EMPIRE PETROLEUM CORP - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________

FORM 10-Q

_________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _____________ to _____________

_________________

EMPIRE PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

_________________

DELAWARE	001-16653	73-1238709
(State or Other Jurisdiction	(Commission	(I.R.S. Employer
of Incorporation or Organization)	File Number)	Identification No.)

1203 East 33^rd Street, Suite 250 Tulsa, OK 74105
(Address of Principal Executive Offices) (Zip Code)

(539) 444-8002
(Registrant's telephone number, including area code)

(Former name or former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	EMPR	None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer ☐

Non-accelerated filer ☒		Smaller reporting company ☒

		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised ﬁnancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

APPLICABLE ONLY TO REGISTRANTS 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 ☐

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares of the registrant's common stock, $0.001 par value, outstanding as of September 30, 2019 was 19,867,277.

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EMPIRE PETROLEUM CORPORATION

INDEX TO FORM 10-Q

PART I.	FINANCIAL INFORMATION	Page No.

Item 1.	Financial Statements

	Consolidated Balance Sheets at September 30, 2019 (Unaudited) and December 31, 2018	4

	Consolidated Statements of Operations – For the nine months ended September 30, 2019 and 2018 (Unaudited)	5

	Consolidated Statements of Changes in Stockholders' Deficit (Unaudited)	6 - 7

	Consolidated Statements of Cash Flows – For the nine months ended September 30, 2019 and 2018 (Unaudited)	8

	Notes to Consolidated Financial Statements	9 - 15

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16 - 19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19



PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	20

Item 4.	Mine Safety Disclosures	20

Item 5.	Other Information	20

Item 6.	Exhibits	20

	Signatures	21

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PART I. FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

EMPIRE PETROLEUM CORPORATION

CONSOLIDATED BALANCE SHEETS

	September 30, 2019			December 31, 2018
ASSETS	(UNAUDITED)

Current assets:
Cash	$	18,076		$	84,631
Accounts receivable		1,163,829			124,577
Unrealized gain on derivative instruments		776,431			113,081
Inventory		468,023			—
Prepaids		141,497			45,214
Total current assets		2,567,856			367,503
Oil and natural gas properties, successful efforts		10,878,151			1,645,297
Less: accumulated depreciation and depletion		(1,664,059	)		(15,527	)
		9,214,092			1,629,770
Other property and equipment, net of $1,046 accumulated depreciation		13,410			-
Total property and equipment, net		9,227,502			1,629,770

Total assets	$	11,795,358		$	1,997,273

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Accounts payable	$	777,991		$	320,749
Accrued expenses		981,646			141,033
Current portion of long-term notes payable		151,051			279,204
Total current liabilities		1,910,688			740,986

Long-term notes payable		7,994,736			1,175,820
Asset retirement obligations		3,764,502			230,650
Total liabilities		13,669,926			2,147,456

Stockholders' deficit:
Common stock - $.001 par value 150,000,000 shares
authorized, 19,867,277 and 17,345,609 shares
issued and outstanding, respectively		19,867			17,345
Additional paid-in capital		18,774,426			16,960,818
Accumulated deficit		(20,668,861	)		(17,128,346	)
Total stockholders' deficit		(1,874,568	)		(150,183	)
Total liabilities and stockholders' deficit	$	11,795,358		$	1,997,273

See accompanying notes to unaudited consolidated financial statements

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EMPIRE PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Nine months Ended
	September 30,						September 30,

	2019			2018			2019			2018
Revenue:
Oil and natural gas sales	$	1,695,264			24,277			4,016,232			24,277
Gain on derivatives, net		492,862			0			925,231			0
Total revenue		2,188,126			24,277			4,941,463			24,277

Costs and expenses:
Operating		1,577,437			26,128			2,971,308			26,128
Taxes - production		109,878			3,040			259,351			3,040
Depletion, depreciation & amortization		769,372			1,254			1,649,578			1,254
Accretion of asset retirement obligation		63,255			0			133,082			0
General and administrative		469,792			205,397			3,126,403			642,476
		2,989,734			235,819			8,139,722			672,898
Operating loss		(801,608	)		(211,542	)		(3,198,259	)		(648,621	)

Other expense:
Interest expense		145,345			22,032			342,256			61,505
Total other expense		145,345			22,032			342,256			61,505


Net loss	$	(946,953	)	$	(233,574	)	$	(3,540,515	)	$	(710,126	)

Net loss per common share, basic & diluted	$	(0.05	)	$	(0.02	)	$	(0.19	)	$	(0.06	)

Weighted average number of
common shares outstanding
basic and diluted		19,867,277			13,040,480			19,020,236			11,731,332

See accompanying notes to unaudited consolidated financial statements

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EMPIRE PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

For the nine months ended September 30, 2019

(UNAUDITED)

					Additional
	Common Stock				Paid-In		Accumulated
	Shares		Par Value		Capital		Deficit			Total

Balances, December 31, 2018		17,345,609	$	17,345	$	16,960,818	$	(17,128,346	)	$	(150,183	)

Net loss		—		—		—		(587,502	)		(587,502	)

Shares, options, warrants and conversion features issued		1,446,668		1,447		215,553		—			217,000

Balances, March 31, 2019		18,792,277		18,792		17,176,371		(17,715,848	)		(520,685	)

Net loss		—		—		—		(2,006,060	)		(2,006,060	)

Shares, options, warrants and conversion features issued		1,075,000		1,075		1,598,055		—			1,599,130

Balances, June 30, 2019		19,867,277		19,867		18,774,426		(19,721,908	)		(927,615	)

Net loss		—		—		—		(946,953	)		(946,953	)

Balances, September 30, 2019		19,867,277	$	19,867	$	18,774,426	$	(20,668,861	)	$	(1,874,568	)

See accompanying notes to unaudited consolidated financial statements

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EMPIRE PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

For the nine months ended September 30, 2018

(UNAUDITED)

					Common Stock			Stock			Additional
	Common Stock				Subscribed, not			Subscription			Paid in		Accumulated
	Shares		Par Value		yet issued			Receivable			Capital		Deficit			Total


Balances December 31, 2017		8,803,942	$	8,803	$	3,225		$	(5,000	)	$	16,232,381	$	(16,111,215	)	$	128,194

Net loss		—		—		—			—			—		(246,305	)		(246,305	)

Shares, options, warrants and conversion features issued		1,190,000		1,190		10			5,000			118,800		—			125,000

Balances, March 31, 2018		9,993,942		9,993		3,235			—			16,351,181		(16,357,520	)		6,889

Net loss		—		—		—			—			—		(230,247	)		(230,247	)

Shares, options, warrants and conversion features issued		1,335,000		1,335		(1,235	)		—			126,968		—			127,068

Balances June 30, 2018		11,328,942		11,328		2,000			—			16,478,149		(16,587,767	)		(96,290	)

Net loss		—		—		—			—			—		(233,574	)		(233,574	)

Shares, options, warrants and conversion features issued		6,016,667		6,017		—			—			646,483		—			652,500

Balances September 30, 2018		17,345,609	$	17,345	$	2,000		$	—		$	17,124,632	$	(16,821,341	)	$	322,636

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EMPIRE PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine months Ended September 30,
	2019			2018

Cash flows from operating activities:
Net loss	$	(3,540,515	)	$	(710,126	)

Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Value of warrants and options granted		1,491,630			117,068
Amortization of warrant value and conversion
feature on convertible notes		4,447			47,705
Amortization of loan issue costs		29,072			—
Depreciation, depletion and amortization		1,649,578			1,254
Accretion of asset retirement obligation		133,082			—
Change in operating assets and liabilities:
Accounts receivable		(1,039,252	)		(21,237	)
Unrealized gain on derivative instruments		(663,350	)		—
Prepaids		(96,283	)		—
Inventory		(33,703	)		—
Accounts payable		457,242			14,920
Accrued expenses		607,344			11,830
Net cash used in operating activities		(1,000,708	)		(538,586	)

Cash flows from investing activities:
Acquisition of oil and natural gas properties		(6,033,135	)		(1,160,866	)
Purchase of other fixed assets		(14,456	)		—
Net cash used in investing activities		(6,047,591	)		(1,160,866	)

Cash flows from financing activities:
Proceeds from debt issued		7,879,744			892,520
Principal payments of debt		(1,065,000	)		—
Proceeds from stock and warrant issuance		167,000			787,500
Net cash provided by financing activities		6,981,744			1,680,020

Net change in cash		(66,555	)		(19,432	)

Cash - Beginning of period		84,631			77,780

Cash - End of period	$	18,076		$	58,348

Supplemental cash flow information:
Cash paid for interest	$	316,809		$	—

Non-cash investing and financing activities:
Non-cash additions to asset retirement obligations	$	3,400,770		$	183,203
Common stock issued in exchange for outstanding notes payable	$	157,500		$	—

See accompanying notes to unaudited consolidated financial statements

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EMPIRE PETROLEUM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(UNAUDITED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements of Empire Petroleum Corporation ("Empire" or the "Company") have been prepared in accordance with United States generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, the results of operations, and the cash flows for the interim period are included. All adjustments are of a normal, recurring nature. Operating results for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The information contained in this Form 10-Q should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2018 which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on April 1, 2019.

The Company has incurred significant losses in recent years. The continuation of the Company as a going concern is dependent upon the ability of the Company to attain future profitable operations and/or additional debt or equity financing until profitable operations are achieved. These financial statements have been prepared on the basis of United States generally accepted accounting principles applicable to a company with continuing operations, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its obligations in the normal course of operations. Management believes the going concern assumption to be appropriate for these financial statements. If the going concern assumption were not appropriate for these financial statements, then adjustments might be necessary to adjust the carrying value of assets and liabilities and reported expenses.

The continuation of the Company is dependent upon the ability of the Company to raise capital and attain future profitable operations. The ultimate recoverability of the Company's investment in oil and natural gas interests is dependent upon the existence and discovery of economically recoverable oil and natural gas reserves, the ability of the Company to obtain necessary financing to further develop the interests, and the ability of the Company to attain future profitable production.

As of September 30, 2019, the Company had $18,076 of cash and working capital of $657,168. The Company has proved reserves of approximately 3,500 Mbbls of oil and 900 MMcf of natural gas, all of which have been acquired within the last fourteen months. The Company plans to continue to look for oil and natural gas investments and will use a combination of debt and equity financing to fund the acquisitions. The Company expects to also incur costs related to evaluating and acquiring oil and natural gas acquisitions for the foreseeable future. It is expected that management will attempt to raise additional capital for future investment and working capital opportunities.

Compensation of Officers and Employees

As of September 30, 2019, the Company had two employees. No independent Board members received compensation from the Company in the first nine months of 2019 or 2018. For the nine months ended September 30, 2019, the Company paid Mr. Morrisett $179,950 and Mr. Pritchard $183,950 for services rendered, excluding the value of options. For the nine months ended September 30, 2018, the Company paid Mr. Morrisett $101,400 and Mr. Pritchard $101,962 for services rendered. In addition, as of September 30, 2019 Mr. Pritchard has outstanding advances of $33,017.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation. The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, Empire Louisiana, LLC ("Empire Louisiana") and Empire North Dakota, LLC ("Empire North Dakota"). All material intercompany balances and transactions have been eliminated.

Use of estimates in the preparation of financial statements. Preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Depletion of oil and natural gas properties is determined using estimates of proved oil and natural gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves, commodity price outlooks and prevailing market rates of other sources of income and costs. Other significant estimates include, but are not limited to, asset retirement obligations, fair value of assets purchased in acquisitions, and taxes.

Interim financial statements. The accompanying consolidated financial statements of the Company have not been audited by the Company's independent registered public accounting firm. In preparing the accompanying consolidated financial statements, management has made certain estimates and assumptions that affect reported amounts in the consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results.

Certain disclosures have been condensed in or omitted from these consolidated financial statements. Accordingly, these condensed notes to the consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Inventory Inventory consists of oil in tanks which has not been delivered and is valued at the contract price to the buyer and pipe which has not yet been put into production.

Revenue recognition. The Company recognizes revenues from the sales of oil and natural gas to its customers and presents them disaggregated on the Company's consolidated statements of operations. The Company enters into contracts with customers to sell its oil and natural gas production. Revenue on these contracts is recognized in accordance with the five-step revenue recognition model prescribed in ASC 606. Specifically, revenue is recognized when the Company's performance obligations under these contracts are satisfied, which generally occurs with the transfer of control of the oil and natural gas to the purchaser. Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature of the products sold, revenue is recognized at a point in time based on the amount of consideration the Company expects to receive in accordance with the price specified in the contract. Consideration under the oil and natural gas marketing contracts is typically received from the purchaser one to two months after production. At September 30, 2019, the Company had receivables related to contracts with customers of approximately $880,000.

Fair value measurements. The Financial Accounting Standards Board ("FASB") fair value measurement standards define fair value, establish a consistent framework for measuring fair value and establish a fair value hierarchy based on the observability of inputs used to measure fair value.

Convertible debt - The carrying value of the convertible debt approximate fair value as of September 30, 2019. Management's estimates are based on the assessment of qualitative factors that are considered Level 3 measurements in the fair value hierarchy as required by FASB ASC 820.

Oil and natural gas properties - The fair value of proved and unproved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved and unproved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. The Company utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired.

The fair value of asset retirement obligations is included in proved oil and natural gas properties with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.

The inputs used to value oil and natural gas properties and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs.

Financial instruments and other- The fair values determined for accounts receivable, accounts payable – trade, accrued drilling costs and other current liabilities were equivalent to the carrying value due to their short-term nature.

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3.	PROPERTY AND EQUIPMENT

In 2018, the Company, through its subsidiary, Empire Louisiana, LLC, purchased oil and natural gas properties in St. Landry and Beauregard parishes in Louisiana. In March 2019, the Company, through its subsidiary, Empire North Dakota, LLC, purchased oil and natural gas properties in Montana and North Dakota.

The aggregate capitalized costs of oil and natural gas properties as of September 30, 2019, are as follows:

Proved producing wells	$	3,900,739
Proved undeveloped		2,232,458
Lease and well equipment		1,106,342
Asset retirement obligation		3,629,491
Unproved leasehold costs		9,121
Gross capitalized costs		10,878,151
Less: accumulated depreciation and depletion		(1,664,059	)
	$	9,214,092

Other property and equipment consists of office furniture and equipment.

Oher property and equipment, at cost	$	14,456
Less: accumulated depreciation		(1,046	)
Oher property and equipment, net		13,410

4.	ACQUISITION OF WARHORSE OIL AND NATURAL GAS PROPERTIES

On June 10, 2019, the Company received a process verbal and related sheriff's deed dated as of May 29, 2019 (the "Sheriff's Deed") pertaining to two wells in St. Landry Parish purchased from Business First Bancshares, Inc. d/b/a Business First Bank ("Business First").

Pursuant to the Sheriff's Deed, the Company acquired certain oil and natural gas properties located in St. Landry Parish, Louisiana, including operated working interest in two producing wells. The Company purchased Business First's position as the superior lienholder and seizing creditor of such oil and natural gas properties, which were owned by Warhorse Oil & Gas, LLC, for $450,000 plus $16,993 sheriff fees. The payment was paid from loan proceeds under the loan agreement with CrossFirst Bank (see Note 7).

The Company had been operating the two wells for Business First since July 2018. Both wells combined produce approximately 31 barrels of oil per day. Working interest purchased by the Company is 48.2% on the Jay Butler No. 1 well and 45% in the Richard No. 1 well.

The Company treated the acquisition as an asset purchase. An amount equal to $90,000 was allocated to lease and well equipment and $376,993 was allocated to producing properties. An asset retirement obligation of $19,732 was recorded in conjunction with the purchase.

5.	ACQUISITION OF ENERGYQUEST II ASSETS

On March 28, 2019, the Company purchased oil producing properties from EnergyQuest II, LLC ("EnergyQuest") for a purchase price of $5,418,653. The effective date of the transaction is January 1, 2019. After certain adjustments related to the effective date, the total proceeds paid to EnergyQuest were $5,458,043. Such proceeds were paid from borrowing on notes payable and sales of unregistered securities of the Company.

The oil and natural gas properties purchased from EnergyQuest include 184 wells in Montana and North Dakota currently producing approximately 375 barrels of oil equivalent (BOE) per day, and Empire operates 139 of such wells. Engineering reports for the properties estimate proved developed reserves 2,874 Mbbls of oil and 13.8 MMcf of natural gas.

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The following table sets forth the Company's purchase price allocation:

Fair Value of Assets Acquired
Accounts receivable	$	1,256,094
Inventory of oil in tanks		438,320
Oil properties		8,341,525

Total Assets Acquired	$	10,035,939

Fair Value of Liabilities Assumed
Accounts payable – trade	$	1,310,516
Asset retirement obligations		3,267,380

Total liabilities assumed	$	4,577,896

Total consideration paid	$	5,458,043

The fair values of assets acquired and liabilities assumed were based on the following key inputs:

Oil and natural gas properties

The fair value of proved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. The Company utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired.

The fair value of asset retirement obligations totaled $3,267,380 and is included in proved oil and natural gas properties with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.

The inputs used to value oil and natural gas properties and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs.

Financial instruments and other

The fair values determined for accounts receivable and accounts payable - trade were equivalent to the carrying value due to their short-term nature.

Accounts payable - trade includes approximately $1,310,516 of liabilities primarily related to well activity prior to close.

6.	DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses derivative financial instruments to manage its exposure to commodity price fluctuations. Commodity derivative instruments are used to reduce the effect of volatility of price changes on the oil and natural gas the Company produces and sells. The Company’s derivative financial instruments consist of oil and natural gas swaps.

The Company does not enter into derivative financial instruments for speculative or trading purposes.

The Company does not designate its derivative instruments to qualify for hedge accounting. Accordingly, the Company reflects changes in the fair value of its derivative instruments in its consolidated statements of operations as they occur. Unrealized gains and losses related to the swap contracts are recognized and recorded as an asset or liability on the Company’s balance sheet.

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The following table summarizes the net realized and unrealized amounts reported in earnings related to the commodity derivative instruments for the nine months ended September 30, 2019 and 2018:

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019			2018
Gain on derivatives:
Oil derivatives	$	492,530	$	—		$	917,482	$	—
Natural gas derivatives		332		—			7,749		—
Total	$	492,862	$	—		$	925,231	$	—

The following represents the Company’s net cash receipts from derivatives for the nine months ended September 30, 2019 and 2018:

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019			2018
Net cash received from payments on derivatives
Oil derivatives	$	156,820	$	—		$	250,323	$	—
Natural gas derivatives		6,846		—			11,557		—
Total	$	163,666	$	—		$	261,880	$	—

The following table sets forth the Company’s outstanding derivative contracts at September 30, 2019. All of the Company’s derivatives are expected to settle by August 31, 2021:

	1^st Quarter		2^nd Quarter		3^rd Quarter		4^th Quarter
2019
Oil Swaps:
Volume (MBbl)		—		—		—		24.58
Price per Bbl		—		—		—	$	61.37


2020
Oil Swaps:
Volume (MBbl)		23.41		23.17		22.94		20.94
Price per Bbl	$	60.32	$	59.53	$	58.26	$	55.09


2021
Oil Swaps:
Volume (MBbl)		15.51		6.69		4.50		—
Price per Bbl	$	49.29	$	49.25	$	49.11		—

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7. NOTES PAYABLE

In July and August 2018, the Company entered into two unsecured note agreements totaling $25,000 with Mr. Anthony Kamin, who is also a member of the Company's Board of Directors. The notes are payable on demand and accrue interest at 8% interest. In February 2019, the Company and Mr. Kamin entered into an unsecured note agreement in the amount of $25,000. The note was due May 1, 2019, and accrued interest at 8%. In March 2019, Mr. Kamin used the $50,000 note balances to exercise some of his outstanding warrants to purchase common stock (see Note 8).

In February 2019, the Company entered into five unsecured promissory note agreements with accredited investors, including the agreement with Mr. Kamin discussed above, totaling $90,000. The notes were due May 1, 2019, and accrued interest at 8%. One of the notes, in the amount of $15,000 was issued to Michael R. Morrisett, the Company's President. These notes and the related interest were paid in May 2019.

On March 27, 2019, the Company entered into a First Amendment to the Senior Revolver Loan Agreement (the "Agreement") with Crossfirst Bank. Under the terms of the Agreement, the commitment amount was increased to $9,000,000 and the maturity date was extended until March 27, 2021. The Company borrowed $4,880,383 of new funds and paid $76,900 in loan origination fees which were added to the balance of the loan. The unamortized loan origination fees have been netted against the outstanding loan balance in accordance with generally accepted accounting principles. The Agreement requires the Company to maintain certain covenants including an EBITDAX to interest expense of at least 3:1 and funded debt to EBITDAX of 4:1 on a trailing 12-month basis. As a part of the First Amendment to the Agreement in conjunction with the Energy Quest II, LLC acquisition, the covenants were modified on a retrospective basis.

On December 31, 2018, the Company and investors for all of the Senior Unsecured Convertible Promissory Notes (the Notes) entered into amended agreements whereby the maturity dates for the notes maturing December 31, 2018 were extended to December 31, 2019, the conversion feature of the notes was modified from $0.15 per share of common stock to $0.10 per share. Additionally, the Warrant Certificates to purchase shares of common stock of the Company, which were issued as a part of the original agreements, were repriced from $0.25 per share to $0.15 per share. The value allocated to the Warrant Certificates modification was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 167%, risk free interest rate of 2.63% and an expected useful life of 12 months. The change in fair value of the Warrant Certificates as a result of the modifications of $139,985 was allocated to Paid in Capital and included as an expense in 2018. The Notes conversion features were equivalent to their intrinsic value at the date of modification. The remaining Debt Issue Costs as of September 30, 2019, from the original notes which mature at December 31, 2019, of $1,449 will be amortized as interest expense over the remaining life of the Notes.

The following table reflects the composition of convertible notes as of September 30:

	2019								2018
	Current			Long Term		Total			Total
Convertible Notes Outstanding	$	152,500		$	—	$	152,500		$	260,000
Debt Issue Costs – Warrants and Conversion Feature		(1,449	)		—		(1,449	)		(27,673	)

Convertible Notes Outstanding, Net	$	151,051		$	—	$	151,051		$	232,327

In the second quarter of 2019, three of the Senior Unsecured Promissory Note investors exercised the conversion feature and converted their $107,500 notes for 1,075,000 shares of the Company's common stock.

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8. EQUITY

Diluted Earnings per Share ("EPS") gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on losses. As a result, if there is a loss from continuing operations, Diluted EPS is computed in the same manner as Basic EPS. At September 30, 2019 and 2018, the Company had 5,004,167 and 4,167 respectively, options outstanding that were not included in the calculation of earnings per share for the periods then ended. Such financial instruments may become dilutive and would then need to be included in future calculations of Diluted EPS. At September 30, 2019 and 2018, the outstanding options were considered anti-dilutive since the strike prices were above the market price and since the Company has incurred losses year to date.

During January 2018, the Company issued to several accredited investors 1,100,000 shares of its common stock and warrants to purchase 1,100,000 shares of its common stock for $0.15 per share which expires on December 31, 2019. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 185%, risk free interest rate of 2.05% and an expected useful life of 24 months. The fair value of the warrants of $108,900 was allocated to Paid in Capital.

During March 2018, the Company issued to an accredited investor 100,000 shares of its common stock and warrants to purchase 100,000 shares of its common stock for $0.15 per share which expires on December 31, 2019. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 179%, risk free interest rate of 2.22% and an expected useful life of 22 months. The fair value of the warrants of $9,900 was allocated to Paid in Capital.

During June 2018, the Company issued warrants to purchase 645,000 shares of its common stock for $0.25 per share which expire on December 31, 2019 to several professionals for business assistance provided. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 174%, risk free interest rate of 2.38% and an expected useful life of 19 months. The fair value of the warrants of $117,068 was recorded as compensation expense and allocated to Paid in Capital.

During June 2018, the Company issued to an accredited investor 100,000 shares of its common stock and warrants to purchase 100,000 shares of its common stock for $0.15 per share which expires on December 31, 2019. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 197%, risk free interest rate of 2.43% and an expected useful life of 18 months. The fair value of the warrants of $9,900 was allocated to Paid in Capital.

In March 2019, 1,446,668 outstanding $0.15 warrants were converted to shares of common stock of the Company. Proceeds received from the conversion was $217,000 including $50,000 of notes payable conversion by Mr. Kamin.

During May 2019, the Company issued warrants to purchase 300,000 shares of its common stock for $0.17 per share which expire on December 31, 2021 to a former employee for business assistance provided. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 217%, risk free interest rate of 1.92% and an expected useful life of 31 months. The fair value of the warrants of $58,380 was recorded as compensation expense and allocated to Paid in Capital.

On April 3, 2019, the Board of Directors of the Company adopted the Empire Petroleum Corporation 2019 Stock Option Plan (the "Stock Option Plan"). The total number of shares of common stock that may be issued pursuant to stock options under the Stock Option Plan is 10,000,000. Further, on April 3, 2019 the Company granted Mr. Pritchard and Mr. Morrissett each, options to purchase 2,500,000 shares of common stock of the Company at an exercise price of $0.33 per share. The options vest in three installments with 1,250,000 vesting immediately and 625,000 vesting each in April 2020 and April, 2021. All of the options expire in April, 2029. The value allocated to the vested options was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 213%, risk free interest rate of 2.32% and an expected useful life of 5.375 years. The fair value of the options of $812,500 was recorded as compensation expense and allocated to Paid in Capital.

On April 3, 2019 the Board of Directors of the Company amended certain warrant certificates which had been issued to Mr. Kamin covering 3,000,000 warrants to purchase common stock of the Company. The original warrants expired on December 31, 2021 and had exercise prices of $0.15 and $0.25 for 500,000 and 2,500,000 shares, respectively. The warrants were extended to expire on April 2, 2029. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 213%, risk free interest rate of 2.32% and an expected useful life of 5 years. The fair value of the warrants of $620,750 was recorded as compensation expense and allocated to Paid in Capital.

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Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL TO ALL PERIODS

RESULTS OF OPERATIONS

The Company's primary business is the exploration and development of oil and natural gas interests. The Company has incurred significant losses from operations, and there is no assurance that it will achieve profitability or obtain the funds necessary to finance its operations. For all periods presented, the Company's effective tax rate is 0%. The Company has generated net operating losses since inception, which would normally reflect a tax benefit in the statement of operations and a deferred asset on the balance sheet. However, because of the current uncertainty as to the Company's ability to achieve profitability, a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented in the statements of operations.

The following table sets forth a summary of our production and operating data for the nine months ended September 30, 2019. The Company had no production prior to August 2018. Because of normal production declines, increased or decreased drilling activities, fluctuations in commodity prices and the effects of acquisitions or divestitures, the historical information presented below should not be interpreted as being indicative of future results.

	Three months ended September 30, 2019		Nine months ended September 30, 2019
Production and operating data:
Net production volumes:
Oil (Bbl) (a)		34,276		76,687
Natural gas (Mcf) (b)		10,501		33,555
Total (Boe) (c)		36,026		82,280

Average price per unit:
Oil (Bbl) (a)	$	52.92	$	54.03
Natural gas (Mcf) (b)	$	3.14	$	2.98
Total (Boe) (c)	$	51.27	$	51.57

(a) Bbl – One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to oil, condensate or natural gas liquids.
(b) Mcf – One thousand cubic feet of natural gas
(c) Boe – One barrel of oil equivalent, a standard convention used to express oil and natural gas volumes on a comparable oil equivalent basis. Natural gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of natural gas to 1.0 Bbl of oil or condensate.

Operating costs and expenses per Boe:
Oil and natural gas production	$	43.79	$	36.11
Production taxes	$	3.05	$	3.15
Depreciation, depletion, amortization and accretion	$	23.11	$	21.67
General and administrative	$	13.04	$	38.00

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THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2019 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2018.

For the three months ended September 30, 2019 and 2018, revenues were $ 1,695,264 and $24,277 respectively. The Company purchased its first oil and natural gas properties on September 27, 2018, so only four days of production occurred prior to September 30, 2018 compared to a full three months of production in 2019.

Operating expenses, production taxes, depreciation and depletion and amortization and accretion increased to $2,519,942 cumulatively for the three months ended September 30, 2019 from $30,422 for the same period in 2018. The increase was due to only four days of production costs in the period ended September 30, 2018.

Gain on derivatives, net increased to $492,862 for the three months ended September 30, 2019, from $0 in the same period due to decrease in oil prices since the agreements were entered into or since March, 31, 2019 for those contracts in existence at that date. The Company had no derivatives during the three months ended September 30, 2018.

General and administrative expenses increased by $264,395 to $469,792 for the three months ended September 30, 2019, from $205,397 for the same period in 2018. The increase was primarily due to wages, professional fees and insurance associated with administration of oil and natural gas properties and travel related to the acquisition of oil and natural gas properties in 2019.

Interest expense was $145,345 and $22,032 for the three months ended September 30, 2019 and 2018, respectively. The increase in interest expense of $123,313 resulted primarily from the debt issued to acquire oil and natural gas properties in 2018 and 2019.

For the reasons discussed above, net loss increased by $713,379 from $(233,574) for the three months ended September 30, 2018, to $(946,953) for the three months ended September 30, 2019.

NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2019 COMPARED TO NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2018.

For the nine months ended September 30, 2019 and 2018, revenues were $ 4,016,232 and $24,277 respectively. The Company purchased its first oil and natural gas properties on September 27, 2018, so only four days of production occurred prior to September 30, 2018 compared to a full nine months of production in 2019.

Operating expenses, production taxes, depreciation and depletion and amortization and accretion increased to $5,013,319 cumulatively for the nine months ended September 30, 2019 from $30,422 for the same period in 2018. The increase was due to only four days of production costs in the period ended September 30, 2018 caused by the Company’s first acquisition closing on September 27, 2018, compared to a full nine months of production in 2019.

Gain on derivatives, net increased to $925,231 for the nine months ended September 30, 2019, from $0 in the same period due to decrease in oil prices since the agreements were entered into, or since December 31, 2018 for those contracts in existence at that date. The Company had no derivatives during the nine months ended September 30, 2018.

General and administrative expenses increased by $2,483,927 to $3,126,403 for the nine months ended September 30, 2019, from $642,476 for the same period in 2018. The increase was primarily due to options and warrants granted, wages and professional fees associated with administration of oil and natural gas properties and travel fees related to the acquisition of oil and natural gas properties and capital raises in 2019.

Interest expense was $342,256 and $61,505 for the nine months ended September 30, 2019 and 2018, respectively. The increase in interest expense of $280,751 resulted primarily from the debt issued to acquire oil and natural gas properties in 2018 and 2019.

For the reasons discussed above, net loss increased by $2,830,389 from $(710,126) for the nine months ended September 30, 2018, to $(3,540,515) for the nine months ended September 30, 2019.

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RECENTLY ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board ("FASB") periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The following is a summary of recent accounting pronouncements that are relevant to the Company:

In November 2018, the FASB issued ASU No. 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606," ("ASU 2018-18") which, among other things, clarifies that (i) certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (ii) adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606, and (iii) requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and early adoption is permitted. The amendments in this update should be applied retrospectively to the date of initial application of Topic 606. An entity should recognize the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings of the later of the earliest annual period presented and the annual period that includes the date of the entity's initial application of Topic 606. Management has reviewed the new standard in conjunction with its current practices and believes that it will not have a material impact on the financial statements.

In June 2016, the FASB issued ASU 2016-13: “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.” This ASU requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. This ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal periods. Entities may adopt earlier as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years. We are currently in the process of evaluating this new standard update; the Company’s accounts receivable are from oil and natural gas sales and are generally received soon after the sale.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

As of September 30, 2019, the Company had $18,076 of cash. The Company expects to incur costs related to future oil and natural gas acquisitions for the foreseeable future. It is expected that management will attempt to raise additional capital for future investment and working capital opportunities.

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OUTLOOK

See Note 5 to the financial statements for information regarding the purchase agreement the Company entered into in 2019 to purchase existing oil and natural gas properties and mineral interests. The Company is also actively pursuing the acquisition of other operated and non-operated oil and natural gas properties. It is anticipated that such acquisitions will be financed through equity or debt transactions.

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q, including this section, includes certain statements that may be deemed "forward-looking statements" within the meaning of federal securities laws. All statements, other than statements of historical facts, that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future, including future sources of financing and other possible business developments, are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties and could be affected by a number of different factors, including the Company's failure to secure short and long-term financing necessary to sustain and grow its operations, increased competition, changes in the markets in which the Company participates and the technology utilized by the Company and new legislation regarding environmental matters. These risks and other risks that could affect the Company's business are more fully described in reports the Company files with the SEC, including its Form 10-K for the year ended December 31, 2018. Actual results may vary materially from the forward-looking statements.

The Company undertakes no duty to update any of the forward-looking statements in this Form 10-Q.

MATERIAL RISKS

The Company has incurred significant losses from operations and there is no assurance that it will achieve profitability or obtain the funds necessary to finance continued operations. For other material risks, see the Company's Form 10-K for the year ended December 31, 2018, which was filed on April 1, 2019.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Item 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an evaluation under the supervision of the Company's President (and principal financial officer) of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Securities Exchange Act Rules 13a - 15(e) and 15d - 15(e). Based on this evaluation, the Company's President (and principal financial officer) has concluded that the disclosure controls and procedures as of the end of the period covered by this report are effective.

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PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

Not applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

31.1	Certification of Thomas Pritchard, Chief Executive Officer, pursuant to Rules 13a - 14 (a) and 15(d) - 14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(1) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith).

31.2	Certification of Michael R. Morrisett, President and principal financial officer, pursuant to Rules 13a - 14 (a) and 15(d) - 14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(1) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith).

32.1	Certification of Thomas Pritchard, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith).

32.2	Certification of Michael R. Morrisett, President and principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith).

101	Financial Statements for XBRL format (submitted herewith).

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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.

		Empire Petroleum Corporation

Date:	November 14, 2019	By:	/s/ Michael R. Morrisett
			Michael R. Morrisett
			President
			(principal financial officer)


Date:	November 14, 2019	By:	/s/ Thomas Pritchard
			Thomas Pritchard
			Chief Executive Officer

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EXHIBIT INDEX

NO.	DESCRIPTION

31.1	Certification of Thomas Pritchard, Chief Executive Officer, pursuant to Rules 13a - 14 (a) and 15(d) - 14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(1) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith).

31.2	Certification of Michael R. Morrisett, President (principal financial officer), pursuant to Rules 13a - 14 (a) and 15(d) - 14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(1) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith).

32.1	Certification of Thomas Pritchard, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith).

32.2	Certification of Michael R. Morrisett, President (principal financial officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith).

101	Financial Statements for XBRL format (submitted herewith).

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