NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THEGLOBE.COM
theglobe.com, inc. (the “Company”
or “theglobe”) was incorporated on May 1, 1995 (inception) and commenced operations on that date. Originally,
theglobe.com was an online community with registered members and users in the United States and abroad. However, due to the
deterioration of the online advertising market, the Company was forced to restructure and ceased the operations of its online community
on August 15, 2001. The Company then sold most of its remaining online and offline properties. The Company continued
to operate its Computer Games print magazine and the associated CGOnline website, as well as the e-commerce games distribution
business of Chips & Bits, until their shutdown in March 2007. On June 1, 2002, Chairman Michael S. Egan and Director
Edward A. Cespedes became Chief Executive Officer and President of the Company, respectively. On November 14, 2002, the Company
entered into the Voice over Internet Protocol (“VoIP”) business by acquiring certain VoIP assets.
On May 9, 2005, the Company exercised an
option to acquire all of the outstanding capital stock of Tralliance Corporation (“Tralliance”), an entity which had
been designated as the registry for the “.travel” top-level domain through an agreement with the Internet Corporation
for Assigned Names and Numbers (“ICANN”).
As more fully discussed in Note 3, “Discontinued
Operations,” in March 2007, management and the Board of Directors of the Company made the decision to discontinue the operating,
research and development activities of its VoIP telephony services business and terminate all of the remaining employees of that
business.
On September 29, 2008, the Company sold
its Tralliance business and issued 229,000,000 shares of its Common Stock to a company controlled by Michael S. Egan, the Company’s
Chairman and Chief Executive Officer. As a result of the sale of its Tralliance business, the Company became a shell company
(as defined in Rule 12b-2 of the Securities and Exchange Act of 1934) with no material operations or assets. However, certain
matters, as more fully discussed in Note 2, “Liquidity and Going Concern Considerations,” raise substantial doubt about
the Company’s ability to continue as a going concern.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries from their respective dates of acquisition. All significant
intercompany balances and transactions have been eliminated in consolidation.
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited interim condensed consolidated
financial statements of the Company as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 included
herein have been prepared in accordance with the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended,
and Article 10 of Regulation S-X under the Securities Act of 1933, as amended. Certain information and note disclosures normally
included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations relating to interim condensed consolidated financial statements.
In the opinion of management, the accompanying
unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company at June 30, 2016 and the results of its operations and its cash
flow for the three and six months ended June 30, 2016 and 2015. The results of operations and cash flows for such periods are not
necessarily indicative of results expected for the full year or for any future period.
USE OF ESTIMATES
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates and assumptions
relate primarily to valuations of accounts payable and accrued expenses. Our estimates, judgments and assumptions are continually
evaluated based upon available information and experience. Because of estimates inherent in the financial reporting process, actual
results could differ from those estimates. See Note 2, “Liquidity and Going Concern Considerations” for a discussion
of the Company’s derecognition of certain accounts payable and accrued expenses.
NET INCOME PER SHARE
The Company reports basic and diluted net
income per common share in accordance with FASB ASC Topic 260, "Earnings Per Share." Basic earnings per share
is computed using the weighted average number of common shares outstanding during the period. Common equivalent shares consist
of the incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Common
equivalent shares are excluded from the calculation if their effect is anti-dilutive.
Due to the anti-dilutive effect of potentially
dilutive securities or common stock equivalents that could be issued, such securities were excluded from the diluted net loss per
common share calculation for all periods presented. Such potentially dilutive securities and common stock equivalents consisted
of the following for the periods ended June 30:
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2016
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2015
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Options to purchase common stock
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100,000
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100,000
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RECENT ACCOUNTING PRONOUNCEMENTS
Management has determined that all recently
issued accounting pronouncements will not have a material impact on the Company’s financial statements or do not apply to
the Company’s operations.
(2) LIQUIDITY AND GOING CONCERN CONSIDERATIONS
The accompanying condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course
of business. Accordingly, the condensed consolidated financial statements do not include any adjustments relating to the recoverability
of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
However, for the reasons described below, Company management does not believe that cash on hand and cash flow generated internally
by the Company will be adequate to fund its limited overhead and other cash requirements beyond a short period of time. These reasons
raise significant doubt about the Company’s ability to continue as a going concern.
Since 2008, the Company was able to continue
operating as a going concern due principally to funding of $500,000 received during 2008 under a Revolving Loan Agreement with
an entity controlled by Michael S. Egan, its Chairman and Chief Executive Officer and total proceeds of approximately $2,437,000
received during 2009 through the second quarter of 2015 under an Earn-out Agreement with an entity also controlled by Mr. Egan,
as well as the forbearance of its creditors. The Earn-out period expired on May 5, 2015, with the final pro-rated payment of $37,000
received by the Company in May 2015. Additionally, as more fully discussed in Note 4, “Debt,” in March 2016, the Company
received funding of $50,000 under a promissory note entered into with the same entity that provided funding under the Revolving
Loan Agreement (the “2016 Promissory Note”).
At June 30, 2016, the Company had a net
working capital deficit of approximately $1,723,000. Such working capital deficit included (i) a total of approximately $949,000
in principal and accrued interest owed under the aforementioned Revolving Loan Agreement and 2016 Promissory Note; (ii) a total
of approximately $650,000 in management service fees owed under a Master Services Agreement to an entity controlled by Mr. Egan;
(iii) a total of approximately $131,000 of accrued officer compensation due primarily to Mr. Egan; and (iv) an aggregate of approximately
$19,000 in other unsecured accounts payable and accrued expenses owed to non-related parties.
During the second quarter of 2015, a former
VoIP telephony service vendor agreed to forgive the remaining accounts payable balance of approximately $40,900 owed by the Company
to such vendor. Accordingly, such amount was written off the balance sheet and a corresponding gain on forgiveness of debt is included
within Discontinued Operations for both the three and six month periods ended June 30, 2015.
During the fourth quarter of 2014, the
Company derecognized approximately $84,000 of old accrued expenses related to its former Tralliance business (including $33,000
of disputed liabilities) based upon the belief that the statute of limitations applicable to enforcement of such liabilities had
lapsed. During the fourth quarter of 2013, the Company derecognized approximately $296,000 of old liabilities of its former Tralliance
business, including approximately $170,000 of disputed accounts payable owed to 2 former vendors and accrued expenses totaling
approximately $126,000, based upon the belief that the statute of limitations applicable to enforcement of such liabilities had
lapsed. As more fully described in Note 3, “Discontinued Operations,” the Company derecognized approximately $1,354,000
of old liabilities of its former VoIP telephony service business, including approximately $1,000,000 of disputed liabilities, during
the fourth quarter of 2012 based upon our belief that the statute of limitations applicable to enforcement of such liabilities
has lapsed. There can be no assurance that the holders of derecognized account payables will agree with our application of statutes
of limitation to time bar claims related to such payables nor seek to assert a basis to toll or suspend the running of the otherwise
applicable statutes of limitation.
As discussed previously, on September 29,
2008, the Company (i) sold the business and substantially all of the assets of its Tralliance Corporation subsidiary to Tralliance
Registry Management, and (ii) issued 229,000,000 shares of its Common Stock (the “Shares”) to Registry Management (the
“Purchase Transaction”). Tralliance Registry Management and Registry Management are entities controlled by Michael
S. Egan. The closing of the Purchase Transaction resulted in the cancellation of all of the Company’s remaining Convertible
Debt, related accrued interest and rent and accounts payable owed to entities controlled by Mr. Egan as of the date of closing
(totaling approximately $6,400,000). However, the Company continues to be obligated to repay its principal borrowings totaling
$550,000, plus accrued interest of $399,000 due to an entity controlled
by Mr. Egan under the aforementioned Revolving Loan Agreement and 2016 Promissory Note.
As additional consideration under the Purchase
Transaction, Tralliance Registry Management was obligated to pay an earn-out to theglobe equal to 10% (subject to certain minimums)
of Tralliance Registry Management’s net revenue (as defined) derived from “.travel” names registered by Tralliance
Registry Management from September 29, 2008 through May 5, 2015 (the “Earn-out”). The minimum Earn-out payable by Tralliance
Registry Management to theglobe was $300,000 in the first year, increasing by $25,000 in each subsequent year (pro-rated for the
final year of the Earn-out). As discussed earlier, the final Earn-out payment of approximately $37,000 was made in May 2015 and
the Earn-out Agreement has now expired.
In connection with the closing of the Purchase
Transaction, the Company also entered into a Master Services Agreement with an entity controlled by Mr. Egan whereby for a fee
of $20,000 per month ($240,000 per annum) such entity will provide personnel and services to the Company so as to enable it to
continue its existence as a public company without the necessity of any full-time employees of its own. Additionally, commensurate
with the closing of the Purchase Transaction, Termination Agreements with each of its current executive officers, which terminated
their previous and then existing employment agreements, were executed. Notwithstanding the termination of these employment agreements,
each of our current executive officers and directors remain as executive officers and directors of the Company.
Immediately following the closing of the
Purchase Transaction, theglobe became a shell company with no material operations or assets, and no source of revenue other than
under the Earn-out. As a shell company, theglobe’s operating expenses have consisted primarily of and are expected
to continue to consist primarily of expenses incurred under the aforementioned Master Services Agreement and other customary public
company expenses, including legal, audit and other miscellaneous public company costs.
MANAGEMENT’S PLANS
On a short term liquidity basis, the Company
must receive the continued indulgence of its primary creditor, Mr. Egan, including the continued forebearance of Mr. Egan and related
entities in making demand for payment for amounts outstanding under the Revolving Loan Agreement and the Master Services Agreement,
as well as the 2016 Promissory Note when it becomes due in September 2016, in order to continue as a going concern.
It is the Company’s preference to
avoid filing for protection under the U.S. Bankruptcy Code. However, based upon the Company’s current financial condition
as discussed above, management believes that additional debt or equity capital will need to be raised in order for theglobe to
continue to operate as a going concern on a long-term basis. Any such capital would likely come from Mr. Egan, as the Company currently
has no access to credit facilities and has traditionally relied on borrowings from related parties to meet short-term liquidity
needs. Any such equity capital would likely result in very substantial dilution in the number of outstanding shares of the Company’s
Common Stock. Given theglobe’s current financial condition, it has no intent to seek to acquire or start any new businesses.
The Company intends to use the proceeds from the 2016 Promissory Note and seek other loans from Mr. Egan and related entities,
if necessary, to fund its public company operating costs while it explores its options related to the future of theglobe.
(3) DISCONTINUED OPERATIONS
In March 2007, management and the Board
of Directors of the Company decided to discontinue the operating, research and development activities of its VoIP telephony services
business and terminate all of the remaining employees of the business.
The Company’s decision to discontinue
the operations of its VoIP telephony services business was based primarily on the historical losses sustained by this business,
management’s expectations of continued losses for the foreseeable future and estimates of the amount of capital required
to successfully monetize this business. All elements of its VoIP telephony services business shutdown plan were completed by the
Company in 2007 except for the resolution of certain disputed vendor accounts payables, totaling approximately $1,000,000, and
the payment of remaining non-disputed accounts payable. The disputed accounts payables related primarily to telecommunications
network service fees charged by various former telecommunication vendors during the period from 2004 to 2007. These charges were
disputed by the Company primarily due to such items as incorrect quantities, rates, in-service dates, regulatory fees/charges,
late fees and contract termination charges.
During the fourth quarter of 2012, the
Company re-evaluated all remaining liabilities of its VoIP telephony services business in light of the passage of time and applicable
state statute of limitation laws. Based upon this re-evaluation, the Company derecognized accounts payable liabilities related
to six (6) former telecommunication vendors totaling approximately $1,354,000, including the disputed liabilities of approximately
$1,000,000 discussed earlier, from its balance sheet at December 31, 2012. As discussed earlier in Note 2, “Liquidity and
Going Concern Considerations,” a former telephony services business vendor agreed to forgive its remaining accounts payable
balance of approximately $40,900 during the second quarter of 2015. Accordingly, there are no Discontinued Operations liabilities
at June 30, 2016.
(4) DEBT
Debt consists of notes payables due to a related party, as summarized
below:
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June 30, 2016
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December 31, 2015
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2008 Revolving Loan Notes due to a related party; due on demand
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$
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500,000
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$
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500,000
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2016 Promissory Note due to a related party; due on September 22, 2016
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50,000
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—
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550,000
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$
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500,000
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On June 6, 2008, the Company and its subsidiaries,
as guarantors, entered into a Revolving Loan Agreement with Dancing Bear Investments, Inc. (“Dancing Bear”), pursuant
to which Dancing Bear may loan up to $500,000 to the Company on a revolving basis (the “Credit Line”). Dancing Bear
is controlled by Michael S. Egan, our Chairman and Chief Executive Officer. In connection with its entry into the Credit Line,
the Company borrowed $100,000 under the Credit Line. Subsequently, during the remainder of 2008, the Company made additional borrowings
totaling the final $400,000 available under the Credit Line. As of June 30, 2016 and December 31, 2015, outstanding principal of
$500,000 and accrued interest of $398,028 and $373,234 respectively, related to this Line of Credit have been reflected as current
liabilities in our Condensed Consolidated Balance Sheet. Related Party Interest Expense related to the Credit Line of $24,795 was
recognized in our Condensed Consolidated Statement of Operations during both the six months ended June 30, 2016 and 2015, respectively.
On May 7, 2009, the Company entered into
a Note and Modification Agreement with Dancing Bear Investments, Inc., which amended the repayment terms of the Revolving Loan
Agreement. Under the terms of the Note Modification Agreement, from and after June 6, 2009 (the original maturity date of the Credit
Line), all amounts due under the Revolving Loan Agreement, including principal and accrued interest, will be due and payable on
the earlier of (i) five (5) business days following any demand for payment, which demand can be made by Dancing Bear at any time;
or (ii) upon the occurrence of an event of default, as defined in the Revolving Loan Agreement. All funds borrowed under the Credit
Line may be prepaid in whole or in part, without penalty, at any time during the term of the Credit Line. The Company currently
has no ability to repay this loan should Dancing Bear demand payment.
In connection with the Credit Line, the
Company executed and delivered a promissory note to Dancing Bear in the amount of $500,000 bearing interest at ten percent (10%)
per annum on the principal amount then outstanding. The Company’s subsidiaries unconditionally guaranteed the Credit Line
by entering into an Unconditional Guaranty Agreement. All amounts outstanding from time to time under the Credit Line are secured
by a lien on all assets of the Company and its subsidiaries pursuant to a Security Agreement with Dancing Bear.
On March 23, 2016, the Company entered
into a $50,000 promissory note (the “2016 Promissory Note”) with, and borrowed the full amount of such promissory note
from, Dancing Bear. The promissory note is unsecured and matures and is due on the first to occur of (i) September 22, 2016, or
(ii) an event of default as defined under the promissory note. Interest at the rate of 10% per annum is payable by the Company
on all unpaid borrowings under the Promissory Note. The Company intends to use the proceeds from the 2016 Promissory Note to pay
its public company operating costs over a short-term period of time. For the period from March 23, 2016 until June 30, 2016, the
Company accrued $1,370 of interest expense on the 2016 Promissory Note.
(5) STOCK OPTION PLANS
As of June 30, 2016, there were no shares
available for grant under the Company’s stock option plans and remaining stock options outstanding and exercisable will expire
in August 2016.
There were no stock option grants or exercises
during each of the six months ended June 30, 2016 and 2015.
Stock option activity during the six
months ended June 30, 2016 was as follows:
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Total Options
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Weighted
Average Exercise
Price
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Outstanding at December 31, 2015
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100,000
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$
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0.14
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Granted
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—
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Exercised
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—
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Expired
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—
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—
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Outstanding at June 30, 2016
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100,000
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$
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0.14
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Options exercisable at June 30, 2016
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100,000
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$
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0.14
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Each of the weighted-average remaining
contractual terms of stock options outstanding and stock options exercisable at June 30, 2016 were 0.1 years. The aggregate intrinsic
value of both options outstanding and stock options exercisable at June 30, 2016 was $0.
Stock compensation cost is recognized on
a straight-line basis over the vesting period. At June 30, 2016, there was no unrecognized compensation expense related to unvested
stock options.
The Company estimates the fair value of
each stock option at the grant date by using the Black Scholes option-pricing model using the following assumptions: no dividend
yield; a risk free interest rate based on the U.S. Treasury yield in effect at the time of grant; an expected option life based
on historical and expected exercise behavior; and expected volatility based on the historical volatility of the Company’s
stock price over a time period that is consistent with the expected life of the option.
(6)
RELATED PARTY TRANSACTIONS
On June 6, 2008, the Company entered into
a Revolving Loan Agreement with Dancing Bear Investments, Inc. (“Dancing Bear”), pursuant to which Dancing Bear may
loan up to $500,000 to the Company on a revolving basis (the “Credit Line”). Dancing Bear is an entity
controlled by Michael S. Egan, the Company’s Chairman and Chief Executive Officer. During 2008 the Company made borrowings
totaling the full amount of the $500,000 Credit Line. At June 30, 2016, outstanding principal and accrued interest under
the Credit Line totaled $500,000 and $398,028, respectively. During both the six months ended June 30, 2016 and 2015, interest
expense related to the Credit Line of $24,795 was recorded. All borrowings under the Credit Line, including accrued interest
on borrowed funds at the rate of 10% per annum, were initially due and payable in one lump sum on the first anniversary of the
Credit Line, or June 6, 2009, or sooner upon the occurrence of an event of default under the loan documentation. On May 7,
2009, such repayment terms were amended so as to require the Company to repay any or all amounts due under the Credit Line in one
lump sum on the earlier of (i) five business days following any demand for payment that is made on or after June 6, 2009,
or (ii) the occurrence of an event of default as defined in the Revolving Credit Agreement.
During the six months ended June 30, 2016
and 2015, the Company received minimum Earn-out installment payments totaling $0 and $149,625, respectively, from Tralliance Registry
Management Company LLC (“Tralliance Registry Management) under an Earn-out Agreement entered into on September 29, 2008 by
and between Tralliance Registry Management and the Company. Tralliance Registry Management is an entity controlled by Michael S.
Egan, and each of our two remaining executive officers and Board members, Edward A. Cespedes, our President, and Robin S. Lebowitz,
our Vice President of Finance, who own a minority interest in The Registry Management Company, LLC, the parent company of Tralliance
Registry Management. The Earn-out Agreement expired on May 5, 2015.
During both the six months ended June 30,
2016 and 2015, the Company paid management services fees totaling $0 to Dancing Bear under a Master Services Agreement entered
into on September 29, 2008 by and between Dancing Bear and the Company. Related party transactions expense of $120,000 was recorded
for both the six month period ended June 30, 2016 and 2015 in connection with the Master Services Agreement. At June 30, 2016,
a total of approximately $650,000 in management service fees remains unpaid and is accrued on the Company’s condensed consolidated
balance sheet.
On March 23, 2016, the Company entered
into a $50,000 promissory note (the “2016 Promissory Note”) with, and borrowed the full amount of such promissory note
from, Dancing Bear. The promissory note is unsecured and matures and is due on the first to occur of (i) September 22, 2016, or
(ii) an event of default as defined under the promissory note. Interest at the rate of 10% per annum is payable by the Company
on all unpaid borrowings under the Promissory Note. For the period from March 23, 2016 until June 30, 2016, the Company accrued
$1,370 of interest expense on the 2016 Promissory Note.
(7)
SUBSEQUENT EVENTS
The Company’s management evaluated
subsequent events through the time of the filing of this report on Form 10-Q. The Company’s management is not aware of any
significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a
material impact on its consolidated financial statements.