Mills Music Trust 10-Q for FY2023 Q2
Mills Music Trust (MMTRS)
About this 10-Q
Mills Music Trust filed this 10-Q on August 14, 2023, covering the quarter ended June 30, 2023 (FY2023 Q2).
Table of Contents
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
N/A |
N/A |
N/A |
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company | ||||
| Emerging growth company | ||||||
Table of Contents
TABLE OF CONTENTS
| PART I — FINANCIAL STATEMENTS | 1 | |||||
| ITEM 1. |
FINANCIAL STATEMENTS | 1 | ||||
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 5 | ||||
| ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 7 | ||||
| ITEM 4. |
CONTROLS AND PROCEDURES | 7 | ||||
| PART II — OTHER INFORMATION | 7 | |||||
| ITEM 1. |
LEGAL PROCEEDINGS | 7 | ||||
| ITEM 1A. |
RISK FACTORS | 7 | ||||
| ITEM 2. |
UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS | 7 | ||||
| ITEM 3. |
DEFAULT UPON SENIOR SECURITIES | 7 | ||||
| ITEM 4. |
MINE SAFETY DISCLOSURES | 8 | ||||
| ITEM 5. |
OTHER INFORMATION | 8 | ||||
| ITEM 6. |
EXHIBITS | 8 | ||||
| 9 | ||||||
Table of Contents
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Receipts from EMI |
$ | $ | $ | $ | ||||||||||||
Undistributed Cash at Beginning of Period |
||||||||||||||||
Disbursements - Administrative Expenses |
( |
) (1) |
( |
) (3) |
( |
) (1) |
( |
) (3) | ||||||||
Balance Available for Distribution |
||||||||||||||||
Cash Distributions to Unit Holders |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
Undistributed Cash at End of Period |
$ |
(2) |
$ |
(4) |
$ |
(2) |
$ |
(4) | ||||||||
Cash Distributions Per Unit (based on |
$ |
$ |
$ |
$ |
||||||||||||
| (1) | Administrative expenses in the aggregate amount of $ |
| (2) | Includes amounts reserved for administrative expenses in the aggregate amount of $ |
| (3) | Administrative expenses in the aggregate amount of $ |
| (4) | Includes amounts reserved for administrative expenses in the aggregate amount of $ |
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Corporate Trustee Fees and Expenses |
$ | $ | ||||||||||||||
Individual Trustee Fees and Expenses |
||||||||||||||||
Transfer Agent and Registrar Fees and Expenses (1) |
||||||||||||||||
TOTALS |
$ |
(2) |
$ |
(3) |
$ |
(2) |
$ |
(3) | ||||||||
| (1) | These services are performed by the Corporate Trustee. |
| (2) | Corporate Trustee Fees and Expenses of $ six-months ended June 30, 2023 were actually paid by the Trust in July 2023. |
| (3) | Corporate Trustee Fees and Expenses of $ six-months ended March 31, 2022 were actually paid by the Trust on July 5, 2022. |
Table of Contents
| ITEM | 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The Copyright Catalogue
The Catalogue is estimated to be composed of over 12,000 music titles, of which approximately 1,430 produced royalty income in recent years. Based on the Listing, the majority of the Trust’s receipts are derived principally from copyrights established prior to 1960 in the Unites States. The receipts fluctuate based on consumer interest in the nostalgia appeal of older songs and the overall popularity of the songs contained in the Catalogue. The Catalogue also generates royalty income in Canada and other foreign countries in which copyright is claimed.
A number of factors create uncertainties with respect to the Catalogue’s ability to continue to generate royalty income on a continuing, long-term basis for the Trust. These factors include: (i) the effect that foreign and domestic copyright laws and any changes thereto have or will have on renewal rights (e.g., vesting of renewal term rights), (ii) the length of the term of copyright protection under foreign and domestic copyright laws, (iii) reversionary rights that may affect whether EMI is able to retain its rights to the Copyrighted Songs during certain renewal terms (e.g., statutory termination of transfers or “copyright recapture”) and (iv) ongoing disputes regarding the payment and calculation of the Contingent Portion.
The Trust does not own the Catalogue or any copyrights or other intellectual property rights and is not responsible for collecting royalties in connection with the Catalogue. As the current owner and administrator of the Catalogue, EMI is obligated under the Asset Purchase Agreement to use its best efforts to collect all royalties, domestic and foreign, in connection with the Catalogue and to remit a portion of its royalty income to the Trust in accordance with its Contingent Portion payment obligation.
The Trust’s income is dependent, in part, on EMI’s ability to maintain its rights in the Copyrighted Songs through copyright protection. Although Copyrighted Songs may continue to generate royalty revenue after their copyrights have expired, in general as the copyrights for the Copyrighted Songs expire, less royalty income will be generated, and the size of each payment of the Contingent Portion will be reduced accordingly.
Based on the Listing, the Top 50 Songs obtained copyright registration under the United States Copyright Act of 1909 (the “1909 Act”) between 1926 and 1958. For copyrighted works subject to the 1909 Act, copyright law generally provides for a possible 95 years of copyright protection, subject to certain factors, including the initial registration date of each copyright and compliance with certain statutory provisions including notice and renewal. The Copyright expiration dates for the Top 50 Songs range between 2021 and 2053, as set forth in the Listing.
The Copyrighted Songs are subject to statutory rights of termination of transfers, which may impact whether EMI is able to retain its ownership of the Copyrighted Songs during their respective terms of copyright protection. For copyrights governed by the 1909 Act, this termination right vests at the end of two different renewal terms, which vary for each Copyrighted Song. As the owner of the Catalogue, EMI (and not the Trust) is responsible for administrating the Catalogue and seeking renewals of the Copyrighted Songs. The Asset Purchase Agreement provides that EMI is obligated to use its best efforts to secure renewals.
Contingent Portion Payments
Payments of the Contingent Portion to the Trust are ordinarily made on a quarterly basis, approximately two to three months after a quarter ends. The Trust distributes the amounts it receives in Contingent Portion payments to the Unit Holders after payment of, or withholdings in connection with, expenses and liabilities of the Trust.
The amount of each payment of the Contingent Portion is based on a formula provided in the Asset Purchase Agreement. Prior to the first quarter of 2010, the Contingent Portion was calculated as an amount ranging from 65% to 75% of gross royalty income from the exploitation of the Catalogue for each quarterly period, less royalty expenses. In addition, the Contingent Portion was guaranteed to be at least a minimum of $167,500 per quarter (the “Minimum Payment Obligation”).
Beginning with the first quarter of 2010, the Asset Purchase Agreement provides for certain changes with respect to the calculation of the Contingent Portion. One such change is that the Minimum Payment Obligation is no longer in effect. The Trust is also of the view that the Contingent Portion payable to the Trust changed to a fixed 75% of gross royalty income from the exploitation of the Catalogue for each quarterly period, less royalty related expenses (the “New Calculation Method”). However, EMI has disputed that the New Calculation Method is the correct interpretation of the Asset Purchase Agreement. As a result of the New Calculation Method not being applied, EMI’s payments of the Contingent Portion have been deficient, in the Trust’s view, by the following amounts (the “Underpayments”):
5
Table of Contents
| Quarterly Payment Period | Amount of Deficiency |
|||
| March 31, 2016 |
$ | 79,889 | ||
| September 30, 2016 |
37,529 | |||
| March 31, 2017 |
85,359 | |||
| September 30, 2017 |
41,557 | |||
| March 31, 2018 |
98,901 | |||
| September 30, 2018 |
75,712 | |||
| March 31, 2019 |
71,489 | |||
| June 30, 2019 |
41,786 | |||
| September 30, 2019 |
68,571 | |||
| December 31, 2019 |
42,572 | |||
| March 31, 2020 |
40,025 | |||
| June 30, 2020 |
15,557 | |||
| September 30, 2020 |
40,085 | |||
| March 31, 2021 |
42,742 | |||
| June 30, 2021 |
43,148 | |||
| September 30, 2021 |
38,846 | |||
| December 31, 2021 |
38,112 | |||
| March 31, 2022 |
0 | |||
| June 30, 2022 |
70,709 | |||
| September 30, 2022 |
83,438 | |||
| December 31, 2022 |
0 | |||
| March 31, 2023 |
44,908 | |||
| June 30, 2023 |
37,491 | |||
|
|
|
|||
| Total |
$ | 1,138,426 | ||
|
|
|
|||
As of the date hereof, the Trust has not received the Underpayments, and EMI has expressly disagreed with the Trust. The Trust can offer no assurance that it will be able to recover any of the Underpayments or that it will resolve favorably the on-going dispute relating to the New Calculation Method with respect to future payments of the Contingent Portion.
In addition, on October 1, 2020, the Trust engaged Citrin Cooperman & Company LLP, an accounting firm specializing in auditing royalty income (“Citrin”), to conduct a special audit of the books and records of EMI administered by Sony/ATV to determine the areas and extent of underpayment, if any, of quarterly Contingent Portion payments payable to the Trust for the periods beginning January 1, 2016 and ended December 31, 2020 (the “Audit Period”). Citrin’s final report (the “Citrin Report”) was delivered to the Trustees on April 4, 2022. The Citrin Report identified multiple asserted royalty omissions and expense over-deductions from the Contingent Portion during the Audit Period in addition to the Underpayments. The Trust distributed the Citrin Report to EMI on or about April 13, 2022. EMI has disputed the findings of the Citrin Report. As part of an effort to settle any disagreement regarding the computation or payment of the Contingent Portion, including the Underpayments and the other amounts identified in the Citrin Report, on October 3, 2022, EMI and the Trust executed a Tolling Agreement pursuant to which the parties agreed to suspend, effective as of January 1, 2022, the running of any relevant statute of limitations applicable to any claim relating to the royalty omissions and expense over-deductions identified in the Citrin Report until June 1, 2023. On or about May 17, 2023, EMI and the Trust agreed to extend the tolling period through November 30, 2023.
The Trust can offer no assurance that it will be able to recover any of the Underpayments or other amounts identified in the Citrin Report, or that it will resolve the dispute relating to the New Calculation Method with respect to future payments of the Contingent Portion.
Recent Contingent Portion Payment
On June 1, 2023, the Trust received $216,119 ($0.7782 per Trust Unit) from EMI for royalty income generated by the Catalog during the first quarter of 2023, as compared to $207,916 ($0.7487 per Trust Unit) for the payment attributable to the first quarter of 2022.
Recent Distributions to Unit Holders
On June 26, 2023, the Trust made a distribution of $105,297 ($0.3791 per Trust Unit) to the Trust’s Unit Holders of record at the close of business on June 25, 2023. For computation details regarding the distribution please refer to the quarterly distribution report, dated June 26, 2023, attached as Exhibit 99.1 to the Current Report on Form 8-K, filed by the Trust with the Securities and Exchange Commission on June 26, 2023.
Cash and Administrative Expenses
As of July 24, 2023, the Trust was holding $46 in cash and had $0 in unpaid administrative expenses for services rendered to the Trust.
6
Table of Contents
Inflation
The Trust does not believe that inflation has materially affected its activities.
Liquidity and Capital Resources
The Declaration of Trust provides for the distribution to the Unit Holders of all funds the Trust receives after payment of, or withholdings in connection with, expenses and liabilities of the Trust.
See the table headed “Statements of Cash Receipts and Disbursements” under Part 1 — Item 1, “Financial Statements” for information regarding cash disbursements made to Unit Holders during the three and six months ended June 30, 2023 and June 30, 2022.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Trust’s financial condition, changes in financial condition, revenues or expenses, results of operations or liquidity that is material to investors.
| ITEM | 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
| ITEM | 4. CONTROLS AND PROCEDURES |
Controls and Procedures
As of the end of the period covered by this quarterly report, the Trust carried out an evaluation of the effectiveness of the design and operation of the Trust’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) under the supervision and with the participation of the Trust’s management, including the Chief Financial Individual providing accounting services and the trust officers of the Corporate Trustee. Based on that evaluation, the Chief Financial Individual providing accounting services and the trust officer of the Corporate Trustee concluded that the Trust’s disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Trust’s reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Trust’s reports filed under the Exchange Act is accumulated and communicated to Trust’s management, including the Chief Financial Individual providing accounting services and the trust officer of the Corporate Trustee, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Trust’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal period covered by this quarterly report that materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.
PART II — OTHER INFORMATION
| ITEM | 1. LEGAL PROCEEDINGS |
None.
ITEM 1A. RISK FACTORS
The Trust is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.
| ITEM | 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
| ITEM | 3. DEFAULT UPON SENIOR SECURITIES |
None.
7
Table of Contents
| ITEM | 4. MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM | 5. OTHER INFORMATION |
None.
| ITEM | 6. EXHIBITS |
| Exhibit |
Description | |
| 31.1 | Certification by the Chief Financial Individual providing accounting services pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
| 31.2 | Certification by the trust officer of the Corporate Trustee pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
| 32.1* | Certification by the Chief Financial Individual providing accounting services pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
| 32.2* | Certification by the trust officer for the Corporate Trustee Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
| 101.1NS | XBRL Instance Document | |
| 101.SCH | XBRL Schema Document | |
| 101.CAL | XBRL Calculation Linkbase Documents | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Labels Linkbase Documents | |
| 101.PRE | XBRL Presentation Linkbase Documents | |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |
| * | Furnished, not filed |
8
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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.
| August 14, 2023 | Mills Music Trust | |||||
| (Registrant) | ||||||
| By: | /s/ Garfield Barrett | |||||
| Garfield Barrett Trust Officer of the Corporate Trustee HSBC Bank USA, NA | ||||||
9
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Garfield Barrett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mills Music Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; *
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| * | The statements of cash receipts and disbursements reflect only cash transactions and do not include transactions that would be recorded in financial statements presented on the accrual basis of accounting. The Trust is required to distribute all funds received. Accordingly, the Trust has not prepared any statements of financial condition or cash flows. |
| August 14, 2023 | /s/ Garfield Barrett | |||||
| Garfield Barrett Trust Officer of the Corporate Trustee HSBC Bank USA, NA |
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joel Faden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mills Music Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; *
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| * | The statements of cash receipts and disbursements reflect only cash transactions and do not include transactions that would be recorded in financial statements presented on the accrual basis of accounting. The Trust is required to distribute all funds received. Accordingly, the Trust has not prepared any statements of financial condition or cash flows. |
| August 14, 2023 | /s/ Joel Faden | |||||
| Joel Faden Chief Financial Individual (principal financial officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Quarterly Report of Mills Music Trust (the “Trust”) on Form 10-Q for the fiscal quarter ended June 30, 2023, as filed with the Securities and Exchange Commission (the “Report”), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to his knowledge:
| 1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition* and results of operations of the Trust. |
| * | The statements of cash receipts and disbursements reflect only cash transactions and do not include transactions that would be recorded in financial statements presented on the accrual basis of accounting. The Trust is required to distribute all funds received after payment of expenses. Accordingly, the Trust has not prepared any statements of financial condition or cash flows. |
| August 14, 2023 | /s/ Garfield Barrett | |||||
| Garfield Barrett Trust Officer of The Corporate Trustee |
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Quarterly Report of Mills Music Trust (the “Trust”) on Form 10-Q for the fiscal quarter ended June 30, 2023, as filed with the Securities and Exchange Commission (the “Report”), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to his knowledge:
| 1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition* and results of operations of the Trust. |
| * | The statements of cash receipts and disbursements reflect only cash transactions and do not include transactions that would be recorded in financial statements presented on the accrual basis of accounting. The Trust is required to distribute all funds received after payment of expenses. Accordingly, the Trust has not prepared any statements of financial condition or cash flows. |
| August 14, 2023 | /s/ Joel Faden | |||||
| Joel Faden Chief Financial Individual (principal financial officer) |