroAlgae will utilize a licensing methodology which includes significant upfront payments without incurring costs related to capital expenditures. Growth will be measured in terms of the number of new deals and through the expansion of those licenses in terms of acreage-growth. Revenue will be realized through licensing fees, milestone payments and royalties. In the USA, PetroAlgae will use a combination of company-owned and joint venture operations to directly produce algae oil, but will not take on any significant capital expenditure commitments until the first international agreements are signed and generating significant revenues.


PetroAlgae is in discussions with many potential customers and licensees around the world (more than a dozen countries to date) whose combined needs will exceed 2 billion gallons per annum by 2010. These parties include biodiesel refiners, petroleum companies, petrochemical manufacturers, large plantation operators, energy providers, commodity traders, amino acid producers, animal feed suppliers and government/military organizations. PetroAlgae has progressed to negotiating the specific terms of potential deals with over a dozen of them, has signed its first non-binding MOUs, and anticipates signing the first of a number of agreements during 2008.



DXTECH LLC (83.7% owned by XL TechGroup)

DxTech is developing the Vantix™ system to unlock the potential of Point-of-Care ('POC') testing, with its goal of defining a new direction in global diagnostics. Its primary focus is to address the US$4.8 billion physician office market for routine blood testing in the US. The patented Vantix diagnostic platform is intended to transform global healthcare by providing a completely integrated solution that puts critical diagnostic testing in the hands of the healthcare provider in real-time, dramatically improving patient care and physician practice profitability. 


The heart of the Vantix platform is its unique P3 Technology™ potentiometric electrochemical sensor. This consists of an electrode which has been coated with polypyrrole, and is then combined with commercially well established antibody/enzyme label based reactions that are used to detect the analyte of choice. The unique polypyrrole coating process isolates the electrode from bulk solution reactions that can result in interference during an assay. This chemical isolation results in an unparalleled combination of high sensitivity and wide dynamic range. Providing these high-quality, real-time results while the patient is in the office will mean patients are treated faster, with better information, and in a single visit. 


technology and intellectual property 

The Vantix platform is founded upon two broad categories of patents. The first category encompasses the initial P3 Technology electrochemical sensor technology, which was acquired through an exclusive, worldwide license to medical and veterinary fields of use from SensortecUK. The next category is based upon DxTech's further internal development of the P3 Technology biosensors into an entire diagnostic system. 


extensive breadth of testing in real-time 

DxTech intends to offer a series of panels for the most frequently ordered blood tests based upon its proprietary sensors. Within six core panels - thyroid, lipid, diabetes, basic metabolic, comprehensive metabolic, and complete blood count - DxTech intends to expand its offering to over 25 individual tests. The disposable cartridges are organized by disease state panels, are about the size of a slim deck of cards, and are inserted into a small desktop reader with the results ready in minutes. 


reference laboratory quality

The platform is based upon the proprietary P3 Technology potentiometric biosensor that delivers unparalleled sensitivity and dynamic range. Quantitative testing to date has demonstrated that DxTech's Vantix platform matches the high quality standards set by reference labs. 


Profitability, Efficiency and revenue generation 

The Vantix system is designed to be the most profitable POC diagnostic system available. Unlike more costly stand-alone POC alternatives, the Vantix system is expected to deliver high margins without adding cost to the healthcare system and opens up the opportunity to penetrate global healthcare markets. Because the Vantix system is designed for CLIA waiver (i.e. easy to use) and fits into the everyday physician office workflow, practice efficiency will be enhanced and office administration will be greatly simplified. The system is expected to be the preferred solution because physicians can capture revenue from every test they run, by shifting reimbursement revenue from the reference lab to the physician's office without adding any incremental cost to the healthcare system. DxTech anticipates that, in an average physician office, doctors can expect to capture as much as US$100,000 in incremental annual revenue.


regulatory strategy and Market entry

DxTech anticipates an FDA filing in 2009 and clearance by the end of the year, which would enable the initial US product launch to also happen in 2009. After 510(k) clearance is received, DxTech will then seek a CLIA waiver for the system. CLIA waived tests are deemed by the FDA to be so simple and accurate as to render the likelihood of erroneous results negligible. This is the key designation that enables usage by a broader customer base and which is therefore expected to drive adoption into the physician office and retail clinic markets. 


global Market opportunity 

Although the US physician office market has the strongest value proposition, DxTech's platform is being developed to meet a growing global market opportunity. DxTech has identified the following initial markets as targets for the Vantix system: 

  • US physician offices;

  • emerging and other countries moving directly to real-time distributed diagnostics rather than building centralized diagnostic laboratories;

  • pharmaceutical companies with biomarkers and theranostics seeking a commercialization platform; and

  • US retail clinics planning to provide real time patient testing.


DxTech is in active discussions with global companies with significant diagnostic businesses. Each has an aggressive approach to POC testing, many have conducted initial due diligence at the DxTech facilities in the US and the UK, and have expressed a clear interest in proceeding toward possible partnership agreements. Deal structures would involve up-front money to DxTech in the form of development fees or license fees, as well as performance based milestone payments. Deals would also include terms regarding supply, distribution and profit sharing.


DxTech recently announced a long-term alliance with Nicholas Piramal India limited ('NPIL'), one of the largest pharmaceutical companies in India. This alliance includes a Product License and Development Agreement ('PDLA'), a Distribution Agreement and an agreement to establish a joint venture between the companies for the marketing and sales of the commercial product. The PDLA gives NPIL an exclusive license to the Vantix platform in IndiaPakistanBangladeshSri LankaNepal and Bhutan. In return, DxTech has received a US$2 million up-front fee and will receive three further product development fees, based on specific milestones over the next 18 - 36 months, totalling an additional US$5 million. DxTech will also receive its share of profits made by the joint venture, as well as a long-term royalty based on gross sales in India. NPIL is allocating dedicated people to this relationship, and intends to invest an additional several million dollars for the joint venture's marketing and distribution costs.



QUONOVA LLC (88.7% owned by XL TechGroup)

QuoNova is developing a proprietary platform of Quorum Sensing Blockers ('QSBs') to limit the virulence of micro-organisms such as bacteria and fungi. The non-biocidal QSB interfere with the communication systems of these organisms, preventing them from colonizing surfaces and forming biofilms or from expressing virulence factors such as toxins into their environment. Since these properties cause significant problems in humans, animals, plants or in industrial settings QuoNova's QSB platform meets unmet needs across many multibillion dollar markets. 


The continued heavy use of antibiotics and biocides over the past decades has led to an increasingly dramatic global problem: the emergence of highly resistant 'superbugs' like methicillin resistant Staphylococcus aureus (MRSA). The distinctly different mechanism of action of QuoNova's QSBs, which have also been shown to be effective against MRSA, offers a valuable approach to controlling the problem of resistant bacteria, which presently kill more people in the USA than AIDS. Moreover, since QSB do not kill bacteria or inhibit their growth, they are not expected to create resistance. 


QuoNova's QSBs have been found to be effective in:

  • preventing biofilms from forming, as well as dispersing existing biofilms, thus opening up large markets for both prevention and treatment;

  • delivering significantly increased potency when used in combination with existing biocides or antibiotics, thus creating the option to increase their efficacy and lower the doses required to reduce resistance development; and

  • a wide range of individual bacteria and fungi, as well as mixed-species colonies.


The proprietary technology platform, comprising families of compounds and related intellectual property, is a completely new approach. This capability is not commercially available anywhere in the world and provides an opportunity for QuoNova to exploit multiple billion dollar markets. 


Biofilms are aggressively growing well protected bacterial colonies 

Micro-organisms are omnipresent, often fulfilling numerous useful biological tasks. They communicate by 'sensing' each other's presence via specific, 'quorum-sensing' pathways. These pathways also trigger mechanisms which initiate colonization and protect the organisms, such as releasing toxins and developing protective biofilms. Both of these are often directly harmful to humans or the environment, are the source of recurrent infection and are very difficult to treat with existing approaches. Biofilms are the protective and nurturing coatings created by colonies of micro-organisms to support their growth. 


QSB technology is highly differentiated from traditional biocidal approaches…

QuoNova's QSBs are small, synthetic molecules which selectively block the communication of bacteria and thus the generation of virulence factors and the growth of harmful biofilms. In this way, QSBs render bacteria less harmful and allow them to be eliminated more effectively. Accordingly, the need for powerful antibiotics or biocides can also be reduced or prevented. Competing technologies, conversely, are still targeted at killing micro-organisms rather than affecting the way they communicate or build their colonies. This presents an opportunity for QuoNova to generate a paradigm shift in bacterial and fungal control.


… and is supported by strong ip

QuoNova's current patent portfolio is based on a group of chemical classes originally identified by 4SC AG, Germany. QuoNova now owns all 4SC compounds related to quorum sensing together with all related patents, and has an exclusive license for the use of 4SC technology for the identification of compounds modulating quorum sensing. QuoNova has had two claims allowed in the USA and notice of grant in the EU of key patents covering composition of matter rights for QSB agents.


QuoNova has further strengthened its IP portfolio with a series of applications that cover chemical classes demonstrating QSB activity, and methods of use for these compounds.


the business model is about partnering …

QuoNova's business model is based on licensing its intellectual property in multiple fields, to generate up-front fees, milestones payments and royalties. The Company intends to initiate multiple co-development agreements with selected partners to exploit its technology platform across industries. QuoNova plans to outsource development to maximize specific industry expertise and minimize capital expenditures. QuoNova's commercialization strategy is based on disciplined prioritization of market sector targets where the prioritization is being determined by a number of criteria including: 

  • ability to generate both near-term and long-term revenues in a highly profitable manner; 

  • attractiveness of market need; 

  • degree of technical difficulty; 

  • understanding and leveraging of regulatory and/or clinical development factors; and 

  • time to monetization in the next few years. 


… across a broad spectrum of large markets

Very significant medium and longer term opportunities exist for QuoNova and its partners in market segments such as therapeutics (e.g. respiratory disease), medical devices (e.g. catheters, wound care), consumer products (e.g. oral care, eye care, personal and domestic hygiene) and in institutional applications. QuoNova has started working on compound development programs in these areas, either alone or on a collaborative basis and, for short to medium term value, the company has prioritized the areas of wound care, eye care, oral care, and catheters. These have estimated times-to-market of less than three years and, according to available market data, they represent markets that exceed US$15 billion. QuoNova is currently working with several well-known industry partners in these application areas, and continues to anticipate signing its first licensing agreements during 2008. 


2007 laid the technical and partnering foundation

In summary, the validity and breadth of application of QuoNova's platform technology continues to be strengthened and expanded. Key developments in the last 12 months towards its goals include:

  • demonstration of efficacy against multiple drug resistant bacterial strains; 

  • demonstration of efficacy against certain clinically relevant fungal strains;

  • efficacy in tests in models predictive of clinical efficacy in wound treatment; 

  • generation of a large portfolio of development candidates for progression in development internally and ultimate licensing; expansion and consolidation of the intellectual property platform with patent claim allowances, notice of grant and continued patenting; 

  • progression of collaborative studies with leading industrial partners; 

  • recruitment of further key skill sets to the management team.



TYRATECH, INC. (45.5% owned by XL TechGroup)

TyraTech was founded by XL TechGroup in May 2004 and is pioneering a new class of highly effective, non-toxic, pesticides and anti-parasitic compounds to address global markets in agriculture, horticulture, functional foods, healthcare and veterinary applications. Using a revolutionary chemoreceptor screening process, TyraTech has identified proprietary blends of natural oils that stimulate the reactions and biological behavior of insects and parasites so that they can be effectively repelled or killed. TyraTech's technology avoids both the environmental concerns and human health risks as well as the development of resistance that are associated with chemical pesticides, while still providing highly potent efficacy. 


technology has broad applicability across multiple markets 

TyraTech's founding technology has broad applicability, for human and animal health markets, as well as the control of insects and other agricultural pests. Its molecular screening technology is used to assay receptor-specific natural and other compounds as putative pesticides, is highly predictive of activity in the in vivo setting, and provides a sensitive quality control procedure for qualifying natural compounds in manufacturing. TyraTech has focused primarily on certain botanical essential oils which are natural ligands for the targeted receptors and, due to their broad spectrum activity, have an excellent safety profile and can sometimes have a speedier regulatory pathway.


However, the receptor-based technology can also be used for the characterization of any chemical (synthetic or natural) to rapidly assess both the binding to receptors and the potency of receptor activation. The biological pathways associated with the receptors also offer a directed way to identify additional active compounds - including other existing pesticides - that may act in a favourable or synergistic fashion with the receptor ligands. In this regard, TyraTech is developing a line of products called 'TyraTech EXTEND' which are composed of lower concentrations of marketed pesticides combined with TyraTech's natural blends. These demonstrate efficacy at a level equal to that of higher concentrations of these chemicals, with a superior safety profile and more favourable environmental impact. 


In addition to its own core technology, TyraTech has proprietary technology which is used in equipment that converts dairy cow manure into a useful growing or potting soil medium and suitable sphagnum peat alternative. A separate division (TyraTech Sustainable Solutions LLC) has been created to sell this equipment to dairy farms in the US, and to purchase the pathogen-free growing medium output at a nominal fee. This will be resold to either the horticulture and home lawn and garden markets as a natural growing medium or as a substitute to peat moss, with or without the addition of a TyraTech Natural pesticide to protect new plant growth, or to local dairy farms as natural bedding, which could incorporate a TyraTech insect repellent to protect the cattle. 


development of market channels via strategic partnerships

The key to TyraTech's success will be the effective development of well-structured channels to market which, at least in its early years, will be primarily through strategic marketing and development partnerships. This is because TyraTech's core technology provides such a large base of products in many diverse market segments that it is impossible for an early stage company to maximize the broad scope of commercial opportunities, particularly in an organized and timely fashion. As a result, strategic partnerships with companies that have a strong global and/or key regional presence will provide TyraTech's products with the most extensive market coverage at a lower cost and with higher operating margins. 


TyraTech's products have been validated through strong partnerships with multinational conglomerates operating within a growing US$23 billion worldwide market that is being increasingly driven by environmental legislation and end-user demand. In particular, TyraTech has formed a key strategic partnership with Kraft Foods Inc. for the development of a functional food that can aid in the control of human intestinal parasites. This project and relationship is progressing well and the first major milestone was achieved at the end of 2007. TyraTech's current insecticide relationships with Arysta and Syngenta also progressed in 2007, successfully achieving target performance and financial milestones. 


strategy focusing on broader segment opportunities 

TyraTech's pesticide technology continues to develop and now demonstrates an opportunity for broader pest control capabilities, putting it in a position to explore partnerships that have broader segment opportunity to better leverage its new active ingredient formulations. As a result, Syngenta and TyraTech have mutually agreed to suspend development activity in the current narrow market segments and to explore TyraTech's technology for a potentially different relationship with broader and larger market segments. Arysta continues to move forward with the lead TyraTech insecticide products, while discussing new areas of partnership.


In addition to a refined partner strategy for the agricultural and horticultural markets, TyraTech also anticipates new relationships in the consumer and professional pest control markets, and in the animal health business. TyraTech will target relationships and license agreements that will be more 'product' specific rather than providing the partner with rights to all technology within a market segment. As a result, TyraTech plans to:

  • create development and product license agreements with competent partners for those products that require very specialized and onerous development and/or marketing skills e.g. functional foods, shelf-space consumer products, human acute treatment products;

  • create product license agreements with partners to sell products that are generated from existing technology and active ingredients in market segments with many end customers;

  • enter, on its own, those market segments where there is, together, an unmet need (safety and/or efficacy), the development process is not onerous and the number of key customers is limited; and

  • go to market with its own sales force for Sustainable Solutions equipment and through distributors for the processed Nature's Natural growing medium. 


good progress in 2007

TyraTech was listed on AIM in June 2007 and raised a net total of US$43.7 million. During 2007, TyraTech achieved major milestones from Kraft and other contract milestones from Arysta and Syngenta, resulting in receipts of US$5.2 million. Net revenues were US$5.5 million compared to negative net revenue of US$0.3 million in 2006. Results before and after tax for 2007 were a loss of US$16.5 million compared to a loss before and after tax of US$11.2 million in 2006. US$11.9 million of the IPO proceeds was used to repay debt payable to XL TechGroup as at the IPO date, and TyraTech ended 2007 with cash of US$27.5 million, and no debt.



GENXL LLC (43.3% owned by XL TechGroup)

GenXL LLC was established in June 2006 as a joint venture between XL TechGroup and GEN3 Partners, Inc. to generate new companies, standalone product lines and technology licensing opportunities from the pipelines of both its founders, as well as from other sources. In particular, over and above XL TechGroup's core business model, GenXL was created to capture the value of those prospects that do not fully meet XL TechGroup's company-building criteria but still demonstrate considerable potential worth. XL TechGroup has committed a total of US$2 million to GenXL but otherwise this joint venture involves relatively little senior XL TechGroup management time. GenXL has so far made investments in three companies.


EnGen LLC (27% owned by GenXL)

In March 2007, GenXL announced its first investment in San Francisco based EnGen, which is exploiting a unique platform technology that has a range of potential applications across various sectors where there are clear unmet market needs. The technology is a proprietary self-structuring, electro-conductive nano-scale polymer, initially focused on energy storage or the battery industry, but also with potential other applications in a number of broader markets. These areas of unmet needs include transportation, consumer electronics and industrial applications such as battery electrodes, cold cathode lighting, electro-optical devices and electro chromic flat glass (smart windows).


The competitive cost and significant performance advantages of EnGen's platform technology have now been validated, and it is ready for commercial deployment in ultra capacitors and in lithium-ion batteries. Negotiations with a number of potential partners are underway, including with a leading market participant that has validated the technology. EnGen's technology can be delivered as a component or a system or a product or service. As a result, potential competitors can actually become partners, which broadens the commercialization opportunities and is expected to significantly shorten the potential time-to-market for products using EnGen's technology.


INSERO LLC (70% owned by GenXL)

In November 2007, GenXL announced that it had taken a 70% stake in INSERO which is developing implantable drug delivery systems, with an initial focus on hypertension. This affects up to one-quarter of the adult population in most middle and high income countries, and is the single leading cause of premature death worldwide. A major problem with existing hypertension treatments is non-compliance - in essence patients failing to keep up with their medication programs, resulting in treatment failure and disease progression. The INSERO technology platform will address this issue directly. 


INSERO is working with a US based company on a feasibility study to evaluate a novel delivery technology. The feasibility study is nearing completion, with initial indications being positive. Assuming these are confirmed, INSERO would expect to obtain a licensing agreement in relation to specified hypertension compounds. In anticipation of moving to the next phase, INSERO is already in discussions with potential sources of third-party next-stage funding.


GenXL Pipeline

GenXL has a number of opportunities going through its review process which may or may not lead to selection for investment. Outlines of some of the potential opportunities under consideration are as follows:

  • slow release implant for the kinetic re-profiling of pharmaceuticals;

  • advancing technology for dealing with large scale forest fires; and

  • non-toxic eco-friendly paint with superior adhesive characteristics.



AGCERT INTERNATIONAL PLC

AgCert has recently concluded its examinership with the proposed scheme of arrangement approved without amendments. The examinership process followed months of negotiations between AgCert, its creditors and customers. XL TechGroup became directly involved in those negotiations during the latter stages, in an attempt to preserve value for all shareholders, resulting in the cash payment and loan note agreements that XL TechGroup announced on February 21, 2008. 


The approved examinership terms mean that AgCert's original core biodigester business will continue as a going concern, wholly-owned by AES, while its newer TurboGreen business is expected to be sold to another third-party. All previous shareholders receive no more than 10% of the nominal value of their shares, while AgCert's unsecured creditors receive a maximum of 10% of agreed claims. Most AgCert employees are expected to continue with the business under new ownership.


XL TechGroup's consistent belief in the continuing value potential of AgCert has been confirmed by the examinership conclusions. It is XL TechGroup's view that AgCert's underlying business model and technology remain strong. While lessons have been learned, the disappointing conclusion does not undermine the validity of the XL TechGroup company building methodology which has been operating successfully for 15 years. 


XL TechGroup now owns all of AgCert's patents and patent applications, together with certain other IP, including the EnviroCert trademarks, software and data management system which facilitates the creation and delivery of quantified, verified, and registered emission reduction credits. AgCert has the right to buy back all of the assigned IP for a total of approximately US$7.9 million plus interest and costs by January 4, 2009. If the buyback is not exercised, XL TechGroup intends to monetize the IP to the maximum extent possible.



CORPORATE AND TECHNOLOGY PARTNERS

A key component of XL TechGroup's systematic process is the Discover phase, in which XL TechGroup leverages an extensive list of industry contacts and partners to identify and validate significant unmet market needs. These Corporate Discovery Partners also serve as future market channels for developed solutions, as well as potential acquirers of XL TechGroup's subsidiary companies. The incentive for a company to participate as a Corporate Discovery Partner arises from the XL TechGroup business model which provides its partners access to innovative new market solutions and the corresponding new revenue opportunities without the risks and roadblocks typically associated with large-company innovation. Corporate Discovery Partners that the XL TechGroup management team has worked with during the last 15 years include AES, Johnson & Johnson, Kraft Foods, Motorola, Phillips, Procter & Gamble, Syngenta and Unilever, to name just a few.


Another key component of XL TechGroup's systematic process is the Match phase, in which XL TechGroup leverages its portfolio of Technology Partners across organizations such as universities, government institutions and corporations across the world. By beginning with an unmet need, XL TechGroup can compose a technical specification that enables it to rapidly find the best-in-class technical solution(s). The identified technology has often undergone several years of development, had millions of dollars already invested, frequently has patents associated with it and is likely to be repurposed from its original intended use. This approach allows XL TechGroup to find solutions that can reach the market faster, more often, and more successfully than through a traditional VC model, which usually only analyzes a technology for its often narrow intended use. Moreover, by negotiating the exclusive rights for the technology in an up-front option agreement with the Technology Partner, XL TechGroup is able to leverage most favorable terms while reducing the risk of full acquisition.



PIPELINE OF POSSIBLE OPPORTUNITIES

XL TechGroup's pipeline consists of technologies that have been matched with unmet needs to create potential opportunities, from which our next new companies might be selected. It is very important to note that, while XL TechGroup has exclusive rights to most of the technologies described, the nature of our rigorous selection process means that only a few of these opportunities will ever be chosen for development and scaling as new companies by XL TechGroup. Some of the opportunities that do not meet all of XL TechGroup's selection criteria may be transferred to GenXL for their evaluation.


The pipeline is continuously evolving as new opportunities are added, and as previous opportunities are eliminated. The following list represents a snapshot of the current possibilities: 

  • a technology for the commercial scale production of unique proteins with revolutionary physical properties and multiple completely novel applications in industry, consumer products and healthcare;

  • a designer micro-organism that efficiently produces isoprene, a direct replacement for gasoline and propane;

  • a unique proprietary technology that provides a method for rapidly screening active ingredients for functional foods targeted at treating chronic metabolic disorders such as obesity and type 2 diabetes; and

  • an offshoot of a novel cancer vaccine technology which is adapted as a peripheral blood diagnostic to screen for early cancer detection.


Given our current focus on maximizing and crystallizing value from our existing companies, it is now anticipated that XL TechGroup's next company will not be launched until 2009.



Summary and outlook

2007 was a positive year for XL TechGroup, with the exception of developments at AgCert which recently reached their conclusion. Significant progress has been made at PetroAlgae, DxTech and QuoNova, while TyraTech has followed its successful IPO with further encouraging news on milestones achieved and new products launched.


Management and staff of XL TechGroup are the largest shareholders and we have also been significantly impacted by the fall in our share price. Nevertheless, we retain full confidence not only in our underlying business model but also in the considerable value that we believe is being built in our Companies. While our accounts include a going concern disclosure and we had no alternative but to request a suspension of trading in our shares following the unexpected last minute withdrawal of negotiated heads-of-terms by a funding party, we are continuing discussions with potential funding partners. Subject to reaching a satisfactory agreement, we are optimistic that we will be able to demonstrate over the coming months that these are temporary short-term issues, with future news flow anticipated to include licensing deals, strategic investments and a non-core asset sale. 


DR JOHN SCOTT

Chief Executive Officer

27 June 2008


  FINANCIAL REVIEW


Materiality oF reVenues

By design, XL TechGroup (the 'Group' or the 'Company' or 'XL TechGroup') does not directly produce and sell products, but rather creates companies that do. Therefore, except for the sale of shares in its companies and service support fees, it is likely that the only revenues that will be reported by XL TechGroup will be the result of consolidation of its early stage new companies and their resulting revenue, which may not be material, consistent or a meaningful measurement of success for the Company. 


suMMary

XL TechGroup's financial results for 2007 reflect the planned growth and development of portfolio companies DxTech, PetroAlgae and QuoNova. They also notably include, on June 1, 2007, the successful completion by the Company's portfolio company TyraTech of an initial public offering (IPO). This raised US$43.7 million, net of offering costs, with US$12.1 million being remitted to the Company in repayment of debt and receivables. Upon the IPO closing, the Company held a 47.9% equity interest in TyraTech valued at US$105.2 million (£52.7 million) whilst, at December 31, 2007 this stake was valued at US$104.8 million (£52.4 million). The IPO triggered a deconsolidation of TyraTech from the consolidated Group financials. 


Separately, AgCert experienced varying financial events in 2007, which caused fluctuations in XL TechGroup's financial results. In May 2007, AgCert completed equity transactions dilutive to the Company to the extent a change in accounting method from the equity to the cost method occurred, whereby the Company marked to fair value its investment in AgCert and recorded unrealized gains of US$17.7 million as a result. However, towards the end of 2007 and in the subsequent period, AgCert experienced negotiation complexities with customers and suppliers which led to AgCert petitioning the High Court of Ireland to formulate creditor arrangements and to the UK Listing Authority to permit AgCert to become a private company. These latter activities resulted in realization of a US$17.4 million impairment loss on XL TechGroup's investment in AgCert. 


results oF operations 

XL TechGroup reported a net loss of US$83.8 million in 2007 (2006: US$39.9 million net loss). This includes revenues of US$5.7 million, operating expenses of US$50.2 million, minority interest of US$0.2 million, recorded losses on investments in non-consolidated companies of US$7.6 million, and a US$17.4 million impairment charge to the Company's investment in AgCert. The Group incurred US$14.1 million in interest expense, interest income of US$2.1 million and a change in fair value of warrants and options of US$2.6 million. The loss per share in the current period was US$1.69 (2006: US$0.81 net loss). 


reVenues

XL TechGroup reported total revenues in 2007 of US$5.7 million (2006: US$0.1 million), primarily due to US$4.5 million from monetizing shares of AgCert, as permitted by debt agreements. Additional revenues included support services fees of US$0.9 million and subsidiary revenue of US$0.3 million (2006: US$0.4 million and negative US$0.3 million respectively).


operating expenses

In 2007, the Group's operating expenses were US$50.2 million (2006: US$30.7 million): US$12.2 million for general and administration and US$38.0 million for business and technical development. Of the US$50.2 million total in 2007, US$33.0 million were costs related to XL TechGroup portfolio companies (see table below). XL TechGroup allocates a portion of its operating expenses to its Group companies for individuals servicing the growth and development of these companies.


US$ million

2007

2006

TyraTech Inc.

6.8

7.1

DxTech LLC

13.6

6.3

PetroAlgae LLC

8.5

1.4

QuoNova LLC

4.1

2.1

Totals

33.0

16.9


The net operating expenses of the Company, after allocations of services, were US$17.2 million (2006: US$16.0 million). The future growth of the Company's operating expenses is expected to be governed by the number of Group companies managed at any time and, as such, are expected to increase marginally.


Funding of XL TechGroup companies

During 2007, XL TechGroup advanced US$25.4 million (2006: US$18.9 million) to its portfolio companies, net of US$11.9 million repayment of debt from TyraTech. Funding the operations of the Company's pipeline opportunities and new companies is a planned aspect of XL TechGroup's business, though near-term future funding of new opportunities is expected to decrease as the Company redeploys an increased amount of core resources more directly into existing portfolio companies and their respective success. Continued funding of existing portfolio companies by XL TechGroup is expected to take the form of either equity contributions or debt, with partial or full repayments of debt to XL TechGroup occurring in relation to exits. As at December 31, 2007, XL TechGroup had outstanding receivables with its portfolio companies of US$26.8 million (2006: US$14.0 million).


As at May 30, 2008, XL TechGroup's accumulated cash investments in its portfolio of companies and the related market values consisted of:


US$ million

Cash Investment (1)

Market Value (2)

TyraTech, Inc. (listed)

7.0

85.6

DxTech LLC

28.4

n/a

PetroAlgae LLC

15.2

n/a

QuoNova LLC

7.5

n/a

GenXL LLC

1.1

n/a

  • Represents cash equity contributions and debt (net of any repayments)

  • Based on closing price as at May 30, 2008


Debt financing

In 2007, the Company entered into three debt agreements with Laurus which provided for newly available funds totalling US$45.0 million and called for the repayment of US$10.0 million against the Company's original US$35.0 million debt extended by Laurus in December 2005. 


In January 2007, the Company entered into a US$20.0 million note agreement with Laurus, due December 30, 2009, with interest payable under terms including a 'cash' interest portion (payable at the US Prime Rate) and an 'advanced' interest portion (payable in Company or affiliate Company-owned equities at 13%, or partially payable in cash at election of the Company).


In October 2007, the Company entered into two note agreements with Laurus, totalling US$25.0 million (separately, a US$13.0 million and US$12.0 million note), due October 3, 2010. The US$13.0 million note provides for interest payable under terms including a 'cash' interest portion (payable at the US Prime Rate) and an 'advanced' interest portion (at the election of the Company, payable in either cash or Company or affiliate Company-owned equities at 12%). The US$12.0 million note provides for interest payable at the US Prime Rate plus 2%, and additionally provides for an option for Laurus to purchase between 1.8 million and 2.0 million shares of PetroAlgae at $0.001 per share upon a qualified IPO event for PetroAlgae. The option has a 10-year term and includes reduction rights benefiting the Company if early principal repayments are made as prescribed in the agreements. 


Simultaneous with entering into the October 2007 note agreements, the Company made a US$10.0 million principal repayment on its original US$35.0 million note with Laurus from December 2005, leaving a remaining balance due on this note at December 31, 2007 of US$24.9 million. The Company anticipates that the due date for the remaining principal balance of December 30, 2008 will be extended into 2009, and has already begun related negotiations. Relative to the original debt agreement entered into with Laurus in December 2005, five years remain on a seven year option for Laurus to invest up to a total of US$7.0 million through the purchase of Company-held shares of any of its portfolio companies. In this regard, Laurus has the option to acquire shares in any XL TechGroup portfolio company that completes a stock market listing, at a discount to the then IPO price.


During 2007, in connection with advanced interest portions of interest payments due on outstanding debts, the Company made interest payments totalling US$4.7 million with AgCert shares. 


Additionally, as of December 31, 2007, the Company committed to transfer 491,432 shares of TyraTech as interest payments due for the same period ending, shares of which were actually transferred in 2008. 


WORKING CAPITAL

During 2007, XL TechGroup completed additional financings with Laurus which realized additional net cash proceeds of US$35.0 million. In June 2007, XL TechGroup received US$11.9 million from TyraTech from the repayment of loans following TyraTech's IPO, which was partially offset by US$5.0 million of additional equity investment by XL TechGroup in TyraTech. As at December 31, 2007, the Group had cash balances of US$11.4 million (2006: US$19.0 million).


The net outflow of cash from operating activities is principally due to the Group's operating loss generated from its continuing new company development activities. The level of these operating losses is and will be driven in part by the pace of new company development. XL TechGroup expects funding of the activities of the Group to start to decrease during 2008 and beyond as existing portfolio companies achieve financial independence. Future funding of Group activities is expected to come from a mixture of receivables collections, sale of tradable securities and by leveraging the value of new companies through debt funding partners, as well as from strategic and other minority investors at the later stages of each company's development. At appropriate times, these funding flows are expected to be more than offset via the proceeds of cash inflows from final exits.


In our Operating Update in February 2008, a number of cash producing events anticipated in 2008 were outlined, as follows:

  • international licensing and co-development deals for PetroAlgae;

  • regional licensing and co-development deals for DxTech;

  • co-development and licensing deals for QuoNova;

  • value realisation from the sale of technologies that do not quite make it through XL TechGroup's selection criteria and which are not appropriate for GenXL; and

  • strategic and non-strategic third party investments in DxTech and PetroAlgae.


The licensing deal between DxTech and Nicholas Piramal India has already been announced and discussions with potential investors in PetroAlgae and DxTech have continued to progress. We remain optimistic that at least one of these companies will be significantly or wholly financially independent of XL TechGroup by the end of 2008. It is anticipated that this will be achieved through a mixture of third-party investment and revenues from licensing agreements.


XL TechGroup has also been negotiating the terms of a financing facility that would enable the Company to cover its short-term financing requirements. A bridge financing heads-of-terms was negotiated but was unexpectedly withdrawn by the funding party at the last minute. Discussions are continuing with this funding party and with other potential funding sources. However, given there can be no certainty on timing or that the negotiations will reach a satisfactory conclusion, the Company requested that trading in its shares be temporarily suspended on June 26, 2008. 


GOING CONCERN

XL TechGroup's auditors have provided an unqualified opinion, with a going concern explanatory paragraph, on the 2007 accounts. The Directors acknowledge that there is currently a timing gap between the deadline for releasing these accounts and the satisfactory conclusion of negotiations with potential financial and strategic investors, the anticipated signing of licensing agreements by one or more of the Company's subsidiaries, and the targeted sale of a non-core technology asset. The Company is working with potential financial and strategic investors to structure financing to provide operating capital to bridge the Company to the point when it completes a number of cash producing events. The Directors are confident that the Company will successfully conclude agreements providing the Company with adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.


treasury policies

XL TechGroup continually reviews its cash management and control over treasury management which is reported to the Board. XL TechGroup does not engage in speculative transactions or derivative trading with respect to cash balances held, and the policy is to optimize interest return while maintaining flexibility to undertake ongoing activities and safeguarding of assets.


reporting ForMat

The financial statements of XL TechGroup have historically been prepared in accordance with accounting principles generally accepted in the United States (US GAAP). In January 2007 the UK Listing Authority determined that listed companies outside the European Union may continue to prepare and report financial results in accordance with certain other accounting principles than the International Financial Reporting Standards (IFRS). Due to the strong similarities of US GAAP versus IFRS, the Group has determined to continue preparation of its financial statements utilizing US GAAP.


DAVID SZOSTAK

Chief Financial Officer

27 June 2008

  Consolidated balance sheets

December 31, 2007 and 2006

US$

December 31

2007

2006

Assets



Current assets:



Cash

11,398,246

18,952,957

Receivables 

446,195

391,759

Notes receivable 

-

5,000,000

Prepaid expenses

212,946

272,391

Due from affiliate 

567,945

62,093

Other current assets

-

219,180

Total current assets

12,625,332

24,898,380

Investment In TyraTech, Inc. (Fair market value of US$104.8 million as of December 31, 2007)

11,458,133

-

Investment in AgCert International plc 

-

9,978,099

Investment in ANX, LLC 

167,100

3,014,455

Investment in GenXL, LLC 

663,012

451,266

Property and equipment, net of accumulated depreciation 

2,675,969

2,272,311

Deferred loan costs, net

3,429,098

4,394,848

Warrants to purchase affiliated stock

1,891,888

-

Other assets

450,738

461,734

Total assets

33,361,270

45,471,093




Liabilities and stockholders' deficit



Current liabilities:



Accounts payable

1,538,798

406,543

Accrued liabilities

4,127,741

4,788,384

Deferred liabilities

-

2,349,224

Liability for warrants and purchase options 

6,148,275

4,152,110

Current instalment of obligations 

24,893,234

16,758

Total current liabilities

36,708,048

11,713,019

Notes payable, net of current instalments 

45,000,000

34,880,000

Other liabilities

1,314,739

720,368

Total liabilities

83,022,787

47,313,387

Minority interest 

-

186,302




Stockholders' deficit



Common stock, par value US$0.001. Authorized - 100,000,000 shares. Issued and outstanding - 49,627,414 shares in 2007 and 49,404,993 shares in 2006.

49,627

49,405

Non-recourse note receivable secured with common stock

(7,116,383)

-

Additional paid-in capital

146,990,782

98,307,104

Accumulated deficit

(189,585,543)

(105,777,573)

Accumulated other comprehensive income

-

5,392,468

Stockholders' deficit

(49,661,517)

(2,028,596)

Total liabilities and stockholders' deficit

33,361,270

45,471,093

  Consolidated statements of operations

Years ended December 31, 2007 and 2006

US$

Years ended December 31

2007

2006

Revenue 



Revenue of subsidiaries

318,549

(265,055)

Support service fees from affiliates

893,457

380,059

Investment revenue from sale of Company-owned subsidiary or affiliate stock

4,526,362

-

Total revenues

5,738,368

115,004

Operating expenses:



General and administrative

(12,152,166)

(7,634.169)

Business and technical development 

(38,011,742)

(23,035,070)

Total operating expenses

(50,163,908)

(30,669,239)

Other income/(expense):



Gain on exercise of warrants 

-

3,125,544

Interest income

2,060,637

1,858,882

Interest expense

(14,079,173)

(8,002,693)

Equity in losses of affiliates 

(7,618,943)

(8,837,544)

Realized loss on impairment of marketable securities

(17,404,071)

-

Change in fair value of warrants and purchase options 

(2,552,894)

1,513,874

Total other expense 

(39,594,444)

(10,341,937)

Loss before income taxes and minority interest

(84,019,984)

(40,896,172)

Income taxes 

-

-

Loss before minority interest

(84,019,984)

(40,896,172)

Minority interest 

212,014

971,506

Net loss

(83,807,970)

(39,924,666)




Loss per share

(1.69)

(0.81)




Weighted average number of common shares

49,571,007

49,369,212

  Consolidated statements of cash flows

Years ended December 31, 2007and 2006

US$

Years ended December 31

2007

2006

Cash flows from operating activities:



Net loss

(83,807,970)

(39,924,666)

Adjustments to reconcile net loss to net cash used for operating activities



Depreciation and amortization

8,636,346

2,363,063

Reserve on note receivable

2,184,787

3,094,000

Gain on sale of affiliated stock

(4,526,362)

-

Realized loss on impairment of AgCert International plc securities

17,404,071

-

Exclusivity and license fees

-

45,529

Fair value of warrants issued

-

495,889

Gain on exercise of warrants

-

(3,125,544)

Equity in losses of affiliate 

7,618,943

8,837,544

Change in fair value of warrants and purchase options

4,365,204

(1,513,874)

In-process research and development

1,124,649

1,498,299

Compensation costs related to stock awards and unit grants

4,715,910

2,829,744

Amortization of loan costs and interest income received on AgCert International plc loan

(562,657)

(37,838)

Minority interest contribution to losses

(212,014)

(971,506)

Changes in operating assets and liabilities



Other receivables

(295,439)

(317,478)

Prepaid expenses and other assets

(66,099)

1,375,393

Due from affiliates

(505,852)

112,627

Accounts payable and accrued liabilities

610,936

1,332,168

Deferred liabilities

(217,338)

2,100,000

Net cash used for operating activities

(43,532,885)

(21,806,650)

Cash flows from investing activities:



Payments on notes receivable

(1,829,180)

(1,320,000)

Purchases of property and equipment

(1,661,139)

(2,091,977)

Investment in and advances with affiliates

(5,810,694)

(5,650,253)

Proceeds from notes receivable

11,856,631

-

Loan costs received on loan to AgCert International plc

-

200,000

Net cash provided by/(used for) investing activities

2,555,618

(8,862,230)

Cash flows from financing activities:



Payment of loan costs 

(1,703,000)

-

Borrowings on notes payable

45,000,000

-

Repayments on notes payable

(10,000,000)

(120,000)

Principal payments made on capital lease obligations

(15,062)

(3,941)

Change in cash restricted for use

-

10,000,000

Sale of AgCert International plc shares 

-

300,000

Proceeds from exercise of warrants 

140,618

34,120

Net cash provided by financing activities

33,422,556

10,210,179

Net decrease in cash

(7,554,711)

(20,458,701)

Cash, beginning of period

18,952,957

39,411,658

Cash, end of period

11,398,246

18,952,957



This information is provided by RNS
The company news service from the London Stock Exchange
 
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