m8207110qsb.htm
FORM
10-Q
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
MARK
ONE
X QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE
ACT OF
1934
For
the
quarterly and six month period ended June 30, 2007
OR
___ TRANSITION
REPORT pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934
FOR
THE
TRANSITION PERIOD FROM _______ TO _______
Commission
File Number: 1-100
CROFF
ENTERPRISES, INC.
(Exact
Name Of Registrant As Specified In Its Charter)
Utah
|
|
80209
|
State
of Incorporation
|
3773
Cherry Creek Drive North, Suite 1025
|
Zip
Code
|
|
Denver,
Colorado
|
|
|
Address
of principal executive offices
|
|
|
|
|
(303)
383-1555
|
|
87-0233535
|
Registrant’s
telephone number, including area code
|
|
I.R.S.
Employer Identification Number
|
|
|
|
Securities
registered pursuant to Section 12(b) of the Act:
Common
-
$0.10
Par
Value
None
Title
of each
class
Name
of each exchange on
which registered
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant has required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90
days. X
Yes _____No
Indicate
by check mark whether the Registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act).
Yes _____ X
No
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12
b-2 of the Exchange
Act) _____Yes X
No
There
were 551,344 shares of common stock outstanding on August 1, 2006, exclusive
of
69,399 common shares held in treasury stock.
INDEX
INDEX
TO
INFORMATION INCLUDED IN THE QUARTERLY REPORT (FORM 10-Q) TO THE SECURITIES
AND
EXCHANGE COMMISSION FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007
(UNAUDITED).
|
|
Page
Number
|
PART
I.
UNAUDITED FINANCIAL INFORMATION
|
|
Item
1.
|
.
|
Unaudited
Financial Statements
|
3
|
Item
2.
|
.
|
Management’s
Discussion and Analysis of Financial
|
|
|
|
Condition
and Results of Operations
|
8
|
Item3.
|
.
|
Controls
and Procedures
|
11
|
PART
II. OTHER INFORMATION
|
12
|
Item
5.
|
|
Material
Subsequent Events
|
12
|
Item
6.
|
|
Exhibits
and Reports on Form 8-K
|
12
|
Signatures
|
|
|
13
|
Certifications
|
|
|
14
|
|
Forward-Looking
Statements
Certain
information included in this report, other materials filed or to be filed by
the
Company with the Securities and Exchange Commission (“SEC”), as well as
information included in oral statements or other written statements made or
to
be made by the Company contain or incorporate by reference certain statements
(other than statements of historical or present fact) that constitute
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
All
statements, other than statements
of historical or present facts, that address activities, events, outcomes or
developments that the Company plans, expects, believes, assumes, budgets,
predicts, forecasts, estimates, projects, intends or anticipates (and other
similar expressions) will or may occur in the future are forward-looking
statements. These forward-looking statements are based on management’s current
belief, based on currently available information, as to the outcome and timing
of future events. When considering forward-looking statements, you should keep
in mind the cautionary statements in this Form 10-Q and the Company’s Annual
Report on Form 10-K/A for the year ended December 31, 2006. Such forward-looking
statements appear in a number of places and include statements with respect
to,
among other things, such matters as: future capital, development and exploration
expenditures (including the amount and nature thereof), drilling, deepening
or
refracing of wells, oil and natural gas reserve estimates (including estimates
of future net revenues associated with such reserves and the present value
of
such future net revenues), estimates of future production of oil and natural
gas, business strategies, expansion and growth of the Company’s operations, cash
flow and anticipated liquidity, prospects and development and property
acquisitions, obtaining financial or industry partners for prospect or program
development, or marketing of oil and natural gas. We caution you that these
forward-looking statements are subject to risks and
uncertainties. These risks include but are not limited to: general
economic conditions, the Company’s ability to finance acquisitions and drilling,
the market price of oil and natural gas, the risks associated with exploration,
the Company’s ability to find, acquire, market, develop and produce new
properties, operating hazards attendant to the oil and natural gas business,
uncertainties in the estimation of proved reserves and in the projection of
future rates of production and timing of development expenditures, the strength
and financial resources of the Company’s competitors, the Company’s ability to
find and retain skilled personnel, climatic conditions, labor relations,
availability and cost of material and equipment, environmental risks, the
results of financing efforts, regulatory developments and the other risks
described in the Company’s Annual Report on Form 10-K/A for the year ended
December 31, 2006.
Reserve
engineering is a subjective process of estimating underground accumulations
of
oil and natural gas that cannot be measured in an exact way. The accuracy of
any
reserve estimate depends on the quality of available data and the interpretation
of that data by reserve engineers. In addition, the results of drilling, testing
and production activities may justify revisions of estimates that were made
previously. If significant, these revisions could change the schedule of any
further production and/or development drilling. Accordingly, reserve estimates
are generally different from the quantities of oil and natural gas that are
ultimately recovered.
In
addition, the Company is in a transition period, with the Company considering
various “going forward” proposals that may materially alter the financing,
structure, and core business of the Company, which may in turn, significantly
affect current estimates or projections.
Should
one or more of the risks or
uncertainties described above or elsewhere in this Form 10-Q or presented in
the
Company’s Annual Report on Form 10-K/A for the year ended December 31, 2006
occur, or should underlying assumptions prove incorrect, actual results and
plans could differ materially from those expressed in any forward-looking
statements. We specifically disclaim all responsibility to publicly update
any
information contained in a forward-looking statement or any forward-looking
statement in its entirety and therefore disclaim any resulting liability for
potentially related damages.
All
forward-looking statements attributable to us are expressly qualified in their
entirety by this cautionary statement.
PART
I. UNAUDITED FINANCIAL INFORMATION
ITEM
1. UNAUDITED FINANCIAL STATEMENTS
The
financial statements included
herein have been prepared in conformity with generally accepted accounting
principles. The statements are unaudited but reflect all adjustments, which,
in
the opinion of management, are necessary to fairly present the Company’s
financial position and results of operations. All such adjustments are of a
normal recurring nature.
CROFF
ENTERPRISES, INC.
BALANCE
SHEETS
(Unaudited)
|
|
|
|
December
31,
|
|
|
June
30
|
|
|
|
2006
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
985,729
|
|
|
$ |
1,050,929
|
|
Accounts receivable
|
|
|
124,900
|
|
|
|
119,189
|
|
|
|
|
1,110,629
|
|
|
|
1,170,118
|
|
|
|
Oil
and natural gas properties, at cost, successful efforts method:
|
|
|
1,340,362
|
|
|
|
1,363,207
|
|
Accumulated depletion and depreciation
|
|
|
(583,830 |
) |
|
|
(608,830 |
) |
|
|
|
756,532
|
|
|
|
754,377
|
|
|
Total
assets
|
|
$ |
1,867,161
|
|
|
|
1,924,495
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
58,756
|
|
|
|
34,139
|
|
Current portion of ARO
|
|
|
23,000
|
|
|
|
23,000
|
|
Accrued liabilities
|
|
|
33,375
|
|
|
|
(7,719 |
) |
|
|
|
115,131
|
|
|
|
49,420
|
|
|
Long-term
portion of ARO
|
|
|
64,695
|
|
|
|
67,922
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Class A Preferred stock, no par value
|
|
|
|
|
|
|
|
|
5,000,000 shares authorized, none issued
|
|
|
--
|
|
|
|
--
|
|
Class B Preferred stock, no par value; 1,000,000 shares
authorized,
|
|
|
|
|
|
|
|
|
540,659 shares issued and outstanding
|
|
|
1,380,387
|
|
|
|
1,493,743
|
|
Common stock, $.10 par value; 20,000,000 shares
authorized,
|
|
|
|
|
|
|
|
|
620,643 shares issued and outstanding
|
|
|
62,064
|
|
|
|
62,064
|
|
Capital in excess of par value
|
|
|
155,715
|
|
|
|
155,715
|
|
Treasury stock, at cost, 69,399 shares
|
|
|
|
|
|
|
|
|
issued and outstanding in 2005 and 2006
|
|
|
(107,794 |
) |
|
|
(107,794 |
) |
Retained earnings
|
|
|
196,963
|
|
|
|
203,425
|
|
|
|
|
1,687,335
|
|
|
|
1,807,153
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
1,867,161
|
|
|
$ |
1,924,495
|
|
|
See
accompanying notes to unaudited condensed financial
statements
CROFF
ENTERPRISES, INC.
|
|
STATEMENTS
OF OPERATIONS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and natural gas sales
|
|
$ |
209,032
|
|
|
$ |
211,792
|
|
|
$ |
435,106
|
|
|
$ |
422,121
|
|
Interest
income
|
|
|
7,221
|
|
|
|
11,279
|
|
|
|
13,879
|
|
|
|
22,428
|
|
Other
income
|
|
|
--
|
|
|
|
2,760
|
|
|
|
--
|
|
|
|
2,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,253
|
|
|
|
225,831
|
|
|
|
448,985
|
|
|
|
447,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expense including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
production
taxes
|
|
|
57,469
|
|
|
|
62,927
|
|
|
|
123,158
|
|
|
|
138,423
|
|
General
and administrative
|
|
|
35,874
|
|
|
|
40,789
|
|
|
|
98,826
|
|
|
|
84,661
|
|
Overhead
expense, related party
|
|
|
8,126
|
|
|
|
12,055
|
|
|
|
24,444
|
|
|
|
24,180
|
|
Accretion
expense
|
|
|
1,467
|
|
|
|
1,614
|
|
|
|
2,934
|
|
|
|
3,227
|
|
Depletion
and depreciation
|
|
|
12,000
|
|
|
|
12,500
|
|
|
|
24,500
|
|
|
|
25,000
|
|
|
|
|
114,936
|
|
|
|
129,885
|
|
|
|
273,862
|
|
|
|
275,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
101,317
|
|
|
|
95,946
|
|
|
|
175,123
|
|
|
|
171,818
|
|
Income
taxes expense
|
|
|
23,000
|
|
|
|
30,000
|
|
|
|
39,000
|
|
|
|
52,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
78,317
|
|
|
$ |
65,946
|
|
|
$ |
136,123
|
|
|
$ |
119,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income applicable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred
B shares
|
|
|
76,682
|
|
|
|
62,965
|
|
|
|
132,091
|
|
|
|
113,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income applicable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
shares
|
|
$ |
1,635
|
|
|
$ |
2,981
|
|
|
$ |
4,032
|
|
|
$ |
6,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
common share
|
|
$ |
* |
|
|
|
*
|
|
|
$ |
0.01
|
|
|
$ |
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
551,224
|
|
|
|
551,224
|
|
|
|
551,224
|
|
|
|
551,224
|
|
*
less
than $0.01 per common share.
See
accompanying notes to unaudited condensed financial statement.
CROFF
ENTERPRISES, INC.
STATEMENTS
OF STOCKHOLDERS’ EQUITY
For the year ended December 31, 2006 and the six months
ended June
30, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
in
|
|
|
|
|
|
|
|
|
|
Preferred
B
stock
|
|
|
Common
stock
|
|
|
excess
of
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
par
value
|
|
|
stock
|
|
|
earnings
|
|
|
Balance
at December 31, 2006
|
|
|
540,659
|
|
|
$ |
1,380,387
|
|
|
|
620,643
|
|
|
$ |
62,064
|
|
|
$ |
155,715
|
|
|
$ |
(107,794 |
) |
|
$ |
196,963
|
|
|
Net
income for the six months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended June 30, 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
119,818
|
|
Preferred stock reallocation
|
|
|
-
|
|
|
|
113,356
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(113,356 |
) |
|
Balance
at June 30, 2007
|
|
|
540,659
|
|
|
|
1,493,743
|
|
|
|
620,643
|
|
|
$ |
62,064
|
|
|
$ |
155,715
|
|
|
$ |
(107,794 |
) |
|
$ |
203,425
|
|
See
accompanying notes to unaudited condensed financial statement
CROFF
ENTERPRISES, INC.
|
|
STATEMENTS
OF CASH FLOWS
|
|
For
the six months ended June 30, 2006 and 2007
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
136,123
|
|
|
$ |
119,818
|
|
Adjustments
to reconcile net income to
|
|
|
|
|
|
|
|
|
net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depletion,
depreciation and accretion
|
|
|
27,434
|
|
|
|
28,227
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
19,232
|
|
|
|
5,711
|
|
Accounts
payable
|
|
|
(6,814 |
) |
|
|
(24,617 |
) |
Accrued
liabilities
|
|
|
(48,903 |
) |
|
|
(41,094 |
) |
Net
cash provided by operating activities
|
|
|
127,072
|
|
|
|
88,045
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Deposit
received for sale of assets
|
|
|
100,000
|
|
|
|
--
|
|
Acquisition
of property leases and improvements
|
|
|
(50,454 |
) |
|
|
(22,845 |
) |
Net
cash provided by investing activities
|
|
|
49,546
|
|
|
|
(22,845 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investment activities:
|
|
|
|
|
|
|
|
|
Costs
incurred for the benefit of farmout agreement
|
|
|
(300,621 |
) |
|
|
--
|
|
Net
cash (used) by financing activities
|
|
|
(300,621 |
) |
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(124,003 |
) |
|
|
65,200
|
|
Cash
and cash equivalents at beginning of period
|
|
|
902,257
|
|
|
|
985,729
|
|
Cash
and cash equivalents at end of period
|
|
$ |
778,254
|
|
|
$ |
1,050,929
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing
activities: None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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See
accompanying notes to unaudited condensed financial statement.
CROFF
ENTERPRISES, INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Basis
of Preparation
The
condensed financial statements for
the three and six month periods ended June 30, 2006 and 2007 in this report
have
been prepared by the Company without audit pursuant to the rules and regulations
of the Securities and Exchange Commission and reflect, in the opinion of the
management, all adjustments necessary to present fairly the results of the
operations of the interim periods presented herein. Certain
information in footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted pursuant to such rules and
regulations, although the Company believes the disclosures presented herein
are
adequate to make the information presented not misleading. It is
suggested that these condensed financial statements be read in conjunction
with
the financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K/A for the year ended December 31, 2006, which report has
been filed with the Securities and Exchange Commission. The Annual
Report is available from the Company’s website
at www.croff.com, and online at the Securities and Exchange
Commission website at www.sec.gov/edgar.
ITEM
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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Overview
Croff
Enterprises, Inc. (“Croff’ or the
“Company”) was incorporated in Utah in 1907. Croff is an independent
energy company engaged in the business of oil and natural gas exploration and
production, primarily through the acquisition of producing oil and natural
gas
leases as well as the ownership of perpetual mineral interests. Other
companies operate almost all of the wells from which Croff receives revenues
and
Croff has no control over the factors which determine royalty or working
interest revenues, such as markets, prices and rates of
production. Today, Croff participates as a working interest owner in
approximately 40 wells or units of several wells. Croff holds small
royalty interests in approximately 212 wells.
Summary
of Current Events – Primarily Termination of the Tiayuan Rongan Business Trading
Company Ltd. Acquisition Agreement
Croff
Enterprises, Inc. announced on December 14, 2006, a Stock Exchange Agreement
(providing for shareholder approval) providing for the majority acquisition
of
the Tiayuan Rongan Business Trading Company Limited, hereafter “TRBT”, a Chinese
company, which operates shopping malls, located in the city of Taiyuan, Shanxi
Province, in the Peoples Republic of China. The stock for stock equivalent
Exchange Agreement (hereafter “exchange agreement”) provided for a change in
control of Croff, a change in the business of Croff, and new management team.
As
part of that agreement, Croff was to cancel its Preferred B stock by exchanging
all Preferred B assets (oil and gas assets and cash) in exchange for all (67.2%)
of the Preferred B shares of the principal shareholder. The 67.2% of the
Preferred B shares held by C. S. Financial LLC and Jensen Development Company,
which are owned by Croff’s Chairman, Gerald L. Jensen, would be exchanged for
67.2% of the assets and the balance of the Preferred B assets purchased for
$600,000.
On
June 1, 2007, Croff Enterprises,
Inc. announced that it had terminated the exchange agreement with “TRBT”. The
agreement was cancelled due to the failure of TRBT to timely supply qualifying
financial statements to complete the proxy process and to comply with reporting
requirements of a public company. As part of the “TRBT” agreement,
Croff had agreed to cancel all of its Preferred B shares and sell the remaining
32.8% of its oil and gas assets not held by the principal shareholders in return
for receiving all of the principal shareholders Preferred B shares constituting
67.2% of all Preferred B shares and the sum of $600,000.
Subsequent
to the cancellation of the “TRBT” Exchange Agreement, the Board appointed an
Independent Committee to determine whether to seek the continuation of the
Preferred B sale and pursue other strategic alternatives. The Independent
Committee was constituted on June 15, 2007. The Independent Committee is
reviewing the strategic options available to the Company with the goals of
simplifying the corporate structure, becoming a larger company and lowering
the
costs of compliance for a small public company.
Critical
Accounting Policies and Estimates
The
Company’s discussion and analysis
of its financial condition and results of operation are based upon financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation
of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
year. The Company analyzes its estimates, including those related to
oil and natural gas revenues, oil and natural gas properties, marketable
securities, income taxes and contingencies.
The
Company bases its estimates on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions. The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements and the uncertainties that it could impact results of operations,
financial conditions and cash flows. The Company accounts for its oil
and natural gas properties under the successful efforts method of
accounting. Depletion, depreciation and amortization of oil and
natural gas properties and the periodic assessments for impairment are based
on
underlying oil and natural gas reserve estimates and future cash flows using
then current oil and natural gas prices combined with operating and capital
development costs. There are numerous uncertainties inherent in estimating
quantities of proved oil and natural gas reserves and in projecting future
rates
of production and timing of development expenditures. Historically, oil and
natural gas prices have experienced significant fluctuations and have been
particularly volatile in recent years. Price fluctuations can result from
variations in weather, levels of regional or national production and demand,
availability of transportation capacity to other regions of the country and
various other factors. Increases or decreases in oil and natural gas prices
received could have a significant impact on future results.
Liquidity
and Capital Resources
At
June 30, 2007, the Company had
assets of $1,924,495 and current assets totaled $1,170,118 compared to current
liabilities of $49,420. Working capital at June 30, 2007 totaled
$1,120,698 an increase of 13% compared to $995,498 at December 31,
2006. The Company had a current ratio at June 30, 2007 of
approximately 24:1. During the six month period ended June 30, 2007, net cash
provided by operations totaled $88,045, as compared to $127,072 for the same
period in 2006. This decrease was primarily due to reduction of current
liabilities in 2007. The Company’s cash flow from operations is
highly dependent on oil and natural gas prices. The Company had no
short-term or long-term debt outstanding at June 30, 2007.
Capital
expenditures in the second quarter included $22,845 paid for completion of
the
Shriners II well which was started in 2006. This well is currently
producing. The Company’s plans for ongoing development, acquisition
and exploration expenditures, and possible equity repurchases over and beyond
the Company’s operating cash flows will depend entirely on the Company’s ability
to secure acceptable financing, and reasonably priced
opportunities. Bank borrowings may be utilized to finance the
Company’s 2007 capital budget. In addition, the Company will utilize
its internal operating cash flows. Future cash flows are subject to a
number of variables, including the level of production and oil and natural
gas
prices. There can be no assurance that operations and other capital
resources will provide cash in sufficient amounts to maintain planned levels
of
capital expenditures or that increased capital expenditures will be
undertaken.
The
Company believes that borrowings
from financial institutions, projected operating cash flows and the cash on
hand
will be sufficient to cover its working capital requirements for the next 12
months, if continuing its current oil and gas activities. In
connection with consummating any significant acquisition or funding an
exploratory or development drilling program, additional debt or equity financing
will be required, which may or may not be available on terms that are acceptable
to the Company.
While
certain costs are affected by the general level of inflation, factors unique
to
the oil and natural gas industry result in independent price fluctuations.
Over
the past five years, significant fluctuations have occurred in oil and natural
gas prices. Although it is particularly difficult to estimate future prices
of
oil and natural gas, price fluctuations have had, and will continue to have,
a
material effect on the Company. Overall, it is management’s belief
that inflation is generally favorable to the Company since it does not have
significant operating expenses.
Results
of Operations
Three
months ended June 30, 2007 compared to three months ended June 30,
2006.
The
Company had a net income for the
second quarter of 2007 which totaled $65,946 compared to a net income of $78,317
for the same period in 2006. This decrease in income from 2006 was
due to lower prices for natural gas, higher lease operating expenses, and higher
general and administrative expenses. The company expects lease operating
expenses to remain relatively stable and general and administrative expenses
to
be higher due to strategic corporate changes.
Revenues
for the second quarter of 2007
totaled $225,831, a slight increase from the same period in 2006. Oil and
natural gas sales for the second quarter of 2007 totaled $211,792, a 1.3%
increase from the same period in 2006. Increased oil prices were
mostly offset with lower natural gas prices in the current
quarter. The Company’s average sales price of oil in the second
quarter of 2007 was slightly higher than the same period in 2006. The
Company’s average sales price of natural gas in the second quarter of 2006 was
approximately $5.50 per Mcf (Mcf equates to one
thousand
cubic feet). The price in the second quarter of 2007 was approximately
$5.00 per Mcf.
For
the second quarter of 2007, lease
operating expenses, which include all production related taxes, totaled $62,927
compared to $57,469 incurred for the same period in 2006. This
increase was primarily due to inflation in oil service pricing in
2007.
Estimated
depreciation and depletion
expense for the second quarter of 2007 totaled $12,500 and for 2006, totaled
$12,500.
General
and administrative expense,
including overhead expense paid to a related party, for the second quarter
of
2007, totaled $52,844 compared to $44,000 for the same period in
2006. This increase related primarily to the higher costs incurred in
the TRBT acquisition and proxy. The Company has incurred additional
costs during the second quarter in both 2006 and 2007, associated with
compliance with the Sarbanes-Oxley Act of 2002.
Provision
for income taxes for the
second quarter of 2007 totaled $30,000 compared to $23,000 for the same period
in 2006. This increase is primarily attributable to the expiration of
offsetting tax loss carry forwards in 2007 and being in a higher tax
bracket.
Six
Months ended June 30, 2007 compared to the six months ended June 30,
2006.
Revenues
for the six months ended June
30, 2007 totaled $ 447,309 essentially equal with revenues of $448,985 at June
30, 2006. Net income for the six months ended June 30, 2007 and 2006 totaled
$119,818 and $136,123 respectively. This decrease in the net income was
primarily due to a higher provision for income taxes.
Oil
and gas sales for the six months
ended June 30, 2007 totaled $422,121 a 3% decrease from the $435,106 for the
same period in 2006. This slight decrease in oil and gas sales in 2007 compared
to 2006 is primarily attributed to a decrease in natural gas
prices.
Lease
operation expense which includes all production related taxes for the six months
ended June 30, 2007 totaled $138,423 an 11% increase from $123,158 in 2006.
This
increase was primarily due to higher oilfield service costs in
2007.
Depletion
and depreciation expense for
the six months ended June 30, 2007 totaled $25,000 from the sum of $24,500
incurred for the same period in 2006. This increase was due to the small
increase in producing assets in 2007.
General
and administrative expenses,
including overhead expense paid to related party, for the six months ended
June
30, 2007 totaled $108,841 compared to $123,270 for the same period in 2006.
Overhead expense paid to related party for the six months ended June 30, 2007
totaled $24,180 compared to $24,444 incurred for the same period in 2006. The
decrease in overhead expenses is primarily attributed to timing of professional
fees in the cancelled TRBT acquisition. The Company has also incurred
additional costs during both 2006 and 2007 with respect to strategic
planning.[This should conform to the quarter above]
Provision
for income taxes for the six
months ending June 30, 2007 totaled $52,000 compared to $39,000 from the same
period in 2006. This increase is primarily attributable to the expiration of
offsetting tax loss carry forwards in 2007 and being in a higher tax
bracket.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company’s major current market risk exposure is in crude oil and natural gas
prices. Realized pricing is primarily driven by the prevailing
domestic price for oil and natural gas. Historically, prices received
for oil and natural gas production have been volatile and
unpredictable. Pricing volatility is expected to
continue. Natural gas price realizations for the Six months ended
June 30, 2007, ranged from a monthly low of approximately $3.50 per Mcf to
a
monthly high of approximately $8 per Mcf. Oil prices ranged from a
monthly low of approximately $55 per barrel to a monthly high of approximately
$70 per barrel. A decline in prices of oil or natural gas could have a material
adverse effect on the Company’s financial condition and results of
operations. For the six months ended June 30, 2007, a 10% reduction
in oil and natural gas prices would have reduced revenues by approximately
$42,000.
ITEM
4. CONTROLS AND PROCEDURES
As
of
June 30, 2007, our Chief Executive Officer and Chief Financial Officer (the
“Certifying Officers”) conducted evaluations of our disclosure controls and
procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Exchange
Act, the term “disclosure controls and procedures” means controls and other
procedures of an issuer that are designed to ensure that information required
to
be disclosed by the issuer in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including the Certifying Officers, to allow timely
decisions regarding required disclosure. Based on this evaluation, the
Certifying Officers have concluded that our disclosure controls and procedures
were effective to ensure that material information is recorded, processed,
summarized and reported by our management on a timely basis in order to comply
with our disclosure obligations under the Exchange Act, and the rules and
regulations promulgated thereunder.
PART
II. OTHER
INFORMATION
ITEM
5. SUBSEQUENT EVENTS
(a)
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On
August 15, 2007, Jennifer Miller resigned as the chief accounting
officer
and secretary of the corporation. The Board expects to appoint a
new
officer at its next meeting.
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(b) Within the next five days, the company intends to file an
Amended 10-K to correct what the Company regards as certain technical accounting
disclosure matters. In all events, the Company does not believe that
the accounting changed any of the actual performance data, such as revenues,
net
earnings or balance sheet data, but were made primarily to conform the
categorizations and descriptions of certain financial information as requested
by the SEC. Further, the Company does not intend to, for the
foregoing reasons, restate any of its prior financial statements or prior
filings. Any person wishing to obtain a listing of and directory to
the specific amendments in the financial data and narrative information within
the 10-K/A may obtain a copy identifying those changed sections from the Company
upon written request.
ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
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Exhibits
– The following documents are filed as exhibits to this Quarterly Report
on Form 10-Q:
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31.1
Certification of Chief Executive Officer pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002. *
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31.2
Certification of Acting Chief Financial Officer pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002. *
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32.1
Certification of Chief Executive Officer, dated May 12, 2006, pursuant
to
18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley
Act of 2002. *
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32.2
Certification of Acting Chief Financial Officer, dated May 12, 2006,
pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of
the
Sarbanes-Oxley Act of 2002. *
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(b)
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The
following reports on Form 8-K were filed by Registrant
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The
Company filed a current report on Form 8-K on June 1, 2007 announcing that
the
Exchange Agreement with Taiyuan Rongan Business Trading Company has been
terminated.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, Registrant has
duly
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
CROFF
ENTERPRISES, INC.
Date:
August 20,
2007 By
/s/ Gerald L.
Jensen
Gerald
L. Jensen,
Acting
Chief Financial Officer and
Chief Executive Officer
13