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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal quarter ended March 31, 2004 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___________ to
____________
Commission file number 0-8773
CRESTED CORP.
- --------------------------------------------------------------------------------
(Exact Name of Company as Specified in its Charter)
Colorado 84-0608126
- ------------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West, Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (307) 856-9271
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NONE
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(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 17, 2004
- ------------------------------------------- -----------------------------
Common stock, $0.001 par value 17,133,098 Shares
CRESTED CORP.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Balance Sheets (Unaudited)
March 31, 2004 and December 31, 2003 . . . . . . . . . . . . 3
Condensed Statements of Operations (Unaudited)
Three Months Ended March 31, 2004 and 2003. . . . . . . . . 4
Condensed Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2004 and 2003. . . . . . . . . 5
Notes to Condensed Financial Statements (Unaudited) . . . . . 6-7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 8-10
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Certifications . . . . . . . . . . . . . . . . . . . . . . . . . 13-16
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRESTED CORP.
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31, December 31,
2004 2003
------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,300 $ 3,300
INVESTMENTS IN AFFILIATES 4,815,000 4,373,800
PROPERTIES AND EQUIPMENT 896,800 896,800
Less accumulated depreciation,
depletion and amortization (886,800) (886,800)
------------- --------------
10,000 10,000
------------- --------------
Total assets $ 4,828,300 $ 4,387,100
============= ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current debt to affiliate $ 10,359,400 $ 9,408,300
Asset retirement obligation 50,000 --
------------- --------------
10,409,400 9,408,300
COMMITMENT TO FUND EQUITY INVESTEES 215,600 215,600
ASSET RETIREMENT OBLIGATION 1,020,800 1,053,300
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK, $.001 par value
15,000 shares issued, forfeitable until earned 10,100 10,100
SHAREHOLDERS' DEFICIT
Preferred stock, $.001 par value;
100,000 shares authorized none issued or outstanding -- --
Common stock, $.001 par value; 20,000,000 shares
authorized; 17,118,098
shares issued and outstanding 17,200 17,200
Additional paid-in capital 11,804,800 11,804,800
Accumulated deficit (18,649,600) (18,122,200)
------------- --------------
(6,827,600) (6,300,200)
------------- --------------
Total liabilities and shareholders' deficit $ 4,828,300 $ 4,387,100
============= ==============
See accompanying notes to condensed financial statements.
-3-
CRESTED CORP.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
--------------------------
2004 2003
------------ ------------
REVENUES: $ -- $ --
COSTS AND EXPENSES:
Accreation of asset retirement obligation 17,500 22,700
General and administrative 40,000 36,500
------------ ------------
57,500 59,200
------------ ------------
LOSS BEFORE EQUITY LOSS, PROVISION
FOR INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (57,500) (59,200)
EQUITY IN LOSS OF AFFILIATES (469,900) (373,500)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME
TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (527,400) (432,700)
PROVISION FOR INCOME TAXES -- --
------------ ------------
LOSS BEFORE CUMULATIVE EFFECT
OF ACCOUNING CHANGE (527,400) (432,700)
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE -- (293,800)
------------ ------------
NET LOSS $ (527,400) $ (726,500)
============ ============
PER SHARE DATA
NET LOSS PER SHARE, BASIC AND DILUTED
FROM CONTINUED OPERATIONS $ (0.03) $ (0.02)
FROM EFFECT OF ACCOUNTING CHANGE -- (0.02)
BASIC AND DILUTED $ (0.03) $ (0.04)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 17,118,098 17,115,137
============ ============
See accompanying notes to condensed financial statements.
-4-
CRESTED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
March 31,
----------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(527,400) $(726,500)
Adjustments to reconcile net loss to net cash
used in by operating activities:
Equity in loss of affiliates 469,900 373,500
Accretion of asset retirement obligation 17,500 22,700
Non cash cummulative effect
of accounting change -- 293,800
Noncash compensation -- 9,600
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (40,000) (26,900)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in affiliates (911,100) (170,700)
CASH FLOWS FROM FINANCING ACTIVITES:
Net activity on debt to affiliate 951,100 197,600
---------- ----------
NET INCREASE IN
CASH AND CASH EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,300 3,300
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,300 $ 3,300
========== ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ -- $ --
========== ==========
Income tax paid $ -- $ --
========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of stock to outside directors $ -- $ 9,600
========== ==========
See accompanying notes to condensed financial statements.
-5-
CRESTED CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1) The Condensed Balance Sheet as of March 31, 2004 and the Condensed
Statements of Operations and Cash Flows for the three months ended March 31,
2004 and 2003, have been prepared by the Company without audit. The Condensed
Balance Sheet at December 31, 2003, has been derived from the audited financial
statements included in the Company's Annual Report on Form 10-K for the period
then ended. In the opinion of the Company, the accompanying financial statements
contain all adjustments (consisting of only normal recurring accruals except for
the cumulative effect of a change in accounting principle in 2003) necessary to
fairly present the financial position of the Company as of March 31, 2004 and
the results of operations and cash flows for the three months ended March 31,
2004 and 2003.
2) Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. It is
suggested that these financial statements be read in conjunction with the
Company's December 31, 2003 Form 10-K. The results of operations for the periods
ended March 31, 2004 and 2003 are not necessarily indicative of the operating
results for the full year.
3) Debt at March 31, 2004 and December 31, 2003, consists of debt payable
to the Company's parent U.S. Energy Corp. ("USE") of $10,359,400 and $9,408,300,
respectively
4) The Company presents basic and diluted earnings per share in accordance
with the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share." Basic and diluted earnings per common share is based on
the weighted average number of common shares outstanding during the period. The
Company has no outstanding stock options or warrants.
5) The Company has mine properties that are in a shut down mode in central
Wyoming for which it is responsible for one half of the reclamation expense. The
Company records the fair value of the reclamation liability on its shut down
mining properties as of the date that the liability is incurred with a
corresponding increase in the properties. The reclamation liabilities are
reviewed each quarter to determine whether estimates of timing or cash flows
have changed as well the accretion of the total liability on a quarterly basis
for the passage of time.
The Company will also deduct from the accrued liability any actual funds
expended for reclamation during the quarter in which it is expended. As a result
of the Company taking impairment allowances in prior periods on its shut down
mining properties, it has no remaining net book value for the properties and has
no economic benefits to be received in future periods. All changes in estimates
will therefore be charged to operations in the quarter in which they are
recorded.
6) The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
-6-
The following is a reconciliation of the total liability for asset
retirement obligations (unaudited)
Balance December 31, 2003 $1,053,300
Addition to Liability --
Liability Settled --
Accretion Expense - 8% discount rate 17,500
----------
Balance March 31, 2004 $1,070,800
==========
These reclamation activities are scheduled to be completed over the next
several years. The Company cannot predict the exact amount of such future asset
retirement obligations. Estimated future reclamation costs are based upon the
Company's best engineering estimates considering legal and regulatory
requirements.
The Company has reviewed other current outstanding statements from the
Financial Accounting Standards Board and does not believe that any of those
statements will have a material adverse affect on the financial statements of
the Company when adopted.
7) On January 30, 2004, Rocky Mountain Gas, Inc., an equity investee of the
Company, closed on the acquisition of the assets of Hi-Pro, Production LLC for
$6,800,000. The transaction was structured as an asset purchase.
8) On July 30, 2003, U.S. Energy Corp. ("USE") and Crested Corp.
("Crested") received an Order and thereafter a Judgment on August 1, 2003 from
the U.S. District Court of Colorado wherein Chief Judge Lewis T. Babcock entered
an Order that Judgment be entered against Nukem/CRIC ("Nukem") in favor of USE
and Crested in the total amount of $20,044,184. The Judgment was entered and
defendant Nukem posted a supersedeas bond in the full amount of the Judgment
plus interest for one year, which was approved by the Court. On October 3, 2003,
Nukem, as Appellants, filed a Notice of Appeal to the 10th Circuit Court of
Appeals and thereafter on October 15, 2003, USE and Crested filed a Notice of
Cross-Appeal to the 10th Circuit. As of April 30, 2004 all briefs from both
parties had been filed with the 10th Circuit Court of Appeals. It is not known
when or if the 10th Circuit Court of Appeals will hear oral arguments or when it
will make its rulings. In the event the Company and USE prevail, one half the
award belongs to the Company. A significant portion of the award may be used to
retire indebtedness to USE.
-7-
CRESTED CORP.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS.
- --------------
The following is Management's Discussion and Analysis of significant
factors, which have affected the Company's liquidity, capital resources and
results of operations during the periods included in the accompanying financial
statements. For a detailed explanation of the Company's Business Overview, it is
suggested that Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three months ended March 31, 2004 be read in
conjunction with the Company's Form 10-K for the year ended December 31, 2003.
FORWARD LOOKING STATEMENTS
- ----------------------------
This Report on Form 10Q includes "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended ("the
Exchange Act"). All statements other than statements of historical fact included
in this Report, are forward-looking statements. In addition, when ever words
like "expect", "anticipate: or "believe" are used, we are making forward looking
statements. For all the above reasons, actual results may vary materially from
the forward-looking statements and there is no assurance that the assumptions
used are necessarily the most likely to occur.
OVERVIEW OF BUSINESS
- ----------------------
The Company has interests in a uranium mine and mill in Southern Utah;
uranium mines in central Wyoming; a gold property in California; coalbed methane
properties in southwestern Wyoming and the Powder River Basin of Wyoming and
Montana and various real estate properties. The mine properties are all in a
shut down mode. All these businesses are operated in conjunction with the
Company's parent, U.S. Energy Corp. ("USE") through a joint venture between the
two companies, the USECB Joint Venture ("USECB"). The Company accounts for USECB
using the equity method of accounting.
CRITICAL ACCOUNTING POLICIES
- ------------------------------
RECLAMATION LIABILITIES - The Company's policy is to accrue the liability
for future reclamation costs of its mineral properties under SFAS 143 based on
the current estimate of the future reclamation costs as determined by internal
and external experts. The present value of the obligation is accreted each
period as the date of obligation settlement approaches.
RECENT ACCOUNTING PRONOUNCEMENTS
- ----------------------------------
The Company has reviewed all current outstanding statements from the
Financial Accounting Standards Board and does not believe that any of those
statements will have a material adverse effect on the financial statements of
the Company when adopted.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
During the three months ended March 31, 2004, the Company incurred $951,100
in additional debt to its parent, USE. This debt was incurred as a result of USE
advancing funds on behalf of the Company to fund its portion of cash obligations
in the various business ventures in which the two companies jointly participate.
-8-
The Company continues to have low cash reserves and is unable to pay its
ongoing administrative costs as well as fund its cash commitments to various
businesses that it and USE operate jointly. The Company must negotiate favorable
terms on the debt due to USE to continue to operate.
The Company anticipates that the ultimate resolution of the litigation with
Nukem, Inc. will improve its liquidity (see "Capital Resources" below). The
Company also will participate equally in any benefits or liabilities, which may
come from the outcome of litigation that the Company and USE have pending with
Phelps Dodge Corporation.
Operations during the three months ended March 31, 2004 and 2003, consumed
$40,000 and $26,900, respectively. The uses of cash in operations was the
Company's portion of audit fees, professional services in connection with the
on-going litigation and other administrative expenditures. Financing activities
during the three months ended March 31, 2004 and 2003, generated $951,100 and
$197,600, respectively, as the Company borrowed money from USE to fund its cash
commitments. Cash consumed in investing activities of $911,100 at March 31, 2004
and $170,700 at March 31, 2003 was as a result of the Company using the cash
borrowed from USE to fund its portion of operating costs in investments jointly
owned with USE.
CAPITAL RESOURCES
- ------------------
The Company and USE have a $750,000 line of credit with a commercial bank.
The line of credit is secured by various real estate holdings and equipment
belonging to the Company and USE. At March 31, 2004, the total amount of the
line of credit was available to the Company and USE and has been renewed to June
2004. The line of credit is used for short term working capital needs associated
with operations.
The Company's cash resources at March 31, 2004 will not be sufficient to
sustain operations during the balance of 2004. The Company will continue to rely
upon funding from USE to meet its operating, administration and capital
requirements. It is not anticipated that during 2004 operations will generate
significant capital resources.
On August 1, 2003, the Company and USE received a judgment from the United
States District of Colorado in the amount of $20,044,184 against Nukem, Inc. The
Judgment was entered and defendant Nukem posted a supersedeas bond in the full
amount of the Judgment plus interest for one year, which was approved by the
Court. Nukem filed a motion to alter and amend portions of the Order and
Judgment and a motion to remand the case to the Arbitration Panel. USE and
Crested also filed a motion to alter and amend certain portions of the Order and
Judgment. The motions were overruled. In the event that the Company and USE
prevail, one half of the award belongs to the Company.
To generate capital resources the Company and USE may continue to sell
surplus equipment or an interest in their various mineral properties, which are
jointly owned with USE.
CAPITAL REQUIREMENTS
- ---------------------
The Company and USE jointly fund the holding costs of the Sheep Mountain
uranium mines; the Plateau uranium mine and mill; costs associated with their
joint real estate and the development of the Rocky Mountain Gas, Inc. ("RMG")
natural gas properties.
The Company and USE, through RMG, have obligations to make delay rental
payments on RMG's portion of natural gas leases. RMG has entered into various
agreements with industry partners
-9-
where a portion or all of its drilling commitments on the natural gas properties
are carried. The Company and USE through RMG continue to seek additional funding
sources to expand their natural gas business.
The Company owes USE $10,359,400 as a result of USE funding operating and
capital expansion expenses. The Company does not have the resources to repay
this debt and must continue to negotiate terms with USE or find some other means
of retiring the debt. To date, USE has not called the debt and has agreed not
to call the debt. Should the Company and USE prevail in the Nukem litigation, a
significant portion of the Company's portion of the award may be used to retire
a portion or all of this indebtedness.
It is anticipated that approximately $50,000 will be expended for the
reclamation of any of the Company's interests in uranium properties in Wyoming
during 2004. The Company will borrow its portion of these reclamation funds
from USE. The Company and USE are required to provide the necessary capital to
perform the reclamation work on these properties. The estimated reclamation
costs on these Wyoming uranium properties are covered by a reclamation bond,
which is secured by a pledge of certain of the Company and USE's real estate
assets. The reclamation bond amount is reviewed annually for sufficiency by
State of Wyoming regulatory agencies.
RESULTS OF OPERATIONS
- -----------------------
The Company had no revenues during the three months ended March 31, 2004
and 2003.
Costs and expenses for the three months ended March 31, 2004 decreased to
$57,500 compared to costs of $59,200 recognized during the three months ended
March 31, 2003. The Company recorded equity losses from USECC and RMG of
$469,900 and $373,500 during the three months ended March 31, 2004 and 2003,
respectively. The primary reason for the increase in the equity losses from
USECC and RMG are the costs associated with the purchase of Hi-Proof RMG
Pinnacle Gas Resources, Inc., a minority owned affiliate. The Company recorded
$293,800 as the cumulative effect of accounting changes as a result of the
adoption of SFAS 143 during the three months ended March 31, 2003.
The Company recorded a net loss of $527,400 during the three months ended
March 31, 2004, as compared to a net loss of $726,500 for the three months ended
March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------
Our management, under the supervision and with the participation of our
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), has
evaluated the effectiveness of our disclosure controls and procedures as defined
in Securities and Exchange Commission ("SEC") Rule 13a-15(e) and 15d-15(e) as of
the end of the period covered by this report. Based upon that evaluation,
management has concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Securities Exchange Act is communicated to
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure and is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
During the fiscal quarter covered by this report, there have been no
significant changes in internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
-10-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
------------------
On July 30, 2003, U.S. Energy Corp. ("USE") and Crested Corp. ("Crested")
received an Order and thereafter a Judgment on August 1, 2003 from the U.S.
District Court of Colorado wherein Chief Judge Lewis T. Babcock entered an Order
that Judgment be entered against Nukem/CRIC ("Nukem") in favor of USE and
Crested in the total amount of $20,044,184. The Judgment was entered and
defendant Nukem posted a supersedeas bond in the full amount of the Judgment
plus interest for one year, which was approved by the Court. On October 3,
2003, Nukem, as Appellants, filed a Notice of Appeal to the 10th Circuit Court
of Appeals and thereafter on October 15, 2003, USE and Crested filed a Notice of
Cross-Appeal to the 10th Circuit. As of April 30, 2004 all briefs from both
parties had been filed with the 10th Circuit Court of Appeals. It is not known
when or if the 10th Circuit Court of Appeals will hear oral arguments or when it
will make its rulings.
No other material developments in the other pending Legal Proceedings have
occurred since they were last reported by the Company in Item 1 of its Form 10-K
for the year ended December 31, 2003.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS NONE
-----------------------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable
----------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable
---------------------------------------------------
ITEM 5. OTHER INFORMATION Not applicable
------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------
(a) Exhibits.
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-15(e) / Rule 15d-15(e)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) / Rule 15(e)/15d-15(e)
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley
Act of 2002
(b) REPORTS ON FORM 8-K. The Company filed two reports on Form 8-K
for the quarter ended March 31, 2004. The events reported were as follows:
1. The report filed on February 17, 2004, under Items 2 and 7,
Referenced the Company's subsidiary, Rocky Mountain Gas,
Inc. (RMG) purchasing coalbed methane properties in the
Power River Basin of Wyoming.
2. The 8/KA report filed on March 5, 2004, under Items 2 and 7,
Referenced the Company's subsidiary, Rocky Mountain Gas,
Inc. (RMG) purchasing coalbed methane properties in the
Power River Basin of Wyoming.
-11-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
CRESTED CORP.
(Company)
Date: May 17, 2004 By: /s/John L. Larsen
-------------------------------------
JOHN L. LARSEN,
CHAIRMAN and CEO
Date: May 17, 2004 By: /s/Robert Scott Lorimer
-------------------------------------
ROBERT SCOTT LORIMER
Principal Financial Officer and
Chief Accounting Officer
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