**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 

**(Mark One)**

**x**                              QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

** **

**For the quarterly periodended December 31, 2006**

** **

**o**                                 TRANSITION REPORTUNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

** **

**For the transition periodfrom                  to**

** **

**Commission file number001-32496**

** **

**CANOPETROLEUM, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                     |   | **77-0635673**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation or  organization) |   | (IRS Employer  Identification No.) |

 

**The Burnett Plaza**

**801 Cherry Street,Suite 3200**

**Fort Worth, TX 76102**

(Address of principal executive offices)

**(817) 698-0900**

(Issuer’s telephone number)

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (orfor 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  x    No  o

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of acceleratedfiler and large accelerated filer in rule 12b-2 of the Exchange Act. (checkone):

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|---------------------------|--------|----------------------|--------|--------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes  o     No x

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date:  32,308,894 shares of commonstock, $.0001 par value per share, as of February 8, 2007.

 

 

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**PART I— FINANCIAL INFORMATION**

**Item 1. FinancialStatements.**

**CANOPETROLEUM, INC.CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                                                                                                   | ** ** | **December 31,** | ** **      | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|-------------------|------------|
| ** **                                                                                                                                                                                                                                                   | ** ** | **2006**              | ** **      | **2006**          | ** ** |
| ** **                                                                                                                                                                                                                                                   | ** ** | **(Unaudited)**       | ** **      | ** **        | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                   | ** ** | ** **            | ** **      | ** **        | ** ** |
| **Current assets**                                                                                                                                                                                                                                           | ** ** | ** **            | ** **      | ** **        | ** ** |
| Cash and cash  equivalents                                                                                                                                                                                                                                   |       | $                     | 902,017         |              | $          | 644,659 |   |
| Accounts  receivable                                                                                                                                                                                                                                         |       | 2,614,267             |            | 3,563,649         |       |
| Derivative  assets                                                                                                                                                                                                                                           |       | 1,535,267             |            | 1,176,959         |       |
| Prepaid expenses                                                                                                                                                                                                                                             |       | 509,485               |            | 205,349           |       |
| Inventory                                                                                                                                                                                                                                                    |       | 304,868               |            | 396,081           |       |
| Other current  assets                                                                                                                                                                                                                                        |       | 101,355               |            | 641,759           |       |
| Total current  assets                                                                                                                                                                                                                                        |       | 5,967,259             |            | 6,628,456         |       |
|                                                                                                                                                                                                                                                         |       |                  |            |              |       |
| **Oil  and gas properties**, successful efforts method                                                                                                                                                                                                       |       | 143,784,867           |            | 133,176,618       |       |
| Less accumulated  depletion and depreciation                                                                                                                                                                                                                 |       | (3,828,376            | )               | (2,126,049        | )          |
| Net oil and gas  properties                                                                                                                                                                                                                                  |       | 139,956,491           |            | 131,050,569       |       |
| ** **                                                                                                                                                                                                                                                   | ** ** | ** **            | ** **      | ** **        | ** ** |
| Fixed assets and other,  net                                                                                                                                                                                                                                 |       | 7,745,614             |            | 6,778,055         |       |
| Derivative assets                                                                                                                                                                                                                                            |       | 2,408,317             |            | 1,705,855         |       |
| Goodwill                                                                                                                                                                                                                                                     |       | 785,796               |            | 785,796           |       |
| **TOTAL ASSETS**                                                                                                                                                                                                                                             | ** ** | **$**                 | **156,863,477** | ** **        | **$**      | **146,948,731** | ** ** |
| ** **                                                                                                                                                                                                                                                   | ** ** | ** **            | ** **      | ** **        | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                               |       |                  |            |              |       |
| **Current liabilities**                                                                                                                                                                                                                                      |       |                  |            |              |       |
| Accounts payable                                                                                                                                                                                                                                             |       | $                     | 3,577,126       |              | $          | 2,304,198 |   |
| Oil and gas  payable                                                                                                                                                                                                                                         |       | 768,435               |            | 1,399,047         |       |
| Accrued  liabilities                                                                                                                                                                                                                                         |       | 252,155               |            | 321,183           |       |
| Taxes payable                                                                                                                                                                                                                                                |       | 584,722               |            | 419,692           |       |
| Current portion  of asset retirement obligations                                                                                                                                                                                                             |       | 20,571                |            | 19,809            |       |
| Total current  liabilities                                                                                                                                                                                                                                   |       | 5,203,009             |            | 4,463,929         |       |
| **Long-term liabilities**                                                                                                                                                                                                                                    |       |                  |            |              |       |
| Long-term debt                                                                                                                                                                                                                                               |       | 2,500,000             |            | 68,750,000        |       |
| Asset retirement  obligations                                                                                                                                                                                                                                |       | 1,605,926             |            | 1,587,569         |       |
| Taxes payable  non-current                                                                                                                                                                                                                                   |       | —                |            | —            |       |
| Deferred tax  liability                                                                                                                                                                                                                                      |       | 32,348,000            |            | 31,511,000        |       |
| Total  liabilities                                                                                                                                                                                                                                           |       | 41,656,935            |            | 106,312,498       |       |
|                                                                                                                                                                                                                                                         |       |                  |            |              |       |
| **Temporary Equity**                                                                                                                                                                                                                                         |       |                  |            |              |       |
| Series D  convertible preferred stock and paid-in-kind dividend; liquidation preference  is $49,797,005                                                                                                                                                      |       | 46,575,812            |            | —            |       |
|                                                                                                                                                                                                                                                         |       |                  |            |              |       |
| **Commitments and contingencies  (Note 11)**                                                                                                                                                                                                                 | ** ** | ** **            | ** **      | ** **        | ** ** |
| **Stockholders’ equity**                                                                                                                                                                                                                                |       |                  |            |              |       |
| Common stock,  par value $.0001 per share; 50,000,000 authorized; 33,577,188 and 32,308,894  shares issued and outstanding at December 31, 2006, respectively; and  26,987,941 and 25,719,647 shares issued and outstanding at June 30, 2006,  respectively. |       | 3,344                 |            | 2,685             |       |
| Additional paid-in  capital                                                                                                                                                                                                                                  |       | 83,097,176            |            | 53,054,699        |       |
| Accumulated  deficit                                                                                                                                                                                                                                         |       | (13,899,058           | )               | (11,850,419       | )          |
| Treasury stock,  at cost; 1,268,294 shares held in escrow                                                                                                                                                                                                    |       | (570,732              | )               | (570,732          | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                             |       | 68,630,730            |            | 40,636,233        |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                          | ** ** | **$**                 | **156,863,477** | ** **        | **$**      | **146,948,731** | ** ** |

 

***See accompanying notes to these unaudited financialstatements.***

2

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**CANO PETROLEUM, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                      | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating Revenues:**                         | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Crude oil and  natural gas sales                |       | $                                                   | 6,902,524  |                                              | $          | 3,163,282 |   | $ | 15,556,197 |   | $ | 5,109,241 |   |
|                                            |       |                                                |       |                                              |       |   |   |   |   |
| **Operating Expenses:**                         |       |                                                |       |                                              |       |   |   |   |   |
| Lease operating  expenses                       |       | 2,465,451                                           |       | 1,240,129                                         |       | 5,413,045 |   | 1,990,302 |   |
| Production and  ad valorem taxes                |       | 592,253                                             |       | 191,526                                           |       | 1,243,619 |   | 301,198 |   |
| General and  administrative                     |       | 2,698,946                                           |       | 1,833,428                                         |       | 5,889,479 |   | 3,210,344 |   |
| Accretion of  asset retirement obligations      |       | 34,086                                              |       | 24,780                                            |       | 67,530 |   | 45,374 |   |
| Depletion and  depreciation                     |       | 1,114,872                                           |       | 280,070                                           |       | 2,130,036 |   | 426,859 |   |
| Total operating  expenses                       |       | 6,905,608                                           |       | 3,569,933                                         |       | 14,743,709 |   | 5,974,077 |   |
|                                            |       |                                                |       |                                              |       |   |   |   |   |
| **Income (loss) from operations**               |       | (3,084                                              | )          | (406,651                                          | )          | 812,488 |   | (864,836 | ) |
|                                            |       |                                                |       |                                              |       |   |   |   |   |
| **Other income (expenses):**                    |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense                                |       | (175,485                                            | )          | (331,440                                          | )          | (2,066,744 | ) | (331,440 | ) |
| Unrealized loss on  hedge contracts             |       | (693,016                                            | )          | (1,635,537                                        | )          | (156,990 | ) | (1,635,537 | ) |
| Interest income and  other, net                 |       | 74,413                                              |       | 94,092                                            |       | 91,182 |   | 94,320 |   |
| Total other  income (expenses)                  |       | (794,088                                            | )          | (1,872,885                                        | )          | (2,132,552 | ) | (1,872,657 | ) |
|                                            |       |                                                |       |                                              |       |   |   |   |   |
| Loss before income  taxes                       |       | (797,172                                            | )          | (2,279,536                                        | )          | (1,320,064 | ) | (2,737,493 | ) |
|                                            |       |                                                |       |                                              |       |   |   |   |   |
| Income tax benefit                              |       | 352,000                                             |       | 793,000                                           |       | 507,000 |   | 793,000 |   |
|                                            |       |                                                |       |                                              |       |   |   |   |   |
| **Net loss**                                    |       | (445,172                                            | )          | (1,486,536                                        | )          | (813,064 | ) | (1,944,493 | ) |
| ** **                                      |       |                                                |       |                                              |       |   |   |   |   |
| Preferred stock dividend                        |       | 966,971                                             |       | —                                            |       | 1,235,575 |   | — |   |
| ** **                                      |       |                                                |       |                                              |       |   |   |   |   |
| **Net loss applicable to common  stock**        |       | $                                                   | (1,412,143 | )                                                 | $          | (1,486,536 | ) | $ | (2,048,639 | ) | $ | (1,944,493 | ) |
| ** **                                      |       |                                                |       |                                              |       |   |   |   |   |
| **Net loss per share - basic and  diluted**     |       | $                                                   | (0.04      | )                                                 | $          | (0.06 | ) | $ | (0.07 | ) | $ | (0.09 | ) |
| ** **                                      |       |                                                |       |                                              |       |   |   |   |   |
| **Weighted average common shares  outstanding** |       |                                                |       |                                              |       |   |   |   |   |
| Basic and diluted                               |       | 31,891,608                                          |       | 23,019,714                                        |       | 28,967,429 |   | 20,517,156 |   |

 

***See accompanying notes to these unauditedfinancial statements.***

 

3

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**CANO PETROLEUM, INC.CONSOLIDATED STATEMENT OF CHANGESIN STOCKHOLDERS’ EQUITYJULY 1, 2006 THROUGH DECEMBER 31, 2006(Unaudited)**
| ** **                                                | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | **Treasury Stock** | ** ** | ** ** | ** **  |
|-----------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|-------------------------|------------|------------|-------------|
| ** **                                                | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit**             | ** ** | **Shares** | ** **  | **Amount** | ** ** | **Total** | ** ** |
|                                                      |       |                  |       |                    |       |            |       |                    |       |       |        |   |   |   |   |
| Balance at July 1, 2006                                   |       | 25,719,647            |       | $                       | 2,685      |            | $          | 53,054,699              |       | $          | (11,850,419 | ) | 1,268,294 |   | $ | (570,732 | ) | $ | 40,636,233 |   |
|                                                      |       |                  |       |                    |       |            |       |                    |       |       |        |   |   |   |   |
| Net proceeds from  issuance of common shares and warrants |       | 6,584,247             |       | $                       | 659        |            | $          | 29,704,737              |       | —     |        | — |   | — |   | $ | 29,705,396 |   |
|                                                      |       |                  |       |                    |       |            |       |                    |       |       |        |   |   |   |   |
| Stock based  compensation, net of forfeiture settlement   |       | 5,000                 |       | —                  |       | 337,740         |       | —                  |       | —     |        | — |   | 337,740 |   |
|                                                      |       |                  |       |                    |       |            |       |                    |       |       |        |   |   |   |   |
| Preferred stock dividend                                  |       | —                |       | —                  |       | —          |       | (1,235,575              | )          | —     |        | — |   | (1,235,575 | ) |
|                                                      |       |                  |       |                    |       |            |       |                    |       |       |        |   |   |   |   |
| Net loss                                                  |       | —                |       | —                  |       | —          |       | (813,064                | )          | —     |        | — |   | (813,064 | ) |
|                                                      |       |                  |       |                    |       |            |       |                    |       |       |        |   |   |   |   |
| Balance at December 31, 2006                              |       | 32,308,894            |       | $                       | 3,344      |            | $          | 83,097,176              |       | $          | (13,899,058 | ) | 1,268,294 |   | $ | (570,732 | ) | $ | 68,630,730 |   |

 

***See accompanying notes to these unauditedfinancial statements.***

 

4

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**CANO PETROLEUM, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                          | ** ** | **Six Months Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------------------|-------------|
| ** **                                                                          | ** ** | **2006**                                              | ** **  | **2005** | ** ** |
| **Cash flow from operating  activities:**                                           |       |                                                  |        |   |   |
| Net loss                                                                            |       | $                                                     | (813,064    | ) | $ | (1,944,493 | ) |
| Adjustments  needed to reconcile to net cash flow provided by (used in) operations: |       |                                                  |        |   |   |
| Unrealized loss  on hedge contracts                                                 |       | 156,990                                               |        | 1,635,537 |   |
| Accretion of  asset retirement obligations                                          |       | 67,530                                                |        | 45,374 |   |
| Depletion and  depreciation                                                         |       | 2,130,036                                             |        | 426,859 |   |
| Stock  compensation expense                                                         |       | 337,740                                               |        | 369,380 |   |
| Deferred income  tax benefit                                                        |       | (507,000                                              | )           | (793,000 | ) |
| Amortization of  debt issuance and prepaid expenses                                 |       | 1,375,388                                             |        | — |   |
|                                                                                |       |                                                  |        |   |   |
| Changes in  operating assets and liabilities:                                       |       |                                                  |        |   |   |
|                                                                                |       |                                                  |        |   |   |
| Accounts  receivable                                                                |       | 949,382                                               |        | 456,950 |   |
| Derivative  assets                                                                  |       | (1,217,760                                            | )           | (5,317,710 | ) |
| Prepaid expenses                                                                    |       | (959,098                                              | )           | (151,222 | ) |
| Inventory                                                                           |       | 91,213                                                |        | (165,238 | ) |
| Accounts payable                                                                    |       | 1,272,928                                             |        | (509,871 | ) |
| Oil and gas  payable                                                                |       | (630,612                                              | )           | 155,626 |   |
| Accrued  liabilities                                                                |       | (69,028                                               | )           | (398,926 | ) |
| Taxes payable                                                                       |       | 165,030                                               |        | — |   |
| Other current  assets                                                               |       | 540,404                                               |        | 24,090 |   |
|                                                                                |       |                                                  |        |   |   |
| **Net cash provided by (used in)  operations**                                      | ** ** | **2,890,079**                                         | ** **  | **(6,166,644** | **)** |
|                                                                                |       |                                                  |        |   |   |
| **Cash flow from investing  activities:**                                           |       |                                                  |        |   |   |
| Additions to oil  and gas properties                                                |       | (10,410,734                                           | )           | (1,941,379 | ) |
| Additions to  fixed assets and other                                                |       | (695,374                                              | )           | (86,623 | ) |
| Acquisition of  W.O. Energy of Nevada, Inc.                                         |       | —                                                |        | (48,292,607 | ) |
| Acquisition of  additional Davenport revenue interest                               |       | (133,000                                              | )           | (500,250 | ) |
| **Net cash used in investing  activities**                                          | ** ** | **(11,239,108**                                       | **)**       | **(50,820,859** | **)** |
|                                                                                |       |                                                  |        |   |   |
| **Cash flow from financing  activities:**                                           |       |                                                  |        |   |   |
| Net proceeds  from long-term debt                                                   |       | 2,500,000                                             |        | 40,750,000 |   |
| Payment for  debt-issuance costs                                                    |       | (189,246                                              | )           | (684,986 | ) |
| Paydown  long-term debt                                                             |       | (68,750,000                                           | )           | — |   |
| Proceeds from  issuance of preferred stock, net                                     |       | 45,894,807                                            |        | — |   |
| Proceeds from  issuance of common stock and warrants, net                           |       | 29,705,396                                            |        | 18,369,594 |   |
| Payment of  preferred stock dividend                                                |       | (554,570                                              | )           | — |   |
| **Net cash from financing  activities**                                             | ** ** | **8,606,387**                                         | ** **  | **58,434,608** | ** ** |
|                                                                                |       |                                                  |        |   |   |
| Net increase in cash  and cash equivalents                                          |       | 257,358                                               |        | 1,447,105 |   |
|                                                                                |       |                                                  |        |   |   |
| Cash and cash  equivalents at beginning of period                                   |       | 644,659                                               |        | 145,489 |   |
|                                                                                |       |                                                  |        |   |   |
| **Cash and cash equivalents at  end of period**                                     | ** ** | **$**                                                 | **902,017** | ** ** | **$** | **1,592,594** | ** ** |
|                                                                                |       |                                                  |        |   |   |
| **Supplemental disclosure of cash  transactions:**                                  |       |                                                  |        |   |   |
| Cash paid during the  period for interest                                           |       | $                                                     | 2,196,081   |   | $ | — |   |
| ** **                                                                          |       |                                                  |        |   |   |
| **Supplemental disclosure of non-cash  transactions:**                              |       |                                                  |        |   |   |
| Payment of preferred  stock dividends in kind                                       |       | $                                                     | 681,005     |   | — |   |

 

***See accompanying notes to these unauditedfinancial statements.***

 

5

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**CANO PETROLEUM, INC.**

**NOTES TO FINANCIAL STATEMENTS**

**1.****   BASISOF PRESENTATION AND USE OF ESTIMATES**

The interim consolidated financial statements of CanoPetroleum, Inc. are unaudited and contain all adjustments (consistingprimarily of normal recurring accruals) necessary for a fair statement of theresults for the interim periods presented. Results for interim periods are notnecessarily indicative of results to be expected for a full year or forpreviously reported periods due in part, but not limited to, the volatility inprices for crude oil and natural gas, future commodity prices for derivativehedging contracts interest rates, estimates of reserves, drilling risks,geological risks, transportation restrictions, the timing of acquisitions,product demand, market competition, interruption in production, our ability toobtain additional capital, and the success of waterflooding and enhanced oilrecovery techniques. You should read these consolidated interim financialstatements in conjunction with the audited consolidated financial statementsand notes thereto included in Cano’s Form 10-KSB dated June 30, 2006.

 The accompanying financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”) and include the accounts of Cano and itswholly-owned subsidiaries. Intercompany accounts and transactions areeliminated. In preparing the accompanying financial statements, management hasmade certain estimates and assumptions that affect reported amounts in thefinancial statements and disclosures of contingencies. Actual results maydiffer from those estimates. Significant assumptions are required in thevaluation of proved oil and natural gas reserves, which may affect the amountat which oil and natural gas properties are recorded. It is at least reasonablypossible these estimates could be revised in the near term, and these revisionscould be material.

**NewAccounting Pronouncements**

On July 13, 2006, theFinancial Accounting Standards Board (“FASB”) released FIN 48, “Accounting forUncertainty in Income Taxes — an Interpretation of FASB Statement 109.” FIN 48 requires companies to evaluate and disclose material uncertain taxpositions it has taken with various taxing jurisdictions.  We arecurrently reviewing FIN 48 and are unable to determine the effect, if any, thatFIN 48 will have to our operating results, financial position, or future cashflows.  We will be required to adopt FIN 48 for our fiscal year endingJune 30, 2008.

**2.****   PREFERREDAND COMMON STOCK FINANCINGS**

On September 6, 2006, we sold in a private placement49,116 shares of Series D Convertible Preferred Stock at a price of $1,000.00per share and 6,584,247 shares of common stock at a price of $4.83 per share,the three day average closing price of the stock prior to the execution of thedefinitive agreements, plus a warrant component.  The preferred stock hasa 7.875% dividend and features a paid-in-kind (“PIK”) provision that allows, atthe investor’s option, the investor to receive additional shares of commonstock upon conversion for the dividend in lieu of a cash dividendpayment.  Holders of approximately 55% of the preferred stock chose thePIK dividend option.  The preferred stock is convertible to common stockat a price of $5.75 per share and the common stock was subject to 25% warrantcoverage at an exercise price of $4.79 per share.  If any Series DConvertible Preferred Stock remains outstanding on September 6, 2011, weare required to redeem the Series D Convertible Preferred Stock for aredemption amount in cash equal to the stated value of the Preferred Stock,plus accrued dividends and PIK dividends.  Gross proceeds from thetransactions were $80.9 million, of which $49.1 million was attributable to thepreferred stock, and $31.8 million was attributable to the common stock andwarrants.  Net proceeds were $75.6 million after deducting for issuancecosts of $5.3 million.

The warrant component totals 1,646,061 common sharesand is exercisable at $4.79 per share.  The exercise period commences onMarch 5, 2007 and expires on March 6, 2008.  We computed the fair value ofthe warrants at September 6, 2006 as approximately $2.3 million based on theBlack-Scholes model assuming the warrants will be exercised prior to the March6, 2008 expiration date, using a 53% expected volatility factor, a risk-freerate of 4.92% and assuming no expected dividend yield.  We have includedthe fair value of the warrants in Additional Paid-In Capital on ourconsolidated balance sheet as of December 31, 2006.

Cash proceeds from the financings were used to repaylong-term debt (see Note 3), for general corporate purposes and to fund ourcapital expenditures.

We were required to file a Registration Statement (FormS-1) with the Securities and Exchange Commission (“SEC”), which was filed onOctober 13, 2006 and was declared effective on January 4, 2007.  We arerequired to maintain the effectiveness of the registration statement, subjectto certain exceptions, and if the effectiveness is not maintained, then we mustpay 1.5% of the gross proceeds and an additional 1.5% for every 30 days it isnot maintained.  The maximum aggregate of all registration delay paymentsis 10% of the gross proceeds.

6

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Pursuant to the terms of the preferred stock andsubject to certain exceptions, if we issue or sell common stock at a price lessthan the conversion price (currently $5.75 per share) in effect immediatelyprior to such issuance or sale, the conversion price shall be reduced.  Ifsuch an issuance is made prior to June 6, 2007, the conversion price will belowered to the average of the conversion price and the issue or saleprice.  If such an issuance is made on or after June 6, 2007, theconversion price will be lowered to the issue or sale price.  The abovedescribed adjustments are not triggered by issuances or sales involving thefollowing: (i) shares issued in connection with an employee benefit plan; (ii)shares issued upon conversion of the Series D Convertible Preferred Stock; (iii)shares issued upon exercise of the warrants issued on September 6, 2006; (iv)shares issued in connection with a firm commitment underwritten pubic offeringwith gross proceeds in excess of $50,000,000; (v) shares issued in connectionwith any strategic acquisition or transaction; (vi) shares issued in connectionwith any options or convertible securities that were outstanding on August 25,2006; or (vii) shares issued in connection with any stock split, stockdividend, recapitalization or similar transaction.

Upon a voluntary or involuntary liquidation,dissolution or winding up of Cano or such subsidiaries of Cano the assets ofwhich constitute all or substantially all of the assets of the business of Canoand its subsidiaries taken as a whole, the holders of the Series D ConvertiblePreferred Stock shall be entitled to receive an amount per share equal to$1,000 plus dividends owing on such share prior to any payments being made toany class of capital stock ranking junior on liquidation to the Series DConvertible Preferred Stock.

In accordance with the provisions of Statement ofFinancial Accounting Standards No. 150,*Accounting for Certain Financial Instruments with Characteristics of BothLiabilities and Equity*and EITF D-98*“Classification and Measurement of Redeemable Securities”,* theissuance of preferred stock is accounted for as temporary equity.

For the three months ended December 31, 2006, thepreferred dividend was $966,970, of which $532,960 pertained to holders of thePIK dividend option.  For the six monthsended December 31, 2006, the preferred dividend was $1,235,575, of which$681,005 pertained to holders of the PIK dividend option.

The liquidation preference for the preferred stock is$49,797,005, which comprises the stated value of $49,116,000 and PIK dividendsof $681,005 as of December 31, 2006.

The amount of common shares issued and outstanding issummarized as follows:

| Issued shares as of June 30,  2006                     |   | 26,987,941 |   |
|--------------------------------------------------------|--------|------------|--------|
| Shares issued in  private placement (above)            |   | 6,584,247  |   |
| Contingently  issued shares (Note 6)                   |   | 5,000      |   |
| Issued shares as  of December 31, 2006                 |   | 33,577,188 |   |
| Management  shares returned to Treasury Stock (Note 6) |   | (1,268,294 | )      |
| Outstanding shares as  of December 31, 2006            |   | 32,308,894 |   |

 

**3.****   LONG-TERM DEBT**

Cash proceeds from the financings discussed in Note 2were used to repay $68.75 million of long-term debt outstanding at June 30,2006, consisting of amounts due under the senior credit agreement andsubordinated credit agreement of $53.75 million and $15 million,respectively.  Due to repaying the $15 million outstanding balance on thesubordinated credit agreement, this debt facility has been permanentlyretired.  The senior credit agreement, with a borrowing base of $55 million,is our only remaining source of debt.  At December 31, 2006, we hadoutstanding long-term debt of $2.5 million and we were in compliance with thecovenants stated in our senior credit agreement.  At December 31, 2006, the interest rate was9.25%.

**4.****   DERIVATIVEHEDGING CONTRACTS**

Pursuant to our senior credit agreement, we arerequired to enter into financial contracts to hedge a portion of our productionat specified prices for oil and natural gas. The objective of the hedgingcontracts is to reduce our exposure to commodity price risk associated withexpected oil and natural gas production. By achieving this objective we intendto protect the outstanding debt amounts and maximize the funds availableunder our existing senior credit agreement, which should enable us to supportour annual capital budgeting and expenditure plans.

During our fiscal year ended June 30, 2006, we paid$6.1 million to enter into financial contracts to set price floors.  During the six months ended December 2006, wepaid $1.2 million to enter into additional financial contracts to set pricefloors for the 2009 calendar year.  Thesefinancial contracts are summarized in the table below.

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| **Time  Period**        | ** ** | **Floor  Oil  Price** | ** ** | **Barrels  per Day** | ** ** | **Floor  Gas  Price** | ** ** | **Gas Mcf  per Day** | ** ** | **Barrels of  Equivalent  Oil  per Day** | ** ** |
|-------------------------|------------|-----------------------|------------|---------------------------|------------|-----------------------|------------|--------------------------------|------------|----------------------------------------------------|------------|
| 1/1/06 —  12/31/06 |       | $                     | 60         |                      | 534        |                  | $          | 8.50                           |       | 1,784                                              |       | 832 |   |
| 6/1/06 —  12/31/06 |       | $                     | 60         |                      | 79         |                  | $          | 7.60                           |       | 690                                                |       | 194 |   |
| 1/1/07 —  12/31/07 |       | $                     | 55         |                      | 507        |                  | $          | 8.00                           |       | 1,644                                              |       | 781 |   |
| 1/1/07 —  12/31/07 |       | $                     | 60         |                      | 72         |                  | $          | 7.60                           |       | 658                                                |       | 182 |   |
| 1/1/08 —  12/31/08 |       | $                     | 55         |                      | 479        |                  | $          | 7.50                           |       | 1,534                                              |       | 735 |   |
| 1/1/08 —  12/31/08 |       | $                     | 60         |                      | 66         |                  | $          | 7.60                           |       | 592                                                |       | 164 |   |
| 1/1/09 — 4/30/09   |       | $                     | 60         |                      | 59         |                  | $          | 7.60                           |       | 559                                                |       | 152 |   |
| 1/1/09 — 12/31/09  |       | $                     | 55         |                      | 395        |                  | $          | 7.60                           |       | 1,644                                              |       | 668 |   |

 

We have no derivative hedging contracts that set aprice ceiling. We do not designate our derivatives as cash flow or fair valuehedges. We do not hold or issue derivative financial instruments forspeculative or trading purposes. We are exposed to credit losses in the eventof nonperformance by the counterparty to our financial hedging contracts. We anticipate,however, that our counterparty, Union Bank of California, will be able to fullysatisfy their obligations under the contracts. We do not obtain collateral orother security to support our financial hedging contracts subject to creditrisk but we monitor the credit standing of the counterparty. At December 31,2006, we had a receivable balance due from our counterparty amounting to$124,090.

Changes in the fair values of our derivativeinstruments are recorded immediately in earnings in other income on ourstatements of operations.  Amounts duefrom or to our counterparty resulting from the settlement of our derivativeinstruments are recorded as other income or expense in the consolidatedstatements of operations. During the three and six month periods ended December31, 2006, there were settlements under our derivative agreements due to Canoamounting to $235,128 and $751,457, which are included in our ConsolidatedStatements of Operations under “Crude oil and natural gas sales.”  Thesettlements were cumulative monthly payments due to Cano since the NYMEXnatural gas price was lower than the $8.50 and $7.60 “floor natural gas prices”and the NYMEX crude oil price was lower than the $60 “floor crude oil price.” The cash flows relating to the derivative instruments are reflected inoperating activities on our statements of cash flow.

We obtained mark-to-market valuations used for ourderivative instruments from an external source and validated such valuationsusing quotes for exchange-traded options with similar terms. In accordance withSFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”as amended, we recorded the $7.3 million payment as Derivative Assets. SFAS 133also provides that derivative instruments be measured at fair value on thebalance sheet date.  During the three and six month period ended December31, 2006, we recognized losses on hedge contracts to our ConsolidatedStatements of Operations amounting to $693,016 and $156,990 under “Unrealizedloss on hedge contracts.”  At December 31, 2006, our Derivative Assetstotaled $3,943,584, of which $2,408,317 is considered long-term.

**5.   ASSET RETIREMENT OBLIGATION**

Our financial statements reflect the provisions ofStatement of Financial Accounting Standards No. 143,*Accounting for Asset Retirement Obligations*.Our asset retirement obligation (“ARO”) primarily represents the estimatedpresent value of the amount we will incur to plug, abandon and remediate ourproducing properties at the end of their productive lives, in accordance withapplicable state laws. We determine our ARO by calculating the present value ofexpected cash flows related to the liability. At December 31, 2006, ourliability for ARO was $1,626,497, of which $1,605,926 is considered long-term.Our asset retirement obligations are recorded as current or non-currentliabilities based on the estimated timing of the anticipated cash flows.

The following table describes the changes in our assetretirement obligations for the six months ended December 31, 2006:

| Asset retirement obligation  at June 30, 2006 |   | $       | 1,607,378 |   |
|----------------------------------------------------|--------|---------|-----------|--------|
| Accretion  expense                                 |   | 67,530  |      |
| Plugging costs                                     |   | (48,411 | )         |
| Asset retirement  obligation at December 31, 2006  |   | $       | 1,626,497 |   |

 

**6.****   DEFERRED COMPENSATION**

***Management Stock Pool Agreement***

As discussed in our Form 10-KSB datedJune 30, 2006 pursuant to the terms of a Management Stock Pool Agreementdated May 28, 2004, the escrowed performance shares totaled 2,505,025shares.  During October 2006, the Boardapproved the release 

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ofperformance shares totaling 1,252,514 shares to the executive Davenportshareholders and the remaining 1,252,511 shares have been returned as treasuryshares.

As of December 31, 2006, the Treasury Stock totaled1,268,294 shares, consisting of the 1,252,511 performance shares which havebeen returned as treasury stock, as previously discussed, and 15,783compensation shares forfeited by a former employee.

***Contingently IssuedShares from the 2005 Long-Term Incentive Plan***

As of December 31, 2006, we have issued 115,000restricted shares to key employees from our 2005 Long-Term Incentive Plan, asdiscussed in our Form 10-KSB dated June 30, 2006, as summarized below:

|                                        | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Price** | ** ** | **Fair Value** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------|------------|---------------------|------------|
| Outstanding at June  30, 2006          |       | 140,000    |       | $                                       | 5.62       |                | $          | 786,800 |   |
| Shares granted  during August 2006     |       | 5,000      |       | $                                       | 5.03       |                | $          | 25,150 |   |
| Shares forfeited  during November 2006 |       | (30,000    | )          | $                                       | 5.62       |                | $          | (168,600 | ) |
| Outstanding at December  31, 2006      |       | 115,000    |       | $                                       | 5.59       |                | $          | 643,350 |   |

 

The restricted shares will vest to the individualemployees based on future years of service ranging from one to three yearsdepending on the life of the award agreement.  The fair value is based ouractual stock price on the date of grant multiplied by the number of restrictedshares granted.  As of December 31, 2006, the value of non-vestedrestricted shares amounted to $442,088.  In accordance with SFAS Nos.123(R), for the three and six months ended December 31, 2006, we have expensed$53,431 and $146,809, respectively, to stock compensation expense based onamortizing the fair value over the appropriate service period.

**7.****   STOCKOPTIONS**

In December 2004, the FASB issued SFASNo. 123(R), “Share-Based Payment.” SFAS No. 123(R) revises SFASNo. 123, “Accounting for Stock-Based Compensation,” and focuses onaccounting for share-based payments for services provided by employee toemployer. The statement requires companies to expense the fair value ofemployee stock options and other equity-based compensation at the grant date.The statement does not require a certain type of valuation model, and either abinomial or Black-Scholes model may be used.  We adopted SFAS 123(R)beginning July 1, 2006.  Since we had expensed stock options granted toemployees in accordance with SFAS 123, the adoption of SFAS No. 123(R) didnot materially impact our operating results, financial position, or our futurecash flows.

We have granted stock options and contingentlyissuable shares to key employees and outside directors as discussed below.

On December 16, 2004, we issued stock options for50,000 shares of our common stock to Gerald Haddock, a current member of ourboard of directors, in exchange for certain financial and management consultingservices to us.  The exercise price is $4 per share.  The options areexercisable at any time, in whole or in part, during the ten-year option periodwhich commenced six months following the date of grant (June 16, 2005) andexpires on June 15, 2015.

On April 1, 2005, we adopted the 2005 Directors’ StockOption Plan (“Plan”). On April 1, 2005, pursuant to the Plan, we granted stockoptions to our five non-employee directors to each purchase 25,000 shares ofcommon stock. The options granted under the Plan totaled 125,000 shares. Theseoptions have an exercise price of $4.13 per share. The options vested on April1, 2006, and expire on April 1, 2015.  During August 2006, optionstotaling 25,000 shares were forfeited by a former board member.

On September 16, 2005, we granted stock options toJames K. Teringo, Jr., our Senior Vice President, General Counsel and CorporateSecretary to purchase 50,000 shares of common stock. These options have anexercise price of $3.98 per share. The options had a fair value of $81,428 andvested on July 11, 2006, and expire on September 16, 2015.

On December 7, 2005, our stockholders approved our2005 Long-Term Incentive Plan (“2005 LTIP”) that authorized the issuance of upto 1,000,000 shares of our common stock to key employees, key consultants andoutside directors of our company and subsidiaries.  On December 28, 2006, our stockholdersapproved an Amendment to the 2005 LTIP that increases the number of sharesauthorized for issuance under the Plan from 1,000,000 to 3,500,000 shares ofour common stock.  The Amendment also increases for Executive Officers (asdefined in the Plan) for any calendar year (i) the number of stock options orstock appreciation rights that any Executive Officer can receive from 100,000shares of common stock to 300,000 shares of common stock, (ii) the numberof shares relating to restricted stock, restricted stock units, performanceawards or other awards that are subject to the attainment of performance goalsthat any Executive Officer can receive from 100,000 shares of common stock to 

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300,000shares of common stock; and (iii) the number of shares relating to allawards that an Executive Officer can receive from 100,000 to 300,000.  The 2005 LTIP permits the grant of incentivestock options, non-qualified stock options, stock appreciation rights, restrictedstock, restricted stock units, performance awards, dividend equivalent rightsand other awards, whether granted singly, or in combination or in tandem.  The 2005 LTIP terminates on December 7, 2015;however, awards granted before that date will continue to be effective inaccordance with their terms and conditions.

On December 13, 2005, under the 2005 LTIP, 25,000options were granted to each of our five non-employee directors. The exerciseprice is $6.30 per share. These granted options vest on December 13, 2006 ifsuch persons are still directors or an employee on December 13, 2006.

During April 2006 and June 2006, we granted optionstotaling 227,185 shares to our employees under the 2005 LTIP.  Optionstotaling 90,000 shares were granted and 45,000 vested on April 1, 2006 and theexercise price was $9.55 per share.  As of December 31, 2006, the 90,000options shares were forfeited.  On June 21, 2006, options totaling 137,185shares were granted and vest on June 21, 2009, with an exercise price of $5.15per share.  Through December 31, 2006, 13,000 of these shares wereforfeited.

On August 11, 2006, under the 2005 LTIP, 15,000options were granted to two non-employee directors. The options granted tothese two directors under the 2005 LTIP totaled 30,000 shares.  Theexercise price is $5.06 per share. These granted options vest on August 11,2007 if such persons are still directors or an employee on this date.

On December 28, 2006, under the 2005 LTIP, 25,000options were granted to each of our six non-employee directors totaling 150,000shares. The exercise price is $5.42 per share. These granted options vest onDecember 28, 2007 if such persons are still directors or an employee onDecember 28, 2007.

On December 28, 2006, under the 2005 LTIP, we granted265,000 total options to our five executive officers. The exercise price is$5.42 per share. If the executive officer is still employed by us on eachanniversary date of the grant, one-third of the stock options will vest on eachof the following three anniversary dates - December 28, 2007, 2008 and2009.

A summary of options as of December 31, 2006 is asfollows:

|                                   | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------|------------|
| Outstanding at  June 30, 2006     |       | 577,185    |       | $                                      | 5.66       |   |
| Shares granted                    |       | 445,000    |       | $                                      | 5.40       |   |
| Shares forfeited  or expired      |       | (128,000   | )          | $                                      | 8.04       |   |
| Outstanding at December  31, 2006 |       | 894,185    |       | $                                      | 5.19       |   |

 

Total options exercisable at December 31, 2006amounted to 325,000 shares and had a weighted average exercise price of$4.92.  Upon exercise, we issue the full amount of shares exercisable perthe term of the options from new shares. We have no plans to repurchase thoseshares in the future.

Pursuant to SFAS No. 123(R), *Accounting for Stock-Based Compensation*,the fair value of each stock option is estimated on the date of grant using theBlack-Scholes option-pricing model.  Expected volatilities are based onhistorical volatility of our common stock.  We use historical data toestimate option exercise and employee termination within the valuation model. The expected lives of options granted represents the period of time thatoptions granted are expected to be outstanding.  The risk-free rate forperiods within the contractual life of the option is based on the U.S. Treasuryyield curve in effect at the time of grant.  The expected dividend yieldreflects our intent not to pay dividends on our common stock during thecontractual periods.  The fair values of options granted through December31, 2006 and 2005 along with the factors used to calculate the fair values ofthose options are summarized in the table below:

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|                                                                                                         | ** ** | **Six Months Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| No. of shares                                                                                           |       | 569,185                                               |       | 325,000 |   |
| Risk free  interest rate                                                                                |       | 4.69 – 5.15                                      | %          | 4.02 – 4.44 | % |
| Expected life                                                                                           |       | 4 years                                               |       | 4 years |   |
| Expected  volatility                                                                                    |       | 51.9 – 53.8                                      | %          | 41.9 – 51.5 | % |
| Expected  dividend yield                                                                                |       | 0.0                                                   | %          | 0.0 | % |
| Weighted average  grant date fair value — exercise prices equal to market value on grant date      |       | $                                                     | 2.47       |   | $ | 2.40 |   |
| Weighted average  grant date fair value — exercise prices greater than market value on grant  date |       | $                                                     | —     |   | $ | — |   |
| Weighted average grant  date fair value — exercise prices less than market value on grant date     |       | $                                                     | —     |   | $ | 1.75 |   |

 

In accordance with the provisions of SFAS 123(R), forthe three-month periods ended December 31, 2006 and 2005, we had recorded acharge to stock compensation expense of $114,699 and $46,736, respectively, forthe estimated fair value of the options granted to our directors andemployees.  For the six-month periodsended December 31, 2006 and 2005, we had recorded a charge to stockcompensation expense of $240,014 and $72,794, respectively, for the estimatedfair value of the options granted to our directors and employees.

The following is a summary of stock optionsoutstanding at December 31, 2006:

| Exercise  Price | ** ** | **Options  Outstanding** | ** ** | **Remaining Contractual  Lives (Years)** | ** ** | **Options  Exercisable** | ** ** |
|-----------------|------------|--------------------------|------------|----------------------------------------------------|------------|--------------------------|------------|
| $4.00           |       |                     | 50,000     |                                               |       |                     | 8.46       |   |   |   | 50,000 |   |   |
| $4.13           |       |                     | 100,000    |                                               |       |                     | 8.25       |   |   |   | 100,000 |   |   |
| $3.98           |       |                     | 50,000     |                                               |       |                     | 8.72       |   |   |   | 50,000 |   |   |
| $6.30           |       |                     | 125,000    |                                               |       |                     | 8.96       |   |   |   | 125,000 |   |   |
| $5.15           |       |                     | 124,185    |                                               |       |                     | 9.48       |   |   |   | — |   |   |
| $5.06           |       |                     | 30,000     |                                               |       |                     | 9.62       |   |   |   | — |   |   |
| $5.42           |       |                     | 415,000    |                                               |       |                     | 10.00      |   |   |   | — |   |   |
| $5.19           |       |                     | 894,185    |                                               |       |                     | 9.46       |   |   |   | 325,000 |   |   |

 

Basedon our $5.48 stock price at December 31, 2006, the intrinsic value of theoptions was approximately $360,000.

**8.****   NET LOSS PER COMMON SHARE**

Basic net income (loss) per common share is computedby dividing the net income attributable to common shareholders by the weightedaverage number of shares of common stock outstanding during the period.

Diluted net income (loss) per common share is computedin the same manner, but also considers the effect of common stock sharesunderlying the following:

|                   | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Stock options     |       | 894,185                         |       | 325,000                         |       |
| Warrants          |       | 1,646,061                       |       | —                          |       |
| Preferred stock   |       | 8,541,913                       |       | —                          |       |
| PIK dividends     |       | 118,436                         |       | —                          |       |
| Restricted shares |       | 115,000                         |       | 2,659,975                       |       |

 

The shares of common stock underlying the stockoptions, warrants, the preferred stock, PIK dividends and the restricted shares,as shown in the preceding table, are not included in weighted average sharesoutstanding for the three and six months ended December 31, 2006 and 2005 astheir effects would be anti-dilutive.

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**9.****   RELATEDPARTY TRANSACTIONS**

During August 2006, we acquired an additional 2.0%overriding royalty interests from THEprivate Energy Company, Inc.(formerly Cano Energy Corporation) for $133,400.  We paid $66,700 perpercentage of net revenue for these royalty interests, which is consistent withthe price we paid for prior royalty interests we acquired from THEprivateEnergy Company, Inc. during December 2005 and during January 2006.

S. Jeffrey Johnson, our Chairman of the Board andChief Executive Officer, is a 30% shareholder in THEprivate EnergyCompany, Inc. The terms of the purchase were supported by a valuationestablished by our independent engineer.  This purchase was approved byour Board pursuant to a recommendation by our Audit Committee.

We have entered into an agreement to be a lead sponsorof a television production called Honey Hole All Outdoors. As part of thesponsorship, we paid $75,000 during the six months ended December 31, 2006 toR.C. Boyd Enterprises, the owner of Honey Hole All Outdoors. Randall Boyd isthe sole shareholder of R.C. Boyd Enterprises and is a member of our Board.

**10.****   INCOME TAXES**

Our income tax benefit is as follows:

|                              | ** ** | **Quarter Ended  December 31,** | ** ** | **6 Months Ended  December 31,** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                  | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current income tax  benefit  |       |                                      |       |                                            |       |   |   |   |   |
| Federal                      |       | $                                         | —     |                                            | $          | — |   | $ | — |   | $ | — |   |
| State                        |       | 33,000                                    |       | —                                          |       | — |   | — |   |
| Total current  tax benefit   |       | 33,000                                    |       | —                                          |       | — |   | — |   |
| Deferred income tax  benefit |       |                                      |       |                                            |       |   |   |   |   |
| Federal                      |       | 275,000                                   |       | 710,000                                         |       | 458,000 |   | 710,000 |   |
| State                        |       | 44,000                                    |       | 83,000                                          |       | 49,000 |   | 83,000 |   |
| Total deferred  tax benefit  |       | 319,000                                   |       | 793,000                                         |       | 507,000 |   | 793,000 |   |
| Total income tax benefit     |       | $                                         | 352,000    |                                            | $          | 793,000 |   | $ | 507,000 |   | $ | 793,000 |   |

 

The difference between our benefit from income taxesrecorded on the statements of operations and the tax computed usingstatutory rates primarily comprises state taxes and adjustments to thevaluation allowance.

At December 31, 2006, we have recorded a totaldeferred tax liability of $32.3 million, which resulted primarily from theacquisition of WO Energy, as discussed in our Form 10-KSB datedJune 30, 2006. A schedule showing the significant components of thenet deferred tax liability as of December 31, 2006 is as follows:

|                                    | ** ** | **December 31, 2006** | ** **  | **June 30, 2006** | ** ** |
|------------------------------------|------------|---------------------------------|-------------|-----------------------------|------------|
| Deferred tax assets:               |       |                            |        |                        |       |
| Deferred  compensation expense     |       | $                               | 973,000     |                        | $          | 834,000 |   |
| Net operating  loss carryovers     |       | 7,327,000                       |        | 4,680,000                   |       |
| Other                              |       | 239,000                         |        | 216,000                     |       |
|                               |       | 8,539,000                       |        | 5,730,000                   |       |
| Less: valuation  allowance         |       | (792,000                        | )           | (792,000                    | )          |
| Total deferred  tax assets         |       | 7,747,000                       |        | 4,938,000                   |       |
|                               |       |                            |        |                        |       |
| Deferred tax  liabilities:         |       |                            |        |                        |       |
| Difference in  book and tax bases: |       |                            |        |                        |       |
| Acquired oil and  gas properties   |       | (38,579,000                     | )           | (35,950,000                 | )          |
| Other properties                   |       | (1,516,000                      | )           | (499,000                    | )          |
| Total deferred  tax liabilities    |       | (40,095,000                     | )           | (36,449,000                 | )          |
| Net deferred tax liability         |       | $                               | (32,348,000 | )                           | $          | (31,511,000 | ) |

 

At December 31, 2006, Cano had net operating loss (“NOL”)carryforwards for tax purposes of approximately $20.4 million. The remainingnet operating losses principally expire in 2024 and 2025. Of the $20.4 million,$2.2 million will be unavailable to offset any future taxable income due tolimitations from change in ownership as defined in Section 382 of theInternal Revenue Service (“IRS”) code. Accordingly, our valuation allowancereflects the unavailable $2.2 million NOL.

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**11.****   COMMITMENTSAND CONTINGENCIES**

***Litigation***

On March 23, 2006, the following lawsuit wasfiled in the 100th Judicial District Court in Carson County, Texas; CauseNo. 9840, The Tom L. and Anne Burnett Trust, by Anne Burnett Windfohr,Windi Phillips, Ben Fortson, Jr., George Beggs, III and EdHudson, Jr. as Co-Trustees; Anne Burnett Windfohr; and Burnett Ranches,Ltd. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.; W. O.Operating Company, Ltd, and W.O. Energy, Inc. The plaintiffs claim thatthe electrical wiring and equipment of Cano or certain of its subsidiariesrelating to oil and natural gas operations started a wildfire that began onMarch 12, 2006 in Carson County.

The plaintiffs (i) allege negligence and grossnegligence and (ii) seek undisclosed damages, including, but not limitedto, damages for damage to their land and livestock, certain expenses related tofighting the fire and certain remedial expenses. In addition, the plaintiffsseek (i) termination of certain oil and natural gas leases,(ii) reimbursement for their attorney’s fees and (iii) exemplarydamages. The plaintiffs also claim that Cano and its subsidiaries are jointlyand severally liable as a single business enterprise and/or a generalpartnership or defacto partnership. The owner of the remainder of the mineralestate, Texas Christian University, has intervened in the suit joining the plaintiffs’request to terminate certain oil and natural gas leases and on January 26,2007, Southwestern Public Service Company d/b/a XCEL Energy, intervened in thesuit as a party adverse to all defendants, claiming that the fire that is thesubject of this lawsuit destroyed transmission and distribution equipment,including utility poles, lines and other equipment with an estimated loss of$1,876,000.

Due to the inherent risk of litigation, the outcome ofthis case is uncertain and unpredictable; however, at this time Cano managementbelieves the suit is without merit and is vigorously defending itself and itssubsidiaries.

On April 28, 2006, the following lawsuit wasfiled in the 31st JudicialDistrict Court of Roberts County, Texas, Case No. 1922, Robert and GlendaAdcock, et al. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.;W. O. Operating Company, Ltd, and W.O. Energy, Inc. There are 43plaintiffs and four groups of interveners that claim that the electrical wiringand equipment of Cano or certain of its subsidiaries relating to oil andnatural gas operations started a wildfire that began on March 12, 2006 inCarson County.

The plaintiffs (i) allege negligence, grossnegligence, trespass and nuisance and (ii) seek undisclosed damages,including, but not limited to, damages to their land, buildings and livestockand certain remedial expenses. In addition, the plaintiffs seek(i) reimbursement for their attorney’s fees and (ii) exemplarydamages.

Due to the inherent risk of litigation and the factthat this case is in the early stages of discovery, the outcome of this case isuncertain and unpredictable; however, at this time Cano management believes thesuit is without merit and is vigorously defending itself and its subsidiaries.

On April 10, 2006, the following lawsuit wasfiled in the 31st Judicial District Court of Roberts County, Texas, CaseNo. 1920, Joseph Craig Hutchison and Judy Hutchison v. CanoPetroleum, Inc., W.O. Energy of Nevada, Inc.; W. O. OperatingCompany, Ltd, and W.O. Energy, Inc. On May 1, 2006, the followinglawsuit was filed in the 31st Judicial District Court of Roberts County, Texas,Case No. 1923, Chisum Family Partnership, Ltd. v. Cano Petroleum, Inc.,W.O. Energy of Nevada, Inc.; W. O. Operating Company, Ltd, and W.O.Energy, Inc. The plaintiffs in both cases claim that the electrical wiringand equipment of Cano or certain of its subsidiaries relating to oil andnatural gas operations started a wildfire that began on March 12, 2006 inCarson County.

The plaintiffs in both cases (i) allegenegligence and trespass and (ii) seek undisclosed damages, including, butnot limited to, damages to their land and certain remedial expenses. Inaddition, the plaintiffs in both cases seek (i) reimbursement for theirattorney’s fees and (ii) exemplary damages.

Due to the inherent risks of litigation and the factthat these cases are in the early stages of discovery, the outcome of thesecases is uncertain and unpredictable; however, at this time Cano managementbelieves the suits are without merit and is vigorously defending itself and itssubsidiaries.

On July 3, 2006, the following lawsuit was filedin the 31st JudicialDistrict Court of Roberts County, Texas, Case No. 1928, Rebecca LeeMartinez, et al v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.;W. O. Operating Company, Ltd., and W.O. Energy, Inc. The plaintiffs claimthat the electrical wiring and equipment of Cano or certain of its subsidiariesrelating to oil and natural gas operations started a wildfire that began on March 12,2006 in Carson County, Texas. The plaintiffs (i) allege negligence andgross negligence and (ii) seek undisclosed damages for the wrongful deathof two individuals who they claim died as a result of the fire. Additionalheirs and relatives of one of the decedents have intervened in this caseseeking similar claims.

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Due to the inherent risk of litigation and the factthat this case is in the early stages of discovery, the outcome of this case isuncertain and unpredictable; however, at this time Cano management believes thesuit is without merit and is vigorously defending itself and its subsidiaries.

On August 9, 2006, the following lawsuit wasfiled in the 233rd Judicial District Court of Gray County, Texas, YolandaVillareal, Individually and on behalf of the Estate of Gerardo Villareal v.Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. OperatingCompany, Ltd., and W.O. Energy, Inc. The plaintiffs claim that theelectrical wiring and equipment of Cano or certain of its subsidiaries relatingto oil and natural gas operations started a wildfire that began onMarch 12, 2006 in Carson County, Texas. The plaintiffs (i) allegenegligence and gross negligence and (ii) seek undisclosed damages for thewrongful death of Gerardo Villareal who they claim died as a result of thefire. Relatives of Roberto Chavira have intervened in the case alleging similarclaims regarding the death of Roberto Chavira.

Due to the inherent risk of litigation and the factthat this case is in the early stages of discovery, the outcome of this case isuncertain and unpredictable; however, at this time Cano management believes thesuit is without merit and is vigorously defending itself and its subsidiaries.

On June 20, 2006,the following lawsuit was filed in the United States District Court for theNorthern District of Texas, Fort Worth Division, C.A. No. 4-06cv-434-A,Mid-Continent Casualty Company, Plaintiff, vs. Cano Petroleum, Inc., W.O.Energy of Nevada, Inc., W.O. Operating Company, Ltd. and W.O.Energy, Inc. seeking a declaration that the plaintiff is not responsiblefor pre-tender defense costs and that the plaintiff has the sole and exclusiveright to select defense counsel and to defend, investigate, negotiate andsettle the litigation described above and on September 18, 2006, the FirstAmended Complaint for Declaratory Judgment was filed with regard to the casesdescribed above. Cano and its subsidiaries were served with the lawsuit betweenSeptember 26-28, 2006.

On February 9, 2007, Canoand its subsidiaries entered into a Settlement Agreement and Release with theplaintiff pursuant to which in exchange for mutual releases, in addition to theapproximately $923,000 that we have been reimbursed by plaintiff, the plaintiffagreed to pay to Cano within 20 business days of February 9, 2007 the amount of$6,699,827 comprised of the following: (a) the $1,000,000 policy limits of theprimary policy; (b) the $5,000,000 policy limits of the excess policy; (c)$500,000 for future defense costs; (d) $144,000 as partial payment for certainunpaid invoices for litigation related expenses; (e) all approved reasonableand necessary litigation related expenses through December 21, 2006 that arenot part of the above-referenced $144,000; and (f) certain specified attorneysfees.

***Other***

On November 9, 2006, Cano entered into a settlementand mutual release agreement with Morris R. Greenhaw, Morris R. Greenhaw Oil& Gas, Inc., Saroco, Inc., KenMor Properties, LLC and Kenneth K. Laughlinregarding various claims and rights of the parties asserted against each otherin connection with Cano’s acquisition of Square One Energy, Inc. and Square One’sdevelopment plans for the Desdemona Field.   As part of thesettlement, a lawsuit for indemnification brought by Morris R. Greenhaw, MorrisR. Greenhaw Oil & Gas, Inc. and Kenneth K. Laughlin (collectively, the “LitigationParties”) against Cano, et al., was dismissed with prejudice in exchange forCano’s agreement to pay reasonable attorneys fees and costs of the LitigationParties through September 30, 2006 in the approximate amount of $220,000 andfuture reasonable attorneys fees and cost incurred by them in connection with alawsuit brought against the Litigation Parties by the Chapter 7 Trustee of theGreenhaw Energy, Inc. estate.  In addition, the settlement agreementprovided for a $690,000 payment to Morris R. Greenhaw for a three yearcompressor site lease in the Desdemona Field, a waiver of his right tochallenge Square One’s development plans for the Desdemona Field and a waiverof his right to require burial of current pipelines on the surface of hisproperty in the Desdemona Field.

Occasionally, we are involved in other variouslawsuits and certain governmental proceedings arising in the ordinary course ofbusiness. Our management does not believe that the ultimate resolution of anycurrent matters that are not set forth above, including due to the existence ofinsurance coverage, indemnification and escrow accounts, will have a materialeffect on our financial position or results of operations. Except as set forthabove regarding the breach of fiduciary duties and/or fraud by a seniorexecutive, none of our directors, officers or affiliates, owners of record orbeneficially of more than five percent of any class of our voting securities,or security holder is involved in a proceeding adverse to our business or has amaterial interest adverse to our business.

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***Environmental***

To date, our expenditures to comply with environmentalor safety regulations have not been significant and are not expected to besignificant in the future. However, new regulations, enforcement policies,claims for damages or other events could result in significant future costs.

**Item 2. Management’s Discussion and Analysis on FinancialCondition and Results of Operations**

**Forward-Looking Statements**

The information in this report on Form 10-Qcontains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. This Act provides a “safe harbor”for forward-looking statements to encourage companies to provide prospectiveinformation about themselves provided they identify these statements as forwardlooking and provide meaningful cautionary statements identifying importantfactors that could cause actual results to differ from the projected results.All statements other than statements of historical fact made in this report areforward looking. In particular, the statements herein regarding industryprospects and future results of operations or financial position areforward-looking statements. Forward-looking statements reflect management’scurrent expectations and are inherently uncertain. Our actual resultsmay differ significantly from management’s expectations as a result ofmany factors, including, but not limited to the volatility in prices for crudeoil and natural gas, future commodity prices for derivative hedging contractsinterest rates, estimates of reserves, drilling risks, geological risks,transportation restrictions, the timing of acquisitions, product demand, marketcompetition, interruption in production, our ability to obtain additionalcapital, and the success of waterflooding and enhanced oil recovery techniques.

You should read the following discussion and analysisin conjunction with the consolidated financial statements of CanoPetroleum, Inc. and subsidiaries and notes thereto, included herewith.This discussion should not be construed to imply that the results discussedherein will necessarily continue into the future, or that any conclusionreached herein will necessarily be indicative of actual operating results inthe future. Such discussion represents only the best present assessment ofmanagement.

**Growth Strategy**

We are a growing independent oil and natural gascompany that intends to actively pursue enhanced oil recovery techniques toincrease production and reserves at our existing properties and propertiesacquired in the future.  Our primary focus is crude oil and our targetacquisitions are onshore U.S. properties.  Our focus on domestic, matureoil fields eliminates exploration risks and uncertainties of internationalsources.  We use waterflooding and enhanced oil recovery (“EOR”) methods,such as surfactant-polymer technology.

During our first two years of operations, our primaryfocus was to achieve growth through acquiring existing, mature oil and naturalgas fields.  We believe the portfolio of oil and natural gas propertiesthat we have acquired thus far provides ample opportunities to applywaterflooding and EOR technology.  The potential of these assets isdiscussed in our Form 10-KSB dated June 30, 2006 - “*Management’s Discussion and Analysis—- Proved Reserves.*” During the twelve months ending June 30, 2007, our emphasis is to achievegrowth by developing our existing oil and natural gas properties throughdevelopment activities such as waterflooding and EOR technology.  Thesedevelopment activities are more clearly defined later in this section under “*Capital Spending Plan for Fiscal Year 2007*.”

**Liquidity and Capital Resources**

As discussed in Note 2, on September 6, 2006, we soldin a private placement 49,116 shares of Series D Convertible Preferred Stock ata price of $1,000.00 per share and 6,584,247 shares of common stock at a priceof $4.83 per share, the three day average closing price of the stock prior tothe execution of the definitive agreements, plus a warrant component.  Thepreferred stock has a 7.875% dividend and features a paid-in-kind (“PIK”)provision that allows, at the investor’s option, the investor to receiveadditional shares of common stock upon conversion for the dividend in lieu of acash dividend payment.  Holders of approximately 55% of the preferredstock chose the PIK dividend option.  The convertible preferred stock isconvertible to common stock at a price of $5.75 per share and the common stockwas subject to 25% warrant coverage at an exercise price of $4.79 pershare.  If any Series D Convertible Preferred Stock remains outstanding onSeptember 6, 2011, we are required to redeem the Series D Convertible PreferredStock for the redemption amount in cash equal to the stated value of the SeriesD Convertible Preferred Stock, plus accrued dividends and PIK dividends. Gross proceeds from the transactions were $80.9 million, of which $49.1 millionwas attributable to preferred stock, and $31.8 million was attributable to thecommon stock and warrants.  Net proceeds were $75.6 million afterdeducting for issuance costs of $5.3 million.

The warrant component totaled 1,646,061 common sharesand is exercisable at $4.79 per share.  The exercise period commences 180days after September 6, 2006 and expires on March 6, 2008.  We computedthe fair value of the warrants at September 6, 2006 as approximately $2.3million based on the Black-Scholes model.  We have included the fair valueof the warrants in Additional Paid-In Capital.

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Cash proceeds from the financings were used to repay$68.75 million of long-term debt as discussed in Note 3, general corporatepurposes and to fund our fiscal 2007 capital expenditures.  Thesubordinated debt has been permanently retired.  The senior creditagreement, with a borrowing base of $55 million, is our only remaining sourceof debt.  At December 31, 2006, we had outstanding long-term debt of $2.5million.

At December 31, 2006, our cash balance was $0.9 million. For the six months ended December 31, 2006, we generated cash from operationsof $2.9 million, which is an improvement of $9.1 million as compared to the $6.2million used in operations for the six months ended December 31, 2005. This is largely due to improved earnings as discussed under “*Results of Operations*,” and the purchaseof derivative hedging contracts.  Duringthe six months ended December 31, 2006 and 2005, we purchased derivativehedging contracts of $1.2 million and $5.3 million, respectively.

We believe the combination of cash on hand, cash flowgenerated from operations, and available debt of $52.5 million is sufficient tofinance our contractual obligations and our $41 million capital expenditureprogram as further discussed below in the section titled “*Capital Spending Plan for Fiscal Year 2007.”*

***Hedging Activities***

As discussed in Note 4, pursuant to our senior creditagreement, we are required to enter into derivative hedging contracts to hedgeour exposure to commodity price risk associated with expected oil and naturalgas production.  During December 2006, wepaid $1.2 million to enter into derivative hedging contracts to set pricefloors for the 2009 calendar year. Through the 2009 calendar year, we are hedged at price floors that rangefrom $55 - $60 per barrel crude oil prices and $7.50 - $8.50 per mcf fornatural gas prices.  For the six monthsended December 31, 2006, approximately 72% of our sales were hedged.

We have no derivative hedging contracts that set aprice ceiling. Therefore, we are entitled to 100% of our revenue receipts and,if crude oil and natural gas NYMEX prices are lower than the price floor, wewill be reimbursed for the difference between the NYMEX price and floor price.

***Capital SpendingPlan for Fiscal Year 2007***

Our capital spending plan for the twelve months endedJune 30, 2007 (“Fiscal Year 2007”), excluding potential acquisitions, isprojected to be $41 million to implement developmental projects at our existingfields to increase reserves and production.  Of this amount, $10.5 millionhas been spent for the six months ended December 31, 2006.  Our capitalspending plan is summarized as follows:

*Panhandle Properties*. We are into the execution of Phase I of our waterflood development plan at theCockrell Ranch Unit. We have one drilling rig running and have drilled andcompleted eight replacement wells to be used in the waterflood.  We plan to drill up to 14 more replacementwells to complete our Phase I development pattern. In respect of Phase I, 30producing wells have been worked over and returned to production and theremaining 28 injection well conversions are anticipated to be complete by theend of the second calendar quarter of 2007. Our Phase I waterflood facilitydesign is complete and procurement is underway. We are on schedule to initiatefield construction work within the next 60 days.  We expect to begin Phase I water injectionduring the second calendar quarter of 2007 and anticipate a preliminary responsefrom the waterflood by the fourth calendar quarter of 2007.  Full waterflood development over theremaining 11,000+ net acres of the Panhandle Properties is anticipated once theinitial response data is available.

*DesdemonaProperties**— Waterflood*.We have secured a drilling rig to drill five injectors and seven producers toinitiate the Duke Sand waterflood at the Desdemona Field and currently havethree workover rigs operating in the field. Procurement and infrastructure development is underway and we plan tobegin field construction work in the next 60 days. We expect regulatoryapprovals to initiate water injection in the second calendar quarter of 2007,and anticipate an initial waterflood response in the fourth calendar quarter of2007. 

*Desdemona Properties**— Barnett Shale.* We have announced a new field discovery inthe Barnett Shale formation in this field, located some 50 miles west ofestablished Barnett Shale production in the Ft. Worth Basin.  We have drilled ten and completed eight verticalBarnett Shale wells in the Desdemona Field out of our original ten well capitalbudget program.  Two wells are currentlyawaiting fracture stimulation treatments. Current gas sales from this new fieldare averaging roughly 850 MCFD gross and 705 MCFD net from five wells.  Compression is currently being added to threewells which will be brought on line within the next week. We currently have twodrilling rigs running in this field.  Dueto the encouraging initial results of this Barnett Shale drilling program, wehave increased our Fiscal Year 2007 capital spending plan allocable to thisprogram to roughly $10 million, for a total of 14 vertical wells and fourhorizontal infill wells.  As we havepreviously mentioned, we intend to test both the Marble Falls and Barnett Shalehorizons in this 10,000 acre field and support a development plan to monetizeboth horizons.

*Nowata Properties*. This field is currently being waterflooded.  We have completed the plannedworkovers to return 15 wells to production to optimize the plannedwaterflood/alkaline, surfactant, polymer (“ASP”) pattern. The pilot plantdesign is complete and 

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we havesourced surfactants, polymers and equipment for a scheduled second calendarquarter 2007 start-up of an ASP pilot. First ASP response is anticipated in thefirst calendar quarter of 2008.

*CorsicanaProperties*.  We have drilled and completed 16pattern replacement wells and plan to reinstate a prior waterflood developmentin this field. We are currently in the permitting phase and expect to receivefinal approvals to inject water in second calendar quarter of 2007. Based onour analysis of the remaining oil saturations in this field and coupled withthe prior successful polymer pilot in this field, we believe that this field isa prime ASP application candidate. Once waterflood response and laboratoryresults are analyzed, we anticipate implementing an ASP pilot in the field inthe fourth calendar quarter of 2007.

*Davenport Properties*. We have completed workover operations and have returned 12 wells to productionand are awaiting final regulatory approval to activate 11 injection wells tooptimize the waterflood pattern at the Davenport Field.  We have seen production increases from thisdevelopment work.  Contingent uponsuccessful laboratory studies, we anticipate initiating an ASP pilot project inthis field in the Fiscal Year 2008 timeframe.

*Rich Valley Field. *We are presently evaluating the RichValley Properties for sale.

**Results of Operations**

***Overall***

For the quarter ended December 31, 2006 (“currentquarter”), we had a loss applicable to common stock of $1.4 million, which was$0.1 million lower as compared to the $1.5 million loss applicable to commonstock incurred for the quarter ended December 31, 2005 (“prior year quarter”).  For the six months ended December 31, 2006 (“currentsix months”), we had a loss applicable to common stock of $2.0 million, whichwas $0.1 million higher as compared to the $1.9 million loss applicable tocommon stock incurred for the six months ended December 31, 2005 (“prior yearsix months”).

The following table summarizes the differences betweenthe quarters and six month periods.
| ** **                                                                     | ** ** | **Quarter Ended  December 31,** | ** ** | **Increase** | ** ** | **Six Months Ended  December 31,** | ** ** | **Increase** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------|------------|---------------------------------------------------|------------|--------------|------------|
| **Amounts in $millions**                                             | ** ** | **2006**                                  | ** ** | **2005**     | ** ** | **(Decrease)**                                    | ** ** | **2006**     | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| Results of oil and gas  producing operations excluding unrealized hedging loss |       | $                                         | 2.7        |         | $          | 1.5                                               |       | $            | 1.2        |   | $ | 6.8 |   | $ | 2.3 |   | $ | 4.5 |   |
| Less the following  items:                                                     |       |                                      |       |         |       |                                              |       |         |       |   |   |   |   |
| General and  administrative expenses                                           |       | 2.7                                       |       | 1.8          |       | 0.9                                               |       | 5.9          |       | 3.2 |   | 2.7 |   |
| Interest expense, net                                                          |       | 0.1                                       |       | 0.2          |       | (0.1                                              | )          | 2.0          |       | 0.2 |   | 1.8 |   |
| Deferred income tax  benefit                                                   |       | (0.4                                      | )          | (0.8         | )          | 0.4                                               |       | (0.5         | )          | (0.8 | ) | 0.3 |   |
| Preferred stock  dividend                                                      |       | 1.0                                       |       | —       |       | 1.0                                               |       | 1.2          |       | — |   | 1.2 |   |
| Loss on hedge contracts                                                        |       | 0.7                                       |       | 1.6          |       | (0.9                                              | )          | 0.2          |       | 1.6 |   | (1.4 | ) |
| Net loss                                                                       | ** ** | **$**                                     | **(1.4**   | **)**        | **$**      | **(1.5**                                          | **)**      | **$**        | **0.1**    | ** ** | **$** | **(2.0** | **)** | **$** | **(1.9** | **)** | **$** | **(0.1** | **)** |

 

Results of oil and natural gas producing operationsconsist of operating revenues less lease operating expenses, production taxes,accretion of asset retirement obligations, and depletion and depreciation. The$1.2 million increase in the current quarter is attributed to including threemonths of operating results from the Panhandle Properties and the PantwistProperties.  The prior year quarter included only one month of PanhandleProperties operating results and did not include any operating results for thePantwist Properties.

The $4.5 million increase in the current six months isattributed to:

·                  Includingsix months of operating results from the Panhandle Properties (i.e. WO Energy)and the Pantwist Properties.  The prior year quarter included only onemonth of Panhandle Properties operating results and did not include anyoperating results for the Pantwist Properties. This contributed $4.0 million to results of oil and gas operations.

·                  Improvedoperating results from our Davenport, Rich Valley, Desdemona, and NowataProperties, primarily due to higher oil and natural gas prices received, andincreased sales from bringing existing non-producing wells to production andincreased natural gas sales at the Desdemona Properties.

The other factors will be addressed in the followingdiscussion.

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***Operating Revenues***

The table below summarizes our operating revenues forthe quarter and six months ended December 31, 2006 and 2005.
| ** **                                     | ** ** | **Quarter ended  December 31,** | ** ** | **Increase** | ** ** | **Six months ended  December 31,** | ** ** | **Increase** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|--------------|------------|---------------------------------------------------|------------|--------------|------------|
| ** **                                     | ** ** | **2006**                                  | ** ** | **2005**     | ** ** | **(Decrease)**                                    | ** ** | **2006**     | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| Operating Revenues                             |       | $                                         | 6,902,524  |         | $          | 3,163,282                                         |       | $            | 3,739,242  |   | $ | 15,556,197 |   | $ | 5,109,241 |   | $ | 10,446,956 |   |
| Sales                                          |       |                                      |       |         |       |                                              |       |         |       |   |   |   |   |
| ·  Crude Oil (MBbls)                 |       | 68                                        |       | 36           |       | 32                                                |       | 141          |       | 64 |   | 77 |   |
| ·  Natural Gas (MMcf)                |       | 346                                       |       | 111          |       | 235                                               |       | 721          |       | 153 |   | 568 |   |
| ·  Total (MBOE)                      |       | 126                                       |       | 54           |       | 72                                                |       | 261          |       | 89 |   | 172 |   |
| Average Price (includes  hedge reimbursements) |       |                                      |       |         |       |                                              |       |         |       |   |   |   |   |
| ·  Crude Oil ($/ Bbl)                |       | $                                         | 58.70      |         | $          | 57.14                                             |       | $            | 1.56       |   | $ | 64.14 |   | $ | 58.55 |   | $ | 5.40 |   |
| ·  Natural Gas ($/ Mcf)              |       | $                                         | 8.39       |         | $          | 8.97                                              |       | $            | (0.58      | ) | $ | 9.03 |   | $ | 8.22 |   | $ | 0.81 |   |

 

The current quarter operating revenues of $6.9 millionrepresent an improvement of $3.7 million as compared to the prior year quarterof $3.2 million. The $3.7 million improvement is primarily attributable toincluding increased operating results from the Panhandle Properties and thePantwist Properties, as previously discussed (combined $3.3 million of revenueand 63 MBOE of sales); the higher prices received for crude oil sales; andincreased sales from other fields due to bringing existing non-producing wellsto production and increased natural gas sales at the Desdemona Properties.

The current six months operating revenues of $15.6million represent an improvement of $10.5 million as compared to the prior yearquarter of $5.1 million.  The $10.5million improvement is primarily attributable to including increased operatingresults from the Panhandle Properties and the Pantwist Properties, aspreviously discussed (combined $9.2 million of revenue and 161 MBOE of sales);the higher prices received for crude oil and natural gas sales; and increasedsales from other fields due to bringing existing non-producing wells to productionand increased natural gas sales at the Desdemona Properties.

The average price we received for crude oil sales isgenerally at or above market prices received at the wellhead. The average pricewe receive for natural gas sales is approximately the market price received atthe wellhead less transportation and marketing expenses.

***Operating Expenses***

For the current quarter, our total operating expenseswere $6.9 million, or $3.3 million higher than the prior year quarter of $3.6million. The $3.3 million increase is primarily attributed to including threemonths of Panhandle Field and Pantwist Properties operating expenses totaling$1.7 million, higher general and administrative expenses of $0.9 million,and higher other operating expenses of $0.7 million.

For the current six months, our total operatingexpenses were $14.7 million, or $8.7 million higher than the prior year quarterof $6.0 million. The $8.7 million increase is primarily attributed to includingthree months of Panhandle Field and Pantwist Properties operating expensestotaling $4.9 million, higher general and administrative expenses of $2.7million, and higher other operating expenses of $1.1 million.

Our lease operating expenses (“LOE”) consists of costsof producing crude oil and natural gas such as labor, supplies, repairs,maintenance, and utilities.  For thecurrent quarter, the LOE per BOE was $19.62, which is a $3.15 per BOEimprovement as compared to the prior quarter of $22.77 per BOE.  For the current six months, the LOE per BOEwas $20.74, which is a $1.51 per BOE improvement as compared to the prior sixmonths of $22.25 per BOE.  Theimprovement in the current quarter and six months results is due toimplementing operational improvements in prior months, which has led to improvedoperating efficiency in current months. We generally incur a high amount of LOE because our fields are moremature and typically produce less oil and more water, and they are generally atthe end of the primary or secondary production cycle.  We are continuing to implement improvementsto field operations to increase operational efficiency.

Our general and administrative (G&A) expensesconsist of support services for our operating activities and investor relationscosts. For the current quarter, our G&A expenses totaled $2.7 million,which is $0.9 million higher than the prior year quarter amount of $1.8million.  The primary contributors to the$0.9 million increase were increased labor and staffing costs of $0.7 million;higher legal fees to comply with regulatory requirements and for litigation of$0.2 million; and increased fees of $0.2 million for accounting services forSEC reporting and to achieve full compliance the Section 404 of theSarbanes-Oxley Act, partially offset by lower other expenses of $0.2million.  For the current six months, ourG&A expenses totaled $5.9 million, which is $2.7 million higher than theprior year six months’ amount of $3.2 million. The primary contributors to the $2.7 million increase were increasedlabor and staffing costs of $1.0 million; higher legal fees to comply withregulatory requirements and for litigation of $0.9 million; increased fees of$0.4 million for accounting services for SEC reporting and to achieve fullcompliance the Section 404 of the Sarbanes-Oxley Act; and higher other expensesof $0.4 million, primarily for office rent and insurance.

 

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Our production and ad valorem taxes (“taxes”) consistsof production taxes for crude oil and natural gas sales assessed by Texas andOklahoma, and ad valorem taxes represent property taxes assessed by Texas andOklahoma on the value of our oil and gas fields.  For the current and prior year quarters, ourtaxes totaled $0.6 million and $0.2 million, respectively.  For the current and prior year six monthperiods, our taxes totaled $1.2 million and $0.3 million, respectively.  The increase in taxes is due to increasedsales of crude oil and natural gas as discussed under “Operating Revenues” andincreased ad valorem taxes from the Panhandle and Pantwist properties.  For the current quarter and six monthperiods, our ad valorem taxes totaled $0.1 million and $0.3 million,respectively.  For the prior year quarterand six month periods, our ad valorem taxes were minimal.

***Loss on Hedging Contracts***

As discussed in Note 4 to the financial statements, weentered into financial contracts to set price floors for crude oil and naturalgas. In accordance with SFAS 133, during the current quarter and current sixmonths, we recorded a Loss on Hedging Contracts of $0.7 million and $0.2million, respectively, to reflect the fair value of the derivative instrumentsas of December 31, 2006.  For the priorquarter and prior six months we had recorded a Loss on Hedging Contracts of$1.6 million.  By their nature, thesederivative instruments can be highly volatile to our earnings. A five percentchange in these prices for our derivative instruments can impact earnings byapproximately $200,000.

Also, during the current quarter and current sixmonths, as discussed in Note 4, there were settlements under our derivativeagreements due to Cano.  The settlementswere cumulative monthly payments to Cano primarily due to the NYMEX natural gasprice being lower than the $8.50 and $7.60 “floor natural gas prices.”  We also received payments for the NYMEX crudeoil price being lower than the $60 “floor crude oil price.” For the currentquarter and current six months, the settlement payments to Cano for natural gaswere $207,899 and $724,228, respectively. For the current quarter and current six months, the settlement paymentsto Cano for crude oil were $27,229.

***Interest Expense***

The interest expense we incurred in the currentquarter and current six months of $0.2 million and $2.1 million, respectively,resulted directly from senior credit agreement and subordinated creditagreement as discussed in Note 3.  The current six months’ amount includes$0.5 million for previously deferred financing costs pertaining to oursubordinated credit agreement since we have permanently retired this creditagreement, as discussed in Note 3.  For the prior year quarter and prioryear six months, our interest expense was $0.3 million.  As we continue progress on our Fiscal Year2007 capital spending plan, we expect to see increased interest expense infuture periods.

***Deferred Income TaxBenefit***

As of December 31, 2006, we had a net deferred taxliability of $32.3 million.  This represents deferred tax benefits fromgeneration of net operating losses because a valuation allowance against suchitems is not required. We review our deferred tax assets at least quarterly andrecord a valuation allowance against those assets when we conclude that it ismore likely than not that those assets will expire without being utilized. Forthe current quarter and current six months, we recorded an income tax benefitof $0.4 million and $0.5 million, respectively.  For the prior yearquarter and prior year six months, we recorded an income tax benefit of $0.8million.

***Preferred Stock Dividend***

The preferred stock dividend during the currentquarter and current six months of $1.0 million and $1.2 million, respectively,resulted from the preferred stock financing, which was completed on September6, 2006, as discussed in Note 2.  Since we did not issue preferred stockduring the six months ended December 31, 2005, there were no preferred stockdividends for the periods ended December 31, 2005.

***New Accounting Pronouncements***

On July 13, 2006, theFASB released FIN 48, “Accounting for Uncertainty in Income Taxes — anInterpretation of FASB Statement 109.”  FIN 48 requires companies toevaluate and disclose material uncertain tax positions it has taken withvarious taxing jurisdictions.  We are currently reviewing FIN 48 and areunable to determine the effect, if any, that FIN 48 will have to our operatingresults, financial position, or future cash flows.  We will be required toadopt FIN 48 in our June 30, 2008 fiscal period.

***SabineJoint Venture Withdrawal***

On January 26, 2007 but effective January 8, 2007,Cano entered into the First Amendment to Amended and Restated Regulations ofSabine Production Operating, LLC (“Sabine Production”) with Carlile Management,LLC, a member, Haddock Enterprises, LLC, a 

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member,Jack I. Tompkins, a manager, Dr. Kenneth Q. Carlile, a manager, Gerald W.Haddock, a manager, and S. Jeffrey Johnson, a manager.  Gerald W. Haddockis a member of Cano’s board of directors and S. Jeffrey Johnson is Cano’sChairman and CEO.

The amendment provides that the maximum amount to becommitted to Sabine Production by any member is increased from $325,000 to$375,000.  The amendment also provides that after funding the increasedcommitment of $375,000, a member may withdraw as a member of SabineProduction.  Upon a withdrawal, the withdrawing member forfeits itsmembership interests in Sabine Production and is released from all of itsobligations under the Amended and Restated Regulations, as amended, the OmnibusAgreement, the Compensation Reimbursement Agreement and the Non-competitionAgreement.

On January 26, 2007, Cano made its final contributionof $50,000 to Sabine Production such that its aggregate contribution was $375,000and on February 1, 2007, Cano delivered its notice of withdrawal from SabineProduction effective on February 1, 2007.

**Item 3. Quantitativeand Qualitative Disclosures About Market Risk.**

See Note 4 to the consolidated financial statementsregarding the updates of our market risk from June 30, 2006 through December31, 2006.

**Item 4. Controls and Procedures.**

As of the end of the period covered by this report, weconducted an evaluation, under the supervision and with the participation ofour chief executive officer, chief financial officer and principal accountingofficer of our disclosure controls and procedures as defined inRule 13a-15(e) and Rule 15d-15(e) of the SecuritiesExchange Act of 1934 (the “Exchange Act”). Based upon this evaluation, our chiefexecutive officer, chief financial officer and principal accounting officerconcluded that our disclosure controls and procedures are effective to ensurethat information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is: (1) accumulated and communicated to ourmanagement, including our chief executive officer, chief financial officer andprincipal accounting officer, as appropriate to allow timely decisionsregarding required disclosure; and (2) recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

During the course of performing our quarter endclosing procedures for the quarter ended September 30, 2006, our internal controlsdetected that a senior executive was involved in fraudulent sales to Cano ofequipment and materials.  In the opinion of management, failure to set upadequate controls over payments to vendors represented a material weakness inthe Company’s internal control over financial reporting as ofSeptember 30, 2006.  We implemented additional procedures tostrengthen our internal controls over accounts payable processing during thequarter ended December 31, 2006.  The additional procedures involveadditional procedures to set-up new vendors in our accounts payable system andadditional review of vendor invoices prior to payment.

As discussed above with respect to the additionalprocedures added to set-up new vendors in our accounts payable system andadditional review of vendor invoices prior to payment, a change of our internalcontrol over financial reporting occurred during the fiscal quarter endedDecember 31, 2006 that materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**PART II — OTHER INFORMATION**

**Item 1. Legal Proceedings.**

See Note 11 which is incorporated into this “Item 1.Legal Proceedings” by reference.

**Item 4. Submission of Matters to a Vote of Security Holders.**

###### We submitted a proxy statementto the Company’s stockholders as of the record date, November 14, 2006.  The proxy statement was furnished to theCompany’s stockholders in connection with the Annual Meeting of Stockholdersheld on December 28, 2006.  There were32,308,894 shares of common stock entitled to vote at the meeting and 49,116shares of our Series D Convertible Preferred Stock entitled to vote at themeeting, on an as converted basis into 8,613,994 shares of common stock,except, due to the rules of the American Stock Exchange, with regard to theauthorization of the issuance of additional shares of common stock issuableupon conversion of the Series D Convertible Preferred Stock.  For all items except the authorization of theissuance of additional shares of common stock issuable upon conversion of theSeries D Convertible Preferred Stock, there were 40,922,888 shares entitled tovote at the meeting.  For the election ofthe Board of Directors, the results were as follows:

| Nominee                 | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-------------------------|------------|--------------------|------------|-------------------------|------------|
| S. Jeffrey  Johnson (1) |       | 22,761,919         |       | 143,744                 |       |
| Donnie D. Dent  (1)     |       | 22,655,213         |       | 250,450                 |       |
| Gerald W.  Haddock (1)  |       | 22,635,263         |       | 270,400                 |       |
| Randall Boyd (1)        |       | 22,634,998         |       | 270,665                 |       |
| Dr. Jim  Underwood (1)  |       | 22,521,063         |       | 384,600                 |       |
| Patrick W.  Tolbert (1) |       | 22,747,317         |       | 158,346                 |       |
| Dennis McCuistion (1)   |       | 22,734,063         |       | 171,600                 |       |

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(1)             Incumbent

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Forthe approval of the issuance of additional shares of common stock uponconversion of Cano’s Series D Convertible Preferred Stock (exclusive of theshares into which the Series D Convertible Preferred Stock is convertible), theresults were as follows:

| Votes For | ** ** | **Votes  Against** | ** ** | **Votes  Abstained** | ** ** | **Broker  Non-Votes** |
|----------------|------------|--------------------|------------|----------------------|------------|-----------------------|
| 13,371,780     |       | 2,873,836          |       | 26,001               |       | 6,634,046             |

 

Forthe approval of the amendment to the Certificate of Incorporation to increasethe number of shares of authorized common stock, the results were as follows:
|        | Votes For | ** ** | **Votes  Against** | ** ** | **Votes  Abstained** | ** ** |
|--------|----------------|------------|--------------------|------------|----------------------|------------|
|   | 23,567,658     |       | 3,301,337          |       | 30,785               |       |

 

Forthe approval of the amendment to the 2005 Long-Term Incentive Plan, the resultswere as follows:

| Votes For | ** ** | **Votes  Against** | ** ** | **Votes  Abstained** | ** ** | **Broker  Non-Votes** |
|----------------|------------|--------------------|------------|----------------------|------------|-----------------------|
| 16,715,857     |       | 3,501,092          |       | 48,785               |       | 6,634,047             |

 

Forthe ratification of Hein & Associates LLP as Cano’s independent registeredpublic accounting firm for the year ended June 30, 2007, the results were asfollows:
|        | Votes For | ** ** | **Votes  Against** | ** ** | **Votes  Abstained** | ** ** |
|--------|----------------|------------|--------------------|------------|----------------------|------------|
|   | 26,827,886     |       | 45,074             |       | 26,821               |       |

 

**Item 5.    Other Information.**

On February 9, 2007, Cano and its subsidiaries enteredinto a Settlement Agreement and Release with Mid-Continent Casualty Company inconnection with the lawsuit filed by Mid-Continent as described in Note 11pursuant to which in exchange for mutual releases, in addition to theapproximately $923,000 that we have been reimbursed by Mid-Continent,Mid-Continent agreed to pay to Cano within 20 business days of February 9, 2007the amount of $6,699,827 comprised of the following: (a) the $1,000,000 policylimits of the primary policy; (b) the $5,000,000 policy limits of the excesspolicy; (c) $500,000 for future defense costs; (d) $144,000 as partial paymentfor certain unpaid invoices for litigation related expenses; (e) all approvedreasonable and necessary litigation related expenses through December 21, 2006that are not part of the above-referenced $144,000; and (f) certain specifiedattorneys fees.

**Item 6. Exhibits.**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                          |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  3.1       |       | Certificate of Amendment of Certificate of  Incorporation incorporated by reference from Exhibit 3.8 to Registration  Statement on Form S-1 (No. 333-126167) filed on January 23, 2007.                                                  |
| + 10.1          |       | Employment Agreement of Patrick McKinney effective  June 1, 2006, incorporated by reference from Exhibit 10.1 to Current Report  on Form 8-K filed on November 9, 2006.                                                                  |
| + 10.2          |       | First Amendment to Employee Agreement of Patrick McKinney  dated November 9, 2006, incorporated by reference from Exhibit 10.2 to  Current Report on Form 8-K filed on November 9, 2006.                                                 |
| + 10.3          |       | Restricted Stock Award Agreement of Patrick McKinney  dated June 1, 2006, incorporated by reference from Exhibit 10.3 to Current  Report on Form 8-K filed on November 9, 2006.                                                          |
| + 10.4          |       | Amendment No. One dated December 28, 2006 to the  Cano Petroleum, Inc. 2005 Long-Term Incentive Plan, incorporated by reference  from Exhibit 10.1 to Current Report on Form 8-K filed on January 4, 2007.                               |
| + 10.5          |       | Stock Option Agreement dated December 28, 2006 by  and between Cano Petroleum, Inc. and S. Jeffrey Johnston, incorporated by  reference from Exhibit 10.2 to Current Report on Form 8-K filed on January 4,  2007.                       |
| + 10.6          |       | Stock Option Agreement dated December 28, 2006 by  and between Cano Petroleum, Inc. and Morris B. Smith, incorporated by  reference from Exhibit 10.3 to Current Report on Form 8-K filed on January 4,  2007.                           |
| + 10.7          |       | Stock Option Agreement dated December 28, 2006 by  and between Cano Petroleum, Inc. and Patrick McKinney, incorporated by  reference from Exhibit 10.4 to Current Report on Form 8-K filed on January 4,  2007.                          |
| + 10.8          |       | Stock Option Agreement dated December 28, 2006 by  and between Cano Petroleum, Inc. and James K. Teringo, Jr., incorporated by  reference from Exhibit 10.5 to Current Report on Form 8-K filed on January 4,  2007.                     |
| + 10.9          |       | Stock Option Agreement dated December 28, 2006 by  and between Cano Petroleum, Inc. and Michael J. Ricketts., incorporated by  reference from Exhibit 10.6 to Current Report on Form 8-K filed on January 4,  2007.                      |
| + 10.10         |       | Stock Option Agreement dated December 28, 2006 by  and between Cano Petroleum, Inc. and Gerald Haddock, incorporated by  reference from Exhibit 10.75 to Registration Statement on Form S-1 (No.  333-126167) filed on January 23, 2007. |

 

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| + 10.11                 |   | Stock Option Agreement dated December 28, 2006 by  and between Cano Petroleum, Inc. and Don Dent, incorporated by reference from  Exhibit 10.76 to Registration Statement on Form S-1 (No. 333-126167) filed on  January 23, 2007.                              |
|-------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| + 10.12                 |   | Stock Option Agreement dated December 28, 2006 by  and between Cano Petroleum, Inc. and Randall Boyd, incorporated by reference  from Exhibit 10.77 to Registration Statement on Form S-1 (No. 333-126167)  filed on January 23, 2007.                          |
| + 10.13                 |   | Stock Option Agreement dated December 28, 2006 by  and between Cano Petroleum, Inc. and James Underwood, incorporated by  reference from Exhibit 10.78 to Registration Statement on Form S-1 (No.  333-126167) filed on January 23, 2007.                       |
| + 10.14                 |   | Stock Option Agreement dated December 28, 2006 by  and between Cano Petroleum, Inc. and Patrick Tolbert, incorporated by  reference from Exhibit 10.79 to Registration Statement on Form S-1 (No.  333-126167) filed on January 23, 2007.                       |
| + 10.15                 |   | Stock Option Agreement dated December 28, 2006 by  and between Cano Petroleum, Inc. and Dennis McCuistion, incorporated by  reference from Exhibit 10.80 to Registration Statement on Form S-1 (No.  333-126167) filed on January 23, 2007.                     |
|    10.16 |   | First Amendment to Amended and Restated Regulations  of Sabine Production Operating, LLC effective January 8, 2007, incorporated  by reference from Exhibit 10.1 to Current Report on Form 8-K filed on  February 1, 2007.                                      |
|    31.1* |   | Certification by Chief Executive Officer, required  by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                            |
|    31.2* |   | Certification by Chief Financial Officer, required  by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                            |
|    31.3* |   | Certification by Principal Accounting Officer,  required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       |
|    32.1* |   | Certification by Chief Executive Officer, required  by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of  Chapter 63 of Title 18 of the United States Code, promulgated pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.      |
|    32.2* |   | Certification by Chief Financial Officer, required  by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of  Chapter 63 of Title 18 of the United States Code, promulgated pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.      |
|    32.3* |   | Certification by Principal Accounting Officer,  required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section  1350 of Chapter 63 of Title 18 of the United States Code, promulgated  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

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*                    Filedherewith

+                    Managementcontract or compensatory plan, contract or arrangement

 

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**SIGNATURES**

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| **CANO PETROLEUM, INC.** | ** ** |       | ** ** |                                               |   |
|--------------------------|------------|------------|------------|----------------------------------------------------|--------|
| ** **               | ** ** |       | ** ** |                                               |   |
| Date: February 9, 2007   | ** ** | By:        | ** ** | /s/ S. Jeffrey Johnson                             |   |
| ** **               | ** ** | ** ** | ** ** | S. Jeffrey Johnson                                 |   |
| ** **               | ** ** | ** ** | ** ** | Chief Executive Officer                            |   |
| ** **               | ** ** | ** ** | ** ** |                                               |   |
| ** **               | ** ** | ** ** | ** ** |                                               |   |
| Date: February 9, 2007   | ** ** | By:        | ** ** | /s/ Morris B. Smith                                |   |
| ** **               | ** ** | ** ** | ** ** | Morris B. Smith                                    |   |
| ** **               | ** ** | ** ** | ** ** | Senior Vice-President and  Chief Financial Officer |   |
| ** **               | ** ** | ** ** | ** ** |                                               |   |
| ** **               | ** ** | ** ** | ** ** |                                               |   |
| Date: February 9, 2007   | ** ** | By:        | ** ** | /s/ Michael J. Ricketts                            |   |
| ** **               | ** ** |       | ** ** | Michael J. Ricketts                                |   |
| ** **               | ** ** |       | ** ** | Vice-President and  Principal Accounting Officer   |   |

 

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