U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Mark One
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NO. 0-25455
MORGAN CREEK ENERGY CORP.
______________________________________________
(Name of small business issuer in its charter)
NEVADA 201777817
_______________________________ ____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5050 QUORUM DRIVE, SUITE 700, DALLAS, TEXAS 75254
_________________________________________________
(Address of principal executive offices)
(214) 321-0603
___________________________
(Issuer's telephone number)
Securities registered pursuant to Section Name of each exchange on which
12(b) of the Act: registered:
NONE
____
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001
____________________
(Title of Class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Check whether the issuer (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State issuers revenues for its most recent fiscal year $ -0-.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. March 25, 2008: $8,815,084
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
N/A
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 and 15(d) of the Securities Exchange Act of 1934 after
the distribution of securities under a plan confirmed by a court. Yes[ ] No[ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding as of March 25, 2008
Common Stock, $0.001 41,976,589
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (i) any annual report to security holders;
(ii) any proxy or information statement; and (iii) any prospectus filed pursuant
to Rule 424(b) or (c) of the Securities Act of 1933 (the "Securities Act"). The
listed documents should be clearly described for identification purposes (e.g.
annual reports to security holders for fiscal year ended December 24, 1990).
N/A
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
2
MORGAN CREEK ENERGY CORP.
FORM 10-KSB
Page
Part I.
Item 1. Description of Business 4
Item 2. Description of Property 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities 24
Item 6. Management's Discussion and Analysis and Plan of
Operation 27
Item 7. Financial Statements 34
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 50
Item 8A. Controls and Procedures 50
Item 8A(T). Controls and Procedures 51
Item 8B. Other Information 51
Part III
Item 9. Directors, Executive Officers, Promoters, Control Persons
and Corporate Governance; Compliance With Section 16(a)
of the Exchange Act 51
Item 10. Executive Compensation 55
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 58
Item 12. Certain Relationships and Related Transactions and
Director Independence 60
Item 13. Exhibits 61
Item 14. Principal Accountant Fees and Services 62
Signatures 63
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Statements made in this Form 10-KSB that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the
Securities Exchange Act of 1934. These statements often can be identified by the
use of terms such as "may," "will," "expect," "believe," "anticipate,"
"estimate," "approximate" or "continue," or the negative thereof. We intend that
such forward-looking statements be subject to the safe harbors for such
statements. We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Any
forward-looking statements represent management's best judgment as to what may
occur in the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond our control that could cause actual
results and events to differ materially from historical results of operations
and events and those presently anticipated or projected. We disclaim any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
AVAILABLE INFORMATION
Morgan Creek Energy Corp. files annual, quarterly, current reports, proxy
statements, and other information with the Securities and Exchange Commission
(the "Commission"). You may read and copy documents referred to in this Annual
Report on Form 10-KSB that have been filed with the Commission at the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You
may obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. You can also obtain copies of our Commission
filings by going to the Commission's website at http://www.sec.gov
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Morgan Creek Energy Corp. was incorporated under the laws of the State of Nevada
on October 19, 2004 and has been engaged in the business of exploration of oil
and gas bearing properties in the United States since its inception. After the
effective date of our registration statement filed with the Securities and
Exchange Commission (February 14, 2006), we commenced trading on the
Over-the-Counter Bulletin Board under the symbol "MCRE:OB". Our shares are also
traded on the Frankfurt Stock Exchange in Germany under the symbol "M6C".
Please note that throughout this Annual Report, and unless otherwise noted, the
words "we," "our," "us," the "Company," or "Morgan
Creek," refers to Morgan Creek Energy Corp.
Transfer Agent
Our transfer agent is Transfer Online, Inc., 317 S.W. Alder Street, 2nd Floor
Portland, Oregon 97204.
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CURRENT BUSINESS OPERATIONS
We are a natural resource exploration and production company currently engaged
in the exploration, acquisition and development of oil and gas properties in the
United States and within North America. Our primary activity and focus is our
leases in Texas (the "Quachita Prospect"). To date, we have acquired
approximately 2,365 gross acres within the Quachita Prospect for a three-year
term. We acquired a 100% working interest and a 77% net revenue interest in
natural gas targeted Quachita Prospect leases. The leases are unproven and were
acquired for approximately $338,000. In addition, we have leased various
properties totaling approximately 4,800 gross acres within the State of New
Mexico for a five-year term in consideration for $52,083 (the "New Mexico
Prospect"). We have a 100% working interest and an 87.5% net revenue interest in
the leases.
OIL AND GAS PROPERTIES
The acreage and location of our oil and gas properties is summarized as follows:
NET ACRES(*)
Texas 1,971
New Mexico 3,472
------------
Total: 5,443
(*) Certain of our interests in our oil and gas properties may be less than
100%. Accordingly, we have presented the acreage of our oil and gas
properties on a net acre basis.
QUACHITA PROSPECT
As of the date of this Annual Report, we lease approximately 1,971 acres within
the Quachita Trend in the State of Texas for a three-year term in consideration
of approximately $338,000. We have a 100% working interest and a 77% net revenue
interest in the Quachita Prospect leases.
BOGGS #1. As of the date of this Annual Report, we received a permit for
drilling of the twin well on the Quachita Prospect and commenced drilling of our
first well (the "Boggs #1). We have identified seven separate potential areas of
exploration interest in the Quachita Lease and have carried out wide scale
leasing on the first of these targets. We completed the drilling portion of the
Boggs #1 well on July 13, 2007. Subsequently, we began production testing and
evaluation of the well. Of the five tested zones, four produced significant
volumes of natural gas. As formation water was also produced with the natural
gas in the tested zones, the Boggs #1 is currently under evaluation. We intend
to secure all immediate rights relating to oil and gas in the areas providing
control over any potential major structural play that develops as a result of
this in-depth exploration. During fiscal year ended December 31, 2007, we
incurred $1,335,780 in drilling and completion expenditures on the Boggs #1.
The Boggs #1 has been privately funded with the funding investors receiving a
75% working interest and a 54% net revenue interest in exchange for providing
100% of all drilling and completion costs. Therefore, we retain a 25% working
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interest and a 23% net revenue interest in the Boggs #1 well. As of December 31,
2007, we have received approximately $759,000 in funding from the private
investors and incurred $1,335,780 in drilling and completion costs on Boggs #1.
Currently, we are negotiating with the funding investors to acquire their well
for an amount equal to the total amount of their investment of $759,000 and
forgiveness of the additional amounts due and owing.
PETERS RANCH LEASE. On approximately January 30, 2007, we acquired a 100%
working interest and a 77% net revenue interest in two fully equipped oil leases
located in the State of Texas for aggregate consideration of $55,000. The Mata
lease is located in Webb County and the Peters Ranch lease is located in Duval
County (collectively, the "Peters Ranch Lease"). On approximately April 23,
2007, we entered into an agreement to sell the Peters Ranch Lease for $65,000
(the "Peters Ranch Agreement"). In accordance with the terms and provisions of
an agreement between the purchaser and one of our shareholders, the amounts due
and owing under the Peters Ranch Agreement were offset against amounts we owed
to our shareholder. See #Item 12. Certain Relationships and Related Transactions
and Director Independence - Loans."
NEW MEXICO PROSPECT
As of the date of this Annual Report, we have leased various properties in the
New Mexico Prospect totaling approximately 3,472 net acres within the State of
New Mexico for a five year term in consideration for $52,083. We have a 100%
working interest and a 87.5% net revenue interest in the leases comprising the
New Mexico Prospect.
PROPOSED FUTURE BUSINESS OPERATIONS
Our strategy is to complete the further acquisition of additional oil and gas
opportunities that fall within the criteria of providing a geological basis for
development of drilling initiatives that can provide near term revenue potential
and fast drilling capital repatriation from production cash flows to create
expanding reserves. We anticipate that our ongoing efforts, subject to adequate
funding being available, will continue to be focused on successfully concluding
negotiations for additional tracts of prime acreage in the coal bed methane and
other gas producing domains, and to implement the drilling of new wells to
develop reserves and to provide revenues. We plan to build a strategic base of
proven reserves and production.
Our ability to continue to complete planned exploration activities and expand
land acquisitions and explore drilling opportunities is dependent on adequate
capital resources being available and further sources of debt and equity being
obtained. The two following alternatives provide the basis for business
development options:
DEVELOPMENT OF CURRENT LEASES
The requirement to raise further funding for oil and gas exploration beyond that
obtained for the next six month period continues to depend on the outcome of
geological and engineering testing occurring over this interval. Based upon the
completion of current property evaluations on the Quachita Prospect, and if
results provide the basis to continue development and geological studies
indicate high probabilities of sufficient production quantities, we will attempt
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to raise capital to further our drilling program to establish up to six wells on
leases in hand, build production infrastructure and pipeline, and raise
additional capital for drilling on the New Mexico Prospect and further land
acquisitions. This has included the following activity:
o Site preparation for entry into current wellbores including roadway
upgrade and operations site, design, review, and finalize testing
procedures, book zone fracture and testing consultants, arrange
equipment required.
o Pull old well tubing, run test tools in wellbore, cut well casing, test
target gas zones with acid and water.
o If gas content conducive to production, complete well by inserting
downhole pump and rods, set pumping unit, wellhead, and gas line.
o Complete pipeline.
o Create well development model and investment documents to develop wells
on subject leases including funding plan.
o Create investor communications materials, corporate identity.
o Raise funding for well development.
o Drill, complete, and produce from well drilling program and selective
re-entry programs.
o Target further leases for exploration potential and obtain further
funding to acquire new development targets.
NEW LEASE ACQUISITION AND DEVELOPMENT
If gas quality and quantities are not deemed sufficient from work to be
conducted on our current leases during the first six months of operation,
additional land acquisitions will be assessed and obtained subject to adequate
capital resources being available and further sources of debt and equity being
obtained. The following outlines anticipated activities pursuant to this
business option.
o Site preparation for entry into current wellbores including roadway
upgrade and operations site, design, review, and finalize testing
procedures, book zone fracture and testing consultants, arrange
equipment required.
o Pull old well tubing, run test tools in wellbore, cut well casing, test
target gas zones with acid and water,
o If gas content not deemed conducive to production, target further
leases for exploration potential and obtain further funding to acquire
new development targets.
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We will require additional funding to implement our proposed future business
activities. See "Item 6. Management's Discussion and Analysis and Plan of
Operation."
We do not expect to purchase any significant equipment or increase significantly
the number of our employees during the next twelve months. Our current business
strategy is to obtain resources under contract where possible because management
believes that this strategy, at its current level of development, provides the
best services available in the circumstances, leads to lower overall costs, and
provides the best flexibility for our business operations.
COAL BED METHANE GAS
Natural gas consists primarily of methane, which is produced when organic
material is physically turned into coal under extreme geologic conditions. When
the coal and methane conversion process occurs such that the resultant coal is
saturated with water and methane is trapped within the coal, the result is "coal
bed methane." Water permeates coal beds and the water pressure traps the gas
within the coal. Because coal has a large and complex internal surface area, it
can store volumes of gas six or seven time as much as a conventional nature gas
reservoir of equal rock volume. Coal bed methane is kept in place usually by the
presence of water. Thus the production of coal bed methane in many cases
requires the dewatering of the coal gas to be extracted. Therefore, in a coal
bed gas well, water can be produced in large volumes especially in the early
stages of production. As the amount of water in the coal decreases, gas
production increases.
COMPETITION
We operate in a highly competitive industry, competing with major oil and gas
companies, independent producers and institutional and individual investors,
which are actively seeking oil and gas properties throughout the world together
with the equipment, labor and materials required to operate properties. Most of
our competitors have financial resources, staffs and facilities substantially
greater than ours. The principal area of competition is encountered in the
financial ability to acquire good acreage positions and drill wells to explore
for oil and gas, then, if warranted, drill production wells and install
production equipment. Competition for the acquisition of oil and gas wells is
intense with many oil and gas properties and/or leases or concessions available
in a competitive bidding process in which we may lack technological information
or expertise available to other bidders. Therefore, we may not be successful in
acquiring and developing profitable properties in the face of this competition.
No assurance can be given that a sufficient number of suitable oil and gas wells
will be available for acquisition and development.
GOVERNMENT REGULATION
The production and sale of oil and gas are subject to various federal, state and
local governmental regulations, which may be changed from time to time in
response to economic or political conditions and can have a significant impact
upon overall operations. Matters subject to regulation include discharge permits
for drilling operations, drilling bonds, reports concerning operations, the
spacing of wells, unitization and pooling of properties, taxation, abandonment
and restoration and environmental protection. These laws and regulations are
under constant review for amendment or expansion. From time to time, regulatory
agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and gas wells below actual production
capacity in order to conserve supplies of oil and gas. Changes in these
8
regulations could require us to expend significant resources to comply with new
laws or regulations or changes to current requirements and could have a material
adverse effect on our business operations.
REGULATION OF OIL AND NATURAL GAS PRODUCTION
Our oil and natural gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal, state and
local authorities and agencies. Failure to comply with such rules and
regulations can result in substantial penalties. The regulatory burden on the
oil and natural gas industry increases our cost of doing business and affects
our profitability. Although we believe we are in substantial compliance with all
applicable laws and regulations, because such rules and regulations are
frequently amended or reinterpreted, we are unable to predict the future cost or
impact of complying with such laws.
Many states require permits for drilling operations, drilling bonds and reports
concerning operations and impose other requirements relating to the exploration
and production of oil and natural gas. Such states also have statutes or
regulations addressing conservation matters, including provisions for the
unitization or pooling of oil and natural gas properties, the establishment of
maximum rates of production from wells, and the regulation of spacing, plugging
and abandonment of such wells.
FEDERAL REGULATION OF NATURAL GAS
The Federal Energy Regulatory Commission ("FERC") regulates interstate natural
gas transportation rates and service conditions, which affect the marketing of
natural gas produced by us, as well as the revenues received by us for sales of
such production. Since the mid-1980's, FERC has issued a series of orders that
have significantly altered the marketing and transportation of natural gas.
These orders mandate a fundamental restructuring of interstate pipeline sales
and transportation service, including the unbundling by interstate pipelines of
the sale, transportation, storage and other components of the city-gate sales
services such pipelines previously performed. One of FERC's purposes in issuing
the orders was to increase competition within all phases of the natural gas
industry. Certain aspects of these orders may be modified as a result of various
appeals and related proceedings and it is difficult to predict the ultimate
impact of the orders on us and others. Generally, the orders eliminate or
substantially reduce the interstate pipelines' traditional role as wholesalers
of natural gas in favor of providing only storage and transportation service,
and have substantially increased competition and volatility in natural gas
markets.
The price, which we may receive for the sale of oil and natural gas liquids,
would be affected by the cost of transporting products to markets. FERC has
implemented regulations establishing an indexing system for transportation rates
for oil pipelines, which, generally, would index such rates to inflation,
subject to certain conditions and limitations. We are not able to predict with
certainty the effect, if any, of these regulations on any future operations.
However, the regulations may increase transportation costs or reduce wellhead
prices for oil and natural gas liquids.
ENVIRONMENTAL MATTERS
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Our operations and properties will be subject to extensive and changing federal,
state and local laws and regulations relating to environmental protection,
including the generation, storage, handling, emission, transportation and
discharge of materials into the environment, and relating to safety and health.
The recent trend in environmental legislation and regulation generally is toward
stricter standards, and this trend will likely continue. These laws and
regulations may (i) require the acquisition of a permit or other authorization
before construction or drilling commences and for certain other activities; (ii)
limit or prohibit construction, drilling and other activities on certain lands
lying within wilderness and other protected areas; and (iii) impose substantial
liabilities for pollution resulting from our operations. The permits required
for several of our operations are subject to revocation, modification and
renewal by issuing authorities. Governmental authorities have the power to
enforce their regulations, and violations are subject to fines or injunctions,
or both. In the opinion of management, we are in substantial compliance with
current applicable environmental law and regulations, and we have no material
commitments for capital expenditures to comply with existing environmental
requirements. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on our
business operations, as well as the oil and natural gas industry in general.
The Comprehensive Environmental, Response, Compensation, and Liability Act
("CERCL ") and comparable state statutes impose strict, joint and several
liability on owners and operators of sites and on persons who disposed of or
arranged for the disposal of "hazardous substances" found at such sites. It is
not uncommon for the neighboring landowners and other third parties to file
claims for personal injury and property damage allegedly caused by the hazardous
substances released into the environment. The Federal Resource Conservation and
Recovery Act ("RCRA") and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize the imposition of substantial
fines and penalties for noncompliance. Although CERCLA currently excludes
petroleum from its definition of "hazardous substance," state laws affecting our
operations impose clean-up liability relating to petroleum and petroleum related
products. In addition, although RCRA classifies certain oil field wastes as
"non-hazardous," such exploration and production wastes could be reclassified as
A hazardous wastes, thereby making such wastes subject to more stringent
handling and disposal requirements.
We intend to acquire leasehold interests in properties that for many years have
produced oil and natural gas. Although the previous owners of these interests
may have used operating and disposal practices that were standard in the
industry at the time, hydrocarbons or other wastes may have been disposed of or
released on or under the properties. In addition, some of our properties may be
operated in the future by third parties over which we have no control.
Notwithstanding our lack of control over properties operated by others, the
failure of the operator to comply with applicable environmental regulations may,
in certain circumstances, adversely impact our business operations.
The National Environmental Policy Act ("NEPA") is applicable to many of our
planned activities and operations. NEPA is a broad procedural statute intended
to ensure that federal agencies consider the environmental impact of their
actions by requiring such agencies to prepare environmental impact statements
("EIS") in connection with all federal activities that significantly affect the
environment. Although NEPA is a procedural statute only applicable to the
federal government, a portion of our properties may be acreage located on
federal land. The Bureau of Land Management's issuance of drilling permits and
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the Secretary of the Interior's approval of plans of operation and lease
agreements all constitute federal action within the scope of NEPA. Consequently,
unless the responsible agency determines that our drilling activities will not
materially impact the environment, the responsible agency will be required to
prepare an EIS in conjunction with the issuance of any permit or approval.
The Endangered Species Act ("ESA") seeks to ensure that activities do not
jeopardize endangered or threatened animals, fish and plant species, nor destroy
or modify the critical habitat of such species. Under ESA, exploration and
production operation, as well as actions by federal agencies, may not
significantly impair or jeopardize the species or their habitat. ESA provides
for criminal penalties for willful violations of the Act. Other statutes that
provide protection to animal and plant species and that may apply to our
operations include, but are not necessarily limited to, the Fish and Wildlife
Coordination Act, the Fishery Conservation and Management Act, the Migratory
Bird Treaty Act and the National Historic Preservation Act. Although we believe
that our operations are in substantial compliance with such statutes, any change
in these statutes or any reclassification of a species as endangered could
subject us to significant expense to modify our operations or could force to
discontinue certain operations altogether.
Management believes that we are in substantial compliance with current
applicable environmental laws and regulations.
RESEARCH AND DEVELOPMENT ACTIVITIES
No research and development expenditures have been incurred, either on our
account or sponsored by customers, to the date of our inception.
EMPLOYEES
We do not employ any persons on a full-time or on a part-time basis. Marcus
Johnson is our President and Chief Executive Officer, and D. Bruce Horton is our
Chief Financial Officer and Treasurer. These individuals are primarily
responsible for all of our day-to-day operations. Other services are provided by
outsourcing and consultant and special purpose contracts.
RISK FACTORS
An investment in our common stock involves a number of very significant risks.
You should carefully consider the following risks and uncertainties in addition
to other information in evaluating our company and its business before
purchasing shares of our common stock. Our business, operating results and
financial condition could be seriously harmed due to any of the following risks.
The risks described below are all of the material risks that we are currently
aware of that are facing our company. Additional risks not presently known to us
may also impair our business operations. You could lose all or part of your
investment due to any of these risks.
RISKS RELATED TO OUR BUSINESS
WE WILL NEED TO RAISE ADDITIONAL FINANCING TO COMPLETE FURTHER
EXPLORATION.
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We will require significant additional financing in order to continue our
exploration activities and our assessment of the commercial viability of our oil
and gas properties. Furthermore, if the costs of our planned exploration
programs are greater than anticipated, we may have to seek additional funds
through public or private share offerings or arrangements with corporate
partners. There can be no assurance that we will be successful in our efforts to
raise these require funds, or on terms satisfactory to us. The continued
exploration of our oil and gas properties and the development of our business
will depend upon our ability to establish the commercial viability of our oil
and gas properties and to ultimately develop cash flow from operations and reach
profitable operations. We currently are in the exploration stage and we have no
revenue from operations and we are experiencing significant negative cash flow.
Accordingly, the only other sources of funds presently available to us are
through the sale of equity. We presently believe that debt financing will not be
an alternative to us as all of our properties are in the exploration stage.
Alternatively, we may finance our business by offering an interest in our oil
and gas properties to be earned by another party or parties carrying out further
exploration and development thereof or to obtain project or operating financing
from financial institutions, neither of which is presently intended. If we are
unable to obtain this additional financing, we will not be able to continue our
exploration activities and our assessment of the commercial viability of our oil
and properties. Further, if we are able to establish that development of our oil
and gas properties is commercially viable, our inability to raise additional
financing at this stage would result in our inability to place our oil and gas
properties into production and recover our investment.
As our oil and gas properties do not contain any reserves, we may not discover
commercially exploitable quantities of oil or gas on our properties that would
enable us to enter into commercial production, achieve revenues and recover the
money we spend on exploration.
Our properties do not contain reserves in accordance with the definitions
adopted by the SEC and there is no assurance that any exploration programs that
we carry out will establish reserves. All of our oil and gas properties are in
the exploration stage as opposed to the development stage and have no known body
of reserves. The known reserves at these projects have not yet been determined
to be economic, and may never be determined to be economic. We plan to conduct
further exploration activities on our oil and gas properties, which future
exploration may include the completion of feasibility studies necessary to
evaluate whether commercial reserves exist on any of our mineral properties.
There is a substantial risk that these exploration activities will not result in
discoveries of commercially recoverable reserves of oil or gas. Any
determination that our properties contain commercially recoverable quantities of
oil or gas may not be reached until such time that final comprehensive
feasibility studies have been concluded that establish that a potential reserve
is likely to be economic. There is a substantial risk that any preliminary or
final feasibility studies carried out by us will not result in a positive
determination that our oil and gas properties can be commercially developed.
OUR EXPLORATION ACTIVITIES ON OUR OIL AND GAS PROPERTIES MAY NOT BE
COMMERCIALLY SUCCESSFUL, WHICH COULD LEAD US TO ABANDON OUR PLANS TO
DEVELOP THE PROPERTY AND OUR INVESTMENTS IN EXPLORATION.
Our long-term success depends on our ability to establish commercially
recoverable quantities of oil and natural gas on our properties that can then be
developed into commercially viable operations. Oil and gas exploration is highly
speculative in nature, involves many risks and is frequently non-productive.
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These risks include unusual or unexpected geologic formations, and the inability
to obtain suitable or adequate machinery, equipment or labor. The success of oil
and gas exploration is determined in part by the following factors:
o identification of potential oil and natural gas reserves based on
superficial analysis;
o availability of government-granted exploration permits;
o the quality of management and geological and technical expertise; and
o the capital available for exploration.
Substantial expenditures are required to establish proven and probable reserves
through drilling and analysis, to develop processes to extract oil and gas, and
to develop the drilling and processing facilities and infrastructure at any
chosen site. Whether an oil and gas reserve will be commercially viable depends
on a number of factors, which include, without limitation, the particular
attributes of the reserve; oil and natural gas prices, which fluctuate widely;
and government regulations, including, without limitation, regulations relating
to prices, taxes, royalties, land tenure, land use, importing and exporting of
oil and gas and environmental protection. We may invest significant capital and
resources in exploration activities and abandon such investments if we are
unable to identify commercially exploitable reserves. The decision to abandon a
project may reduce the trading price of our common stock and impair our ability
to raise future financing. We cannot provide any assurance to investors that we
will discover or acquire any oil or gas reserves in sufficient quantities on any
of our properties to justify commercial operations. Further, we will not be able
to recover the funds that we spend on exploration if we are not able to
establish commercially recoverable reserves of oil or natural gas on our
properties.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED
OPERATING HISTORY.
In considering whether to invest in our common stock, you should consider that
there is only limited historical financial and operating information available
on which to base your evaluation of our performance. Our inception was October
19, 2004 and, as a result, we have a limited operating history.
WE HAVE A HISTORY OF OPERATING LOSSES AND THERE CAN BE NO ASSURANCE WE
WILL BE PROFITABLE IN THE FUTURE.
We have a history of operating losses, expect to continue to incur losses, and
may never be profitable, and we must be considered to be in the exploration
stage. Further, we have been dependent on sales of our equity securities and
debt financing to meet our cash requirements. We have incurred losses totaling
approximately $4,963,000 from October 19, 2004 (inception) to December 31, 2007.
As of December 31, 2007, we had an accumulated deficit of $4,962,778 and had
incurred losses of approximately $817,000 during fiscal year ended December 31,
2007. Further, we do not expect positive cash flow from operations in the near
term. There is no assurance that actual cash requirements will not exceed our
estimates. In particular, additional capital may be required in the event that:
(i) the costs to acquire additional leases are more than we currently
anticipate; (ii) drilling and completion costs for additional wells increase
13
beyond our expectations; or (iii) we encounter greater costs associated with
general and administrative expenses or offering costs.
Our development of and participation in what could evolve into an increasing
number of oil and gas prospects may require substantial capital expenditures.
The uncertainty and factors described throughout this section may impede our
ability to economically find, develop, produce, and acquire natural gas and oil
reserves. As a result, we may not be able to achieve or sustain profitability or
positive cash flows from operating activities in the future.
WE HAVE RECEIVED A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS'
REPORT ACCOMPANYING OUR DECEMBER 31, 2007 AND DECEMBER 31, 2006
FINANCIAL STATEMENTS.
The independent auditor's report accompanying our December 31, 2007 and 2006
audited financial statements contains an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern. The
consolidated financial statements have been prepared "assuming that the Company
will continue as a going concern." Our ability to continue as a going concern is
dependent on raising additional capital to fund our operations and ultimately on
generating future profitable operations. There can be no assurance that we will
be able to raise sufficient additional capital or eventually have positive cash
flow from operations to address all of our cash flow needs. If we are not able
to find alternative sources of cash or generate positive cash flow from
operations, our business and shareholders will be materially and adversely
affected.
WE WILL REQUIRE ADDITIONAL FUNDING IN THE FUTURE.
Based upon our historical losses from operations, we will require additional
funding in the future. If we cannot obtain capital through financings or
otherwise, our ability to execute our development plans and achieve production
levels will be greatly limited. Our current development plans require us to make
capital expenditures for the exploration and development of our oil and natural
gas properties. Historically, we have funded our operations through the issuance
of equity. We may not be able to obtain additional financing on favorable terms,
if at all. Our future cash flows and the availability of financing will be
subject to a number of variables, including potential production and the market
prices of oil and natural gas. Further, debt financing, if utilized, could lead
to a diversion of cash flow to satisfy debt-servicing obligations and create
restrictions on business operations. If we are unable to raise additional funds,
it would have a material adverse effect upon our operations.
AS PART OF OUR GROWTH STRATEGY, WE INTEND TO ACQUIRE ADDITIONAL OIL AND
GAS PROPERTIES.
As part of our growth strategy, we intend to acquire additional oil and gas
production properties. Current and subsequent acquisitions may pose substantial
risks to our business, financial condition, and results of operations. In
pursuing acquisitions, we will compete with other companies, many of which have
greater financial and other resources to acquire attractive properties. Even if
we are successful in acquiring additional properties, some of the properties may
not produce revenues at anticipated levels or failure to conduct drilling on
prospects within specified time periods may cause the forfeiture of the lease in
that prospect. There can be no assurance that we will be able to successfully
integrate acquired properties, which could result in substantial costs and
delays or other operational, technical, or financial problems. Further,
14
acquisitions could disrupt ongoing business operations. If any of these events
occur, it would have a material adverse effect upon our operations and results
from operations.
WE ARE A NEW ENTRANT INTO THE OIL AND GAS EXPLORATION AND DEVELOPMENT
INDUSTRY WITHOUT PROFITABLE OPERATING HISTORY.
Since inception, our activities have been limited to organizational efforts,
obtaining working capital and acquiring and developing a very limited number of
properties. As a result, there is limited information regarding property related
production potential or revenue generation potential. Further, our Leases have
no probable, proved or developed producing reserves. As a result, our future
revenues may be limited or non-existent.
The business of oil and gas exploration and development is subject to many risks
and if oil and natural gas is found in economic production quantities, the
potential profitability of future possible oil and gas ventures depends upon
factors beyond our control. The potential profitability of oil and natural gas
properties if economic quantities are found is dependent upon many factors and
risks beyond our control, including, but not limited to: (i) unanticipated
ground conditions; (ii) geological problems; (iii) drilling and other processing
problems; (iv) the occurrence of unusual weather or operating conditions and
other force majeure events; (v) lower than expected reserve quantities; (vi)
accidents; (vii) delays in the receipt of or failure to receive necessary
government permits; (viii) delays in transportation; (ix) labor disputes; (x)
government permit restrictions and regulation restrictions; (xi) unavailability
of materials and equipment; and (xii) the failure of equipment or drilling to
operate in accordance with specifications or expectations.
OUR DRILLING OPERATIONS MAY NOT BE SUCCESSFUL.
We intend to test certain zones in wellbores already drilled on certain of the
properties and if results are positive and capital is available, drill
additional wells and begin production operations from existing and new wells.
There can be no assurance that our current well re-completion activities or
future drilling activities will be successful, and we cannot be sure that our
overall drilling success rate or our production operations within a particular
area will ever come to fruition, and if it does, will not decline over time. We
may not recover all or any portion of our capital investment in the wells or the
underlying leaseholds. Unsuccessful drilling activities would have a material
adverse effect upon our results of operations and financial condition. The cost
of drilling, completing, and operating wells is often uncertain, and a number of
factors can delay or prevent drilling operations including: (i) unexpected
drilling conditions; (ii) pressure or irregularities in geological formations;
(iii) equipment failures or accidents; (iv) adverse weather conditions; and (iv)
shortages or delays in availability of drilling rigs and delivery of equipment.
OUR PRODUCTION INITIATIVES MAY NOT PROVE SUCCESSFUL.
The coal beds from which we intend to produce natural gas frequently contain
water, which may hamper our ability to produce gas in commercial quantities. The
amount of natural gas that can be commercially produced depends upon the coal
quality, the original gas content of the coal seam, the thickness of the seam,
the reservoir pressure, the rate at which gas is released from the coal, and the
existence of any natural fractures through which the gas can flow to the well
bore. However, coal beds frequently contain water that must be removed in order
15
for the gas to detach from the coal and flow to the well bore. The average life
of a coal bed well is only five to six years. Our ability to remove and dispose
of sufficient quantities of water from the coal seam will determine whether or
not we can produce coal bed methane in commercial quantities.
There is no guarantee that the potential drilling locations we have or acquire
in the future will ever produce natural gas or oil, which could have a material
adverse effect upon our results of operations.
PROSPECTS THAT WE DECIDE TO DRILL MAY NOT YIELD NATURAL GAS OR OIL IN
COMMERCIALLY VIABLE QUANTITIES.
We describe some of our current prospects in this Annual Report. Our prospects
are in various stages of preliminary evaluation and assessment and we have not
reached the point where we will decide to drill at all on the subject prospects.
However, the use of seismic data, historical drilling logs, offsetting well
information, and other technologies and the study of producing fields in the
same area will not enable us to know conclusively prior to drilling and testing
whether natural gas or oil will be present or, if present, whether natural gas
or oil will be present in sufficient quantities or quality to recover drilling
or completion costs or to be economically viable. In sum, the cost of drilling,
completing and operating any wells is often uncertain and new wells may not be
productive.
WE MAY BE UNABLE TO IDENTIFY LIABILITIES ASSOCIATED WITH THE PROPERTIES
OR OBTAIN PROTECTION FROM SELLERS AGAINST THEM.
One of our growth strategies is to capitalize on opportunistic acquisitions of
oil and natural gas reserves. However, our reviews of acquired properties are
inherently incomplete because it generally is not feasible to review in depth
every individual property involved in each acquisition. A detailed review of
records and properties may not necessarily reveal existing or potential
problems, nor will it permit a buyer to become sufficiently familiar with the
properties to assess fully their deficiencies and potential. Further,
environmental problems, such as ground water contamination, are not necessarily
observable even when an inspection is undertaken. We may not be able to obtain
indemnification or other protections from the sellers against such potential
liabilities, which would have a material adverse effect upon our results of
operations.
THE POTENTIAL PROFITABILITY OF OIL AND GAS VENTURES DEPENDS UPON GLOBAL
POLITICAL AND MARKET RELATED FACTORS BEYOND OUR CONTROL.
World prices and markets for oil and gas are unpredictable, highly volatile,
potentially subject to governmental fixing, pegging, controls, or any
combination of these and other factors, and respond to changes in domestic,
international, political, social, and economic environments. Additionally, due
to worldwide economic uncertainty, the availability and cost of funds for
production and other expenses have become increasingly difficult, if not
impossible, to project. These and other changes and events may materially affect
our financial performance. The potential profitability of oil and gas properties
is dependent on these and other factors beyond our control.
16
PRODUCTION OR OIL AND GAS RESOURCES IF FOUND ARE DEPENDENT ON NUMEROUS
OPERATIONAL UNCERTAINTIES SPECIFIC TO THE AREA OF THE RESOURCE THAT
AFFECTS ITS PROFITABILITY.
Production area specifics affect profitability. Adverse weather conditions can
hinder drilling operations and ongoing production work. A productive well may
become uneconomic in the event water or other deleterious substances are
encountered which impair or prevent the production of oil and/or gas from the
well. Production and treatments on other wells in the area can have either a
positive or negative effect on our production and wells. In addition, production
from any well may be unmarketable if it is impregnated with water or other
deleterious substances. The content of hydrocarbons is subject to change over
the life of producing wells. The marketability of oil and gas from any specific
reserve which may be acquired or discovered will be affected by numerous factors
beyond our control. These factors include, but are not limited to, the proximity
and capacity of oil and gas pipelines, availability of room in the pipelines to
accommodate additional production, processing and production equipment operating
costs and equipment efficiency, market fluctuations of prices and oil and gas
marketing relationships, local and state taxes, mineral owner and other
royalties, land tenure, lease bonus costs and lease damage costs, allowable
production, and environmental protection. These factors cannot be accurately
predicted and the combination of these factors may result in us not receiving an
adequate return on our invested capital.
IF PRODUCTION RESULTS FROM OPERATIONS, WE ARE DEPENDENT UPON
TRANSPORTATION AND STORAGE SERVICES PROVIDED BY THIRD PARTIES.
We will be dependent on the transportation and storage services offered by
various interstate and intrastate pipeline companies for the delivery and sale
of our gas supplies. Both the performance of transportation and storage services
by interstate pipelines and the rates charged for such services are subject to
the jurisdiction of the Federal Energy Regulatory Commission or state regulatory
agencies. An inability to obtain transportation and/or storage services at
competitive rates could hinder our processing and marketing operations and/or
affect our sales margins.
OUR RESULTS OF OPERATIONS ARE DEPENDENT UPON MARKET PRICES FOR OIL AND
GAS, WHICH FLUCTUATE WIDELY AND ARE BEYOND OUR CONTROL.
If and when production from oil and gas properties is reached, our revenue,
profitability, and cash flow depend upon the prices and demand for oil and
natural gas. The markets for these commodities are very volatile and even
relatively modest drops in prices can significantly affect our financial results
and impede our growth. Prices received also will affect the amount of future
cash flow available for capital expenditures and may affect our ability to raise
additional capital. Lower prices may also affect the amount of natural gas and
oil that can be economically produced from reserves either discovered or
acquired. Factors that can cause price fluctuations include: (i) the level of
consumer product demand; (ii) domestic and foreign governmental regulations;
(iii) the price and availability of alternative fuels; (iv) technical advances
affecting energy consumption; (v) proximity and capacity of oil and gas
pipelines and other transportation facilities; (vi) political conditions in
natural gas and oil producing regions; (vii) the domestic and foreign supply of
natural gas and oil; (viii) the ability of members of Organization of Petroleum
Exporting Countries to agree to and maintain oil price and production controls;
(ix) the price of foreign imports; and (x) overall domestic and global economic
conditions.
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The availability of a ready market for our oil and gas depends upon numerous
factors beyond our control, including the extent of domestic production and
importation of oil and gas, the relative status of the domestic and
international economies, the proximity of our properties to gas gathering
systems, the capacity of those systems, the marketing of other competitive
fuels, fluctuations in seasonal demand and governmental regulation of
production, refining, transportation and pricing of oil, natural gas and other
fuels.
THE OIL AND GAS INDUSTRY IN WHICH WE OPERATE INVOLVED MANY INDUSTRY
RELATED OPERATING AND IMPLEMENTATION RISKS THAT CAN CAUSE SUBSTANTIAL
LOSSES, INCLUDING, BUT NOT LIMITED TO, UNPRODUCTIVE WELLS, NATURAL
DISASTERS, FACILITY AND EQUIPMENT PROBLEMS AND ENVIRONMENTAL HAZARDS.
Our drilling activities are subject to many risks, including the risk that we
will not discover commercially productive reservoirs. Drilling for oil and
natural gas can be unprofitable, not only from dry holes, but from productive
wells that do not produce sufficient revenues to return a profit. In addition,
our drilling and producing operations may be curtailed, delayed or canceled as a
result of other drilling and production, weather and natural disaster, equipment
and service failure, environmental and regulatory, and site specific related
factors, including but not limited to: (i) fires; (ii) explosions; (iii)
blow-outs and surface cratering; (iv) uncontrollable flows of underground
natural gas, oil, or formation water; (v) natural disasters; (vi) facility and
equipment failures; (vii) title problems; (viii) shortages or delivery delays of
equipment and services; (ix) abnormal pressure formations; and (x) environmental
hazards such as natural gas leaks, oil spills, pipeline ruptures and discharges
of toxic gases.
If any of these events occur, we could incur substantial losses as a result of:
(i) injury or loss of life; (ii) severe damage to and destruction of property,
natural resources or equipment; (iii) pollution and other environmental damage;
(iv) clean-up responsibilities; (v) regulatory investigation and penalties; (vi)
suspension of our operations; or (vii) repairs necessary to resume operations.
If we were to experience any of these problems, it could affect well bores,
gathering systems and processing facilities, any one of which could adversely
affect our ability to conduct operations. We may be affected by any of these
events more than larger companies, since we have limited working capital.
THE OIL AND GAS INDUSTRY IS HIGHLY COMPETITIVE AND THERE IS NO
ASSURANCE THAT WE WILL BE SUCCESSFUL IN ACQUIRING LEASES.
The oil and natural gas industry is intensely competitive, and we compete with
other companies that have greater resources. Many of these companies not only
explore for and produce oil and natural gas, but also carry on refining
operations and market petroleum and other products on a regional, national or
worldwide basis. These companies may be able to pay more for productive oil and
natural gas properties and exploratory prospects or define, evaluate, bid for
and purchase a greater number of properties and prospects than our financial or
human resources permit. In addition, these companies may have a greater ability
to continue exploration activities during periods of low oil and natural gas
market prices. Our larger competitors may be able to absorb the burden of
18
present and future federal, state, local and other laws and regulations more
easily than we can, which would adversely affect our competitive position. Our
ability to acquire additional properties and to discover reserves in the future
will be dependent upon our ability to evaluate and select suitable properties
and to consummate transactions in a highly competitive environment. In addition,
because we have fewer financial and human resources than many companies in our
industry, we may be at a disadvantage in bidding for exploratory prospects and
producing oil and natural gas properties.
THE MARKETABILITY OF NATURAL RESOURCES WILL BE AFFECTED BY NUMEROUS
FACTORS BEYOND OUR CONTROL, WHICH MAY RESULT IN US NOT RECEIVING AN
ADEQUATE RETURN ON INVESTED CAPITAL TO BE PROFITABLE OR VIABLE.
The marketability of natural resources which may be acquired or discovered by us
will be affected by numerous factors beyond our control. These factors include
market fluctuations in oil and gas pricing and demand, the proximity and
capacity of natural resource markets and processing equipment, governmental
regulations, land tenure, land use, regulation concerning the importing and
exporting of oil and gas and environmental protection regulations. The exact
effect of these factors cannot be accurately predicted, but the combination of
these factors may result in us not receiving an adequate return on invested
capital to be profitable or viable.
OIL AND GAS OPERATIONS ARE SUBJECT TO COMPREHENSIVE REGULATION WHICH
MAY CAUSE SUBSTANTIAL DELAYS OR REQUIRE CAPITAL OUTLAYS IN EXCESS OF
THOSE ANTICIPATED CAUSING AN ADVERSE EFFECT ON OUR BUSINESS OPERATIONS.
Oil and gas operations are subject to federal, state, and local laws relating to
the protection of the environment, including laws regulating removal of natural
resources from the ground and the discharge of materials into the environment.
Oil and gas operations are also subject to federal, state, and local laws and
regulations which seek to maintain health and safety standards by regulating the
design and use of drilling methods and equipment. Various permits from
government bodies are required for drilling operations to be conducted; no
assurance can be given that such permits will be received. Environmental
standards imposed by federal, provincial, or local authorities may be changed
and any such changes may have material adverse effects on our activities.
Moreover, compliance with such laws may cause substantial delays or require
capital outlays in excess of those anticipated, thus causing an adverse effect
on us. Additionally, we may be subject to liability for pollution or other
environmental damages which we may elect not to insure against due to
prohibitive premium costs and other reasons. To date we have not been required
to spend material amounts on compliance with environmental regulations. However,
we may be required to do so in future and this may affect our ability to expand
or maintain our operations.
In general, our exploration and production activities are subject to certain
federal, state and local laws and regulations relating to environmental quality
and pollution control. Such laws and regulations increase the costs of these
activities and may prevent or delay the commencement or continuance of a given
operation. Compliance with these laws and regulations has not had a material
effect on our operations or financial condition to date. Specifically, we are
subject to legislation regarding emissions into the environment, water
discharges and storage and disposition of hazardous wastes. In addition,
legislation has been enacted which requires well and facility sites to be
19
abandoned and reclaimed to the satisfaction of state authorities. However, such
laws and regulations are frequently changed and we are unable to predict the
ultimate cost of compliance. Generally, environmental requirements do not appear
to affect us any differently or to any greater or lesser extent than other
companies in the industry.
We believe that our operations comply, in all material respects, with all
applicable environmental regulations. We need insurance to protect our self
against risks associated with the leases obtained. The leases allow for entry
onto the properties for the purposes of oil and gas exploration. The insurance
we require relates solely to developments on the properties for the purposes of
oil and gas exploration.
When and if we are convinced that our current leases or those subsequently
acquired are capable of hydrocarbon production and sales, and we plan to drill
more than one well, we intend to maintain a $2,000,000 per year limit policy on
bodily injury and general liability with regard to risks incurred for the
drilling of up to 25 wells. This will allow for our growth to contain non
contract labor that would require us to carry such additional insurance for
risks pertaining to oil and gas exploration conducted directly by us. Such a
policy would include coverage for numerous locations for pollution,
environmental damage, chemical spills and commercial general liability, fire,
and personal injury. Such a policy will not be required until such time and date
as we believe that we will begin a sustained drilling and operating program, and
that at least one well has been drilled and is producing to justify and warrant
further drilling and a sustained drilling and operating program.
ANY CHANGE TO GOVERNMENT REGULATION/ADMINISTRATIVE PRACTICES MAY HAVE A
NEGATIVE IMPACT ON OUR ABILITY TO OPERATE AND OUR PROFITABILITY.
The laws, regulations, policies or current administrative practices of any
government body, organization or regulatory agency in the United States or any
other jurisdiction, may be changed, applied or interpreted in a manner which
will fundamentally alter our ability to carry on business. The actions, policies
or regulations, or changes thereto, of any government body or regulatory agency,
or other special interest groups, may have a detrimental effect on us. Any or
all of these situations may have a negative impact on our ability to operate
and/or our profitability.
WE MAY BE UNABLE TO RETAIN KEY EMPLOYEES OR CONSULTANTS OR RECRUIT
ADDITIONAL QUALIFIED PERSONNEL.
Our extremely limited personnel means that we would be required to spend
significant sums of money to locate and train new employees in the event any of
our employees resign or terminate their employment with us for any reason. Due
to our limited operating history and financial resources, we are entirely
dependent on the continued service of Marcus Johnson, our Chief Executive
Officer, and D. Bruce Horton, our Chief Financial Officer. Further, we do not
have key man life insurance on either of these individuals. We may not have the
financial resources to hire a replacement if one or both of our officers were to
die. The loss of service of either of these employees could therefore
significantly and adversely affect our operations.
OUR OFFICERS AND DIRECTORS MAY BE SUBJECT TO CONFLICTS OF INTEREST.
20
Our officers and directors serve only part time and are subject to conflicts of
interest. Each devotes part of his working time to other business endeavors,
including consulting relationships with other entities, and has responsibilities
to these other entities. Such conflicts include deciding how much time to devote
to our affairs, as well as what business opportunities should be presented to
us. Because of these relationships, our officers and directors will be subject
to conflicts of interest. Currently, we have no policy in place to address such
conflicts of interest.
NEVADA LAW AND OUR ARTICLES OF INCORPORATION MAY PROTECT OUR DIRECTORS
FROM CERTAIN TYPES OF LAWSUITS.
Nevada law provides that our officers and directors will not be liable to us or
our stockholders for monetary damages for all but certain types of conduct as
officers and directors. Our Bylaws permit us broad indemnification powers to all
persons against all damages incurred in connection with our business to the
fullest extent provided or allowed by law. The exculpation provisions may have
the effect of preventing stockholders from recovering damages against our
officers and directors caused by their negligence, poor judgment or other
circumstances. The indemnification provisions may require us to use our limited
assets to defend our officers and directors against claims, including claims
arising out of their negligence, poor judgment, or other circumstances.
RISKS RELATED TO OUR COMMON STOCK
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK INTO THE
PUBLIC MARKET BY CERTAIN STOCKHOLDERS MAY RESULT IN SIGNIFICANT
DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK AND COULD AFFECT
YOUR ABILITY TO REALIZE THE CURRENT TRADING PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of our common stock in the public market
by certain stockholders could cause a reduction in the market price of our
common stock. As of the date of this Annual Report, we have 41,976,589 shares of
common stock issued and outstanding. Of the total number of issued and
outstanding shares of common stock, certain stockholders are able to resell up
to 4,167,700 shares of our common stock pursuant to the Registration Statement
declared effective on February 14, 2006. As a result of the Registration
Statement, 4,167,700 shares of our common stock were issued and are available
for immediate resale which could have an adverse effect on the price of our
common stock.
As of the date of this Annual Report, there are 25,105,789 outstanding shares of
our common stock that are restricted securities as that term is defined in Rule
144 under the Securities Act of 1933, as amended (the "Securities Act").
Although the Securities Act and Rule 144 place certain prohibitions on the sale
of restricted securities, restricted securities may be sold into the public
market under certain conditions. Further, as of the date of this Annual Report,
there are an aggregate of 1,850,000 stock options outstanding and an aggregate
of 944,105 Warrants outstanding. See "Item 5. Market for Common Equity and
Related Stockholder Matters."
Any significant downward pressure on the price of our common stock as the
selling stockholders sell their shares of our common stock could encourage short
sales by the selling stockholders or others. Any such short sales could place
21
further downward pressure on the price of our common stock.
THE TRADING PRICE OF OUR COMMON STOCK ON THE OTC BULLETIN BOARD WILL
FLUCTUATE SIGNIFICANTLY AND STOCKHOLDERS MAY HAVE DIFFICULTY RESELLING
THEIR SHARES.
As of the date of this Annual Report, our common stock trades on the
Over-the-Counter Bulletin Board. There is a volatility associated with Bulletin
Board securities in general and the value of your investment could decline due
to the impact of any of the following factors upon the market price of our
common stock: (i) disappointing results from our discovery or development
efforts; (ii) failure to meet our revenue or profit goals or operating budget;
(iii) decline in demand for our common stock; (iv) downward revisions in
securities analysts' estimates or changes in general market conditions; (v)
technological innovations by competitors or in competing technologies; (vi) lack
of funding generated for operations; (vii) investor perception of our industry
or our prospects; and (viii) general economic trends.
In addition, stock markets have experienced price and volume fluctuations and
the market prices of securities have been highly volatile. These fluctuations
are often unrelated to operating performance and may adversely affect the market
price of our common stock. As a result, investors may be unable to sell their
shares at a fair price and you may lose all or part of your investment.
ADDITIONAL ISSUANCE OF EQUITY SECURITIES MAY RESULT IN DILUTION TO OUR
EXISTING STOCKHOLDERS.
Our Articles of Incorporation authorize the issuance of 100,000,000 shares of
common stock. Common stock is our only authorized class of stock. The board of
directors has the authority to issue additional shares of our capital stock to
provide additional financing in the future and the issuance of any such shares
may result in a reduction of the book value or market price of the outstanding
shares of our common stock. If we do issue any such additional shares, such
issuance also will cause a reduction in the proportionate ownership and voting
power of all other stockholders. As a result of such dilution, your
proportionate ownership interest and voting power will be decreased accordingly.
Further, any such issuance could result in a change of control.
OUR COMMON STOCK IS CLASSIFIED AS A "PENNY STOCK" UNDER SEC RULES WHICH
LIMITS THE MARKET FOR OUR COMMON STOCK.
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stocks." Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ system, provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). Penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
those rules, to deliver a standardized risk disclosure document prepared by the
SEC, which specifies information about penny stocks and the nature and
significance of risks of the penny stock market. A broker-dealer must also
provide the customer with bid and offer quotations for the penny stock, the
compensation of the broker-dealer, and sales person in the transaction, and
monthly account statements indicating the market value of each penny stock held
22
in the customer's account. In addition, the penny stock rules require that,
prior to a transaction in a penny stock not otherwise exempt from those rules,
the broker-dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the trading activity in the secondary market for stock that becomes
subject to those penny stock rules. If a trading market for our common stock
develops, our common stock will probably become subject to the penny stock
rules, and shareholders may have difficulty in selling their shares.
A MAJORITY OF OUR DIRECTORS AND OFFICERS ARE OUTSIDE THE UNITED STATES,
WITH THE RESULT THAT IT MAY BE DIFFICULT FOR INVESTORS TO ENFORCE
WITHIN THE UNITED STATES ANY JUDGMENTS OBTAINED AGAINST US OR ANY OF
OUR DIRECTORS OR OFFICERS.
A majority of our directors and officers are nationals and/or residents of
countries other than the United States, and all or a substantial portion of such
persons' assets are located outside the United States. As a result, it may be
difficult for investors to effect service of process on our directors or
officers, or enforce within the United States or Canada any judgments obtained
against us or our officers or directors, including judgments predicated upon the
civil liability provisions of the securities laws of the United States or any
state thereof. Consequently, you may be effectively prevented from pursuing
remedies under U.S. federal securities laws against them. In addition, investors
may not be able to commence an action in a Canadian court predicated upon the
civil liability provisions of the securities laws of the United States.
ITEM 2. DESCRIPTION OF PROPERTIES
We lease our principal office space located at 5050 Quorum Drive, Suite 700,
Dallas, Texas 75254. The office space is for corporate identification, mailing,
and courier purposes only and costs us approximately $210 monthly. The office
and services related thereto may be cancelled at any time with a thirty day
notice.
ITEM 3. LEGAL PROCEEDINGS
During fiscal year ended December 31, 2007, we were in a dispute in connection
with the services provided by Warwick Advisors Corp. under a consulting
agreement dated September 6, 2006 (the "Agreement"). The parties entered into
binding arbitration as allowed for within the Agreement. On October 9, 2007 the
Arbitrator ruled in favor of Warkwick Advisors Corp. and we were ordered to pay
$24,120. The liability was settled on October 31, 2007.
Management is not aware of any other legal proceedings contemplated by any
governmental authority or any other party involving us or our properties. As of
the date of this Annual Report, no director, officer or affiliate is (i) a party
adverse to us in any legal proceeding, or (ii) has an adverse interest to us in
any legal proceedings. Management is not aware of any other legal proceedings
pending or that have been threatened against us or our properties.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During fiscal year ended December 31, 2007, no matters were submitted to our
stockholders for approval.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR COMMON EQUITY
Shares of our common stock commenced trading on the OTC Bulletin Board under the
symbol "MCRE:OB" on approximately May 24, 2006. The market for our common stock
is limited, and can be volatile. The following table sets forth the high and low
bid prices relating to our common stock on a quarterly basis for the periods
indicated as quoted by the NASDAQ stock market. These quotations reflect
inter-dealer prices without retail mark-up, mark-down, or commissions, and may
not reflect actual transactions.
QUARTER ENDED HIGH BID LOW BID
December 31, 2007 $0.76 $0.30
September 30, 2007 $0.85 $0.45
June 30, 2007 $1.20 $0.36
March 31, 2007 $0.98 $0.45
As of March 1, 2008, we had 25 shareholders of record, which does not include
shareholders whose shares are held in street or nominee names.
DIVIDEND POLICY
No dividends have ever been declared by the Board of Directors on our common
stock. Our losses do not currently indicate the ability to pay any cash
dividends, and we do not indicate the intention of paying cash dividends either
on our common stock in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
We have one equity compensation plan, the Morgan Creek Energy Corp. 2006 Stock
Option Plan (the "2006 Plan"). The table set forth below presents information
relating to our equity compensation plans as of the date of this Annual Report:
24
NUMBER OF SECURITIES TO BE NUMBER OF SECURITIES
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE REMAINING AVAILABLE FOR
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING FUTURE ISSUANCE UNDER
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
PLAN CATEGORY (A) (B) (EXCLUDING COLUMN (A))
_______________________________ __________________________ ____________________________ _________________________
Equity Compensation Plans
Approved by Security Holders
(2006 Stock Option Plan) 1,850,000 $1.10 3,150,000
Equity Compensation Plans Not
Approved by Security Holders 944,105 $3.00 -0-
2006 STOCK OPTION PLAN
On April 3, 2006, our Board of Directors authorized and approved the adoption of
the 2006 Plan effective April 3, 2006, under which an aggregate of 5,000,000 of
our shares may be issued.
The purpose of the 2006 Plan is to enhance our long-term stockholder value by
offering opportunities to our directors, officers, employees and eligible
consultants to acquire and maintain stock ownership in order to give these
persons the opportunity to participate in our growth and success, and to
encourage them to remain in our service.
The 2006 Plan is to be administered by our Board of Directors or a committee
appointed by and consisting of one or more members of the Board of Directors,
which shall determine (i) the persons to be granted Stock Options under the 2006
Plan; (ii) the number of shares subject to each option, the exercise price of
each Stock Option; and (iii) whether the Stock Option shall be exercisable at
any time during the option period up to ten (10) years or whether the Stock
Option shall be exercisable in installments or by vesting only. The 2006 Plan
provides authorization to the Board of Directors to grant Stock Options to
purchase a total number of shares of Common Stock of the Company, not to exceed
5,000,000 shares as at the date of adoption by the Board of Directors of the
2006 Plan. At the time a Stock Option is granted under the 2006 Plan, the Board
of Directors shall fix and determine the exercise price at which shares of our
common stock may be acquired.
In the event an optionee ceases to be employed by or to provide services to us
for reasons other than cause, retirement, disability or death, any Stock Option
that is vested and held by such optionee generally may be exercisable within up
to ninety (90) calendar days after the effective date that his position ceases,
and after such 90-day period any unexercised Stock Option shall expire. In the
event an optionee ceases to be employed by or to provide services to us for
reasons of retirement, disability or death, any Stock Option that is vested and
held by such optionee generally may be exercisable within up to one-year after
the effective date that his position ceases, and after such one-year period any
unexercised Stock Option shall expire.
25
No Stock Options granted under the Stock Option Plan will be transferable by the
optionee, and each Stock Option will be exercisable during the lifetime of the
optionee subject to the option period up to ten (10) years or limitations
described above. Any Stock Option held by an optionee at the time of his death
may be exercised by his estate within one (1) year of his death or such longer
period as the Board of Directors may determine.
The exercise price of a Stock Option granted pursuant to the 2006 Plan shall be
paid in full to us by delivery of consideration equal to the product of the
Stock Option in accordance with the requirements of the Nevada Revised Statutes.
Any Stock Option settlement, including payment deferrals or payments deemed made
by way of settlement of pre-existing indebtedness may be subject to such
conditions, restrictions and contingencies as may be determined.
INCENTIVE STOCK OPTIONS
The 2006 Plan further provides that, subject to the provisions of the Stock
Option Plan and prior shareholder approval, the Board of Directors may grant to
any key individuals who are our employees eligible to receive options one or
more incentive stock options to purchase the number of shares of common stock
allotted by the Board of Directors (the "Incentive Stock Options"). The option
price per share of common stock deliverable upon the exercise of an Incentive
Stock Option shall be at least 100% of the fair market value of the common
shares of the Company, and in the case of an Incentive Stock Option granted to
an optionee who owns more than 10% of the total combined voting power of all
classes of our stock, shall not be less than 100% of the fair market value of
our common shares. The option term of each Incentive Stock Option shall be
determined by the Board of Directors, which shall not commence sooner than from
the date of grant and shall terminate no later than ten (10) years from the date
of grant of the Incentive Stock Option, subject to possible early termination as
described above.
COMMON STOCK PURCHASE WARRANTS
As of the date of this Annual Report, there are an aggregate of 944,105 common
stock purchase warrants issued and outstanding (the "Warrants") We did not issue
any Warrants during fiscal year ended December 31, 2007. The Warrants to
purchase shares of common stock and the shares of common stock underlying the
Warrants were issued in a private placement by us during fiscal year 2006 at an
exercise price of $3.00 per share during the period commencing on October 16,
2006 and ending on the day which is earlier of (a) twenty-four months from the
date of issuance of the Warrants or eighteen months from the effective date of a
proposed registration statement.
As of the date of this Annual Report, none of the Warrants have been exercised.
RECENT SALES OF UNREGISTERED SECURITIES
As of the date of this Annual Report and during fiscal year ended December 31,
2007, to provide capital, we sold stock in private placement offerings, issued
stock in exchange for our debts or pursuant to contractual agreements as set
forth below.
26
FEBRUARY 2008 PRIVATE PLACEMENT OFFERING
On February 13, 2008, we closed a private placement offering (the "Private
Placement Offering"), whereby we issued an aggregate of 7,576,068 shares of
common stock at a deemed settlement and issuance price of $0.20 per share in
settlement of an aggregate $1,515,214 in debt due and owing by us to certain
non-U.S. residents. See "Item 6 Management's Discussion and Analysis and Plan of
Operation - Material Commitments."
The Private Placement Offering was completed in reliance on Regulation S of the
Securities Act. Sales were made to only non-U.S. residents. The Private
Placement Offering was not registered under the Securities Act or under any
state securities laws and may not be offered or sold without registration with
the Securities and Exchange Commission or an applicable exemption from the
registration requirements. The per share price of the Private Placement Offering
was arbitrarily determined by our Board of Directors based upon analysis of
certain factors including, but not limited to, stage of development, industry
status, investment climate, perceived investment risks, our assets and net
estimated worth.
DEBT SETTLEMENT
Our Board of Directors, pursuant to a Board of Directors' meeting held on April
1, 2008, approved and authorized the settlement of an aggregate of $917,123 in
current indebtedness (the "Debt Settlement") by the issuance of an aggregate
4,585,616 shares of our restricted common stock at $0.20 per share effective as
of March 24, 2008. The aggregate 4,585,616 shares of common stock were issued to
seven creditors (each a "Creditor") pursuant to the terms and conditions of
those certain $0.20 Share for Debt Private Placement Subscription Agreements
(collectively, the "Subscription Agreements") as entered into between us and
each such Creditor.
The Debt Settlement was made to five non-United States Creditors in reliance on
Rule 903 of Regulation S promulgated under the Securities Act and to two United
States accredited Creditors in reliance on Section 4(2) of the Securities Act.
The securities issued in the Debt Settlement have not been registered under the
Securities Act or under any state securities laws and may not be offered or sold
without registration with the United States Securities and Exchange Commission
or an applicable exemption from the registration requirements. See "Item 12.
Certain Relationships and Related Transactions and Director Independence -
Loans."
There were no finders' fees or commissions payable by us upon the successful
completion of the Debt Settlement and we have agreed to file a registration
statement with the United States Securities and Exchange Commission in
accordance with the Securities Act covering the resale of the shares of common
stock as issued to the Creditors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
The summarized financial data set forth in the table below is derived from and
should be read in conjunction with our audited financial statements for the
period from inception (October 19, 2004) to year ended December 31, 2007,
including the notes to those financial statements which are included in this
Annual Report. The following discussion should be read in conjunction with our
audited financial statements and the related notes that appear elsewhere in this
Annual Report. The following discussion contains forward-looking statements that
27
reflect our plans, estimates and beliefs. Our actual results could differ
materially from those discussed in the forward looking statements. Factors that
could cause or contribute to such differences include, but are not limited to
those discussed below and elsewhere in this Annual Report, particularly in the
section entitled "Risk Factors". Our audited financial statements are stated in
United States Dollars and are prepared in accordance with United States
Generally Accepted Accounting Principles.
We are an exploration stage company and have not generated any revenue to date.
The following table sets forth selected financial information for the periods
indicated.
RESULTS OF OPERATION
FISCAL YEAR ENDED FOR THE PERIOD FROM
DECEMBER 31 OCTOBER 19, 2004
2007 AND 2006 (INCEPTION) TO
DECEMBER 31, 2007
_________________________ ____________________
General and $817,021 $3,918,002 $4,962,778
Administrative Expenses
Investor relations 9,120 112,744 162,074
expenses
Consulting expenses 189,991 346,992 628,458
Management fees 312,990 311,707 624,697
Impairment of oil and -0- 1,273,410 1,273,410
gas properties
Management fees -0- 1,527,170 1,527,170
-stock based
compensation
Office and general 156,639 176,884 356,744
Professional 148,281 169,095 390,225
Fees
Net Loss ($817,021) ($3,918,002) ($4,962,778)
We have incurred recurring losses to date. Our financial statements have been
prepared assuming that we will continue as a going concern and, accordingly, do
not include adjustments relating to the recoverability and realization of assets
and classification of liabilities that might be necessary should we be unable to
continue in operation.
28
We expect we will require additional capital to meet our long term operating
requirements. We expect to raise additional capital through, among other things,
the sale of equity or debt securities.
FISCAL YEAR ENDED DECEMBER 31, 2007 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2006.
Our net loss for fiscal year ended December 31, 2007 was ($817,021) compared to
a net loss of ($3,918,002) during fiscal year ended December 31, 2006 (a
decrease of $3,100,981). During fiscal year ended December 31, 2007 and 2006, we
did not generate any revenue.
During fiscal year ended December 31, 2007, we incurred general and
administrative expenses of $817,021 compared to $3,918,002 incurred during
fiscal year ended December 31, 2006 (a decrease of $3,100,981). These general
and administrative expenses incurred during fiscal year ended December 31, 2007
consisted of: (i) consulting fees of $189,991 (2006: $346,992); (ii) investor
relations of $9120 (2006: $112,744); (iii) management fees of $312,990 (2006:
$311,707); (iv) office and general of $156,639 (2006: $176,884); (v)
professional fees of $148,281 (2006: $169,095); (vi) management fees - stock
based compensation of $-0- (2006: 1,527,170); and (vii) impairment of oil and
gas properties of $-0- (2006: $1,273,410).
During fiscal year ended December 31, 2007, we did not incur any management fees
- stock based compensation relating to the valuation of stock options granted to
our officers and directors. We also did not record any impairment of oil and gas
properties during fiscal year ended December 31, 2007. Thus, general and
administrative expenses incurred during fiscal year ended December 31, 2007
compared to fiscal year ended December 31, 2006 decreased primarily due to the
non-incurrence of management fees - stock based compensation and no impairment
of oil and gas properties. General and administrative expenses generally include
corporate overhead, financial and administrative contracted services, marketing,
and consulting costs.
Consulting fees decreased during fiscal year ended December 31, 2007 due to
decrease in use of contractual services. Of the $817,021 incurred as general and
administrative expenses during fiscal year ended December 31, 2007, we incurred
consulting expenses of $189,991 payable to International Market Trend, Inc.
("IMT"). In addition, IMT advanced us $6,000 during fiscal year ended December
31, 2007. As of December 31, 2007, we owed IMT $56,873, which is unsecured and
non-interest bearing and has no definite repayment terms. Effective March 24,
2008, we settled an aggregate $86,873 with IMT by the issuance of 434,366 shares
of our restricted common stock at $0.20 per share. An officer and director of
IMT is also one of our shareholders.
Of the $817,021 incurred as general and administrative expenses during fiscal
year ended December 31, 2007, an aggregate of $312,990 was incurred payable to
our officers and directors in management fees. We also incurred additional
compensation to our Chief Geologist and Operations Manager in accordance with
certain contractual arrangements that in the event we acquire an oil and gas
property which was directly introduced to us by either our Chief Geologist or
Operations Manager, we will assign up to a 1.5% overriding royalty interest.
Therefore, during fiscal year ended December 31, 2007, we recorded additional
compensation of $1,739, which is the estimated cost of royalty interests earned
during the period. See "Item 10. Executive Compensation."
29
Our net loss during fiscal year ended December 31, 2007 was ($817,021) or
($0.03) per share compared to a net loss of ($3,918,002) or ($0.14) per share
during fiscal year ended December 31, 2006. The weighted average number of
shares outstanding was 29,814,905 for fiscal year ended December 31, 2007
compared to 28,811,306 for fiscal year ended December 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR ENDED DECEMBER 31, 2007
As at fiscal year ended December 31, 2007, our current assets were $33,989 and
our current liabilities were $2,718,691, which resulted in a working capital
deficiency of ($2,684,702). As at fiscal year ended December 31, 2007, current
assets were comprised of: (i) $16,098 in cash; and (ii) $17,891 in prepaid
expenses and other. As at fiscal year ended December 31, 2007, current
liabilities were comprised of: (i) $389,612 in accounts payable and accrued
liabilities; and (ii) $1,570,079 due to related parties; and (iii) $759,000 in
drilling advances payable.
As at fiscal year ended December 31, 2007, our total assets were $1,758,091
comprised of: (i) $33,989 in current assets; and (ii) $1,724,102 in unproven oil
and gas properties. The increase in total assets during fiscal year ended
December 31, 2007 from fiscal year ended December 31, 2006 was primarily due to
recording of drilling costs relating to the Boggs #1 well.
As at fiscal year ended December 31, 2007, our total liabilities were $2,718,691
comprised entirely of current liabilities. The increase in liabilities during
fiscal year ended December 31, 2007 from fiscal year ended December 31, 2006 was
primarily due to the increase in amounts due to related parties and in amounts
payable and accrued liabilities and drilling advances payable. See " - Material
Commitments."
Stockholders' deficit increased from ($143,579) for fiscal year ended December
31, 2006 to ($960,600) for fiscal year ended December 31, 2007.
CASH FLOWS FROM OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. For fiscal
year ended December 31, 2007, net cash flows used in operating activities was
($385,194), consisting primarily of a net loss of ($817,021). Net cash flows
used in operating activities was adjusted by $269,877 to reconcile accounts
payable and accrued liabilities, $191,086 to reconcile costs due to related
parties, and $29,136 to reconcile prepaid expenses and other. For fiscal year
ended December 31, 2006, net cash flows used in operating activities was
($839,051), consisting primarily of a net loss of ($3,918,002), and adjusted by
$1,527,170 in stock based compensation, $1,273,410 in impairment of oil and gas
properties, $200,000 to reconcile costs due to related parties, $64,043 to
reconcile accounts payable and accrued liabilities, and $28,083 to reconcile
amounts due to related parties.
CASH FLOWS FROM INVESTING ACTIVITIES
30
For fiscal year ended December 31, 2007, net cash flows used in investing
activities was ($1,479,032) consisting of oil and gas property expenditures. For
fiscal year ended December 31, 2006, net cash flows used in investing activities
was ($903,393) for the acquisition of oil and gas properties.
CASH FLOWS FROM FINANCING ACTIVITIES
We have financed our operations primarily from either advancements or the
issuance of equity and debt instruments. For fiscal year ended December 31,
2007, net cash flows provided from financing activities was $1,874,500 compared
to $1,741,158 for fiscal year ended December 31, 2006. Cash flows from financing
activities for fiscal year ended December 31, 2007 consisted primarily of
$759,000 in drilling advances and $1,115,500 in advances from related parties
compared to $1,416,158 in proceeds on sale of common stock and $325,000 in
advances from related parties for fiscal year ended December 31, 2006.
We expect that working capital requirements will continue to be funded through a
combination of our existing funds and further issuances of securities. Our
working capital requirements are expected to increase in line with the growth of
our business.
PLAN OF OPERATION AND FUNDING
Existing working capital, further advances and debt instruments, and anticipated
cash flow are expected to be adequate to fund our operations over the next six
months. We have no lines of credit or other bank financing arrangements.
Generally, we have financed operations to date through the proceeds of the
private placement of equity and debt instruments. In connection with our
business plan, management anticipates additional increases in operating expenses
and capital expenditures relating to: (i) oil and gas operating properties; (ii)
possible drilling initiatives on current properties and future properties; and
(iii) future property acquisitions. We intend to finance these expenses with
further issuances of securities, and debt issuances. Thereafter, we expect we
will need to raise additional capital and generate revenues to meet long-term
operating requirements. Additional issuances of equity or convertible debt
securities will result in dilution to our current shareholders. Further, such
securities might have rights, preferences or privileges senior to our common
stock. Additional financing may not be available upon acceptable terms, or at
all. If adequate funds are not available or are not available on acceptable
terms, we may not be able to take advantage of prospective new business
endeavors or opportunities, which could significantly and materially restrict
our business operations.
During fiscal year ended December 31, 2007, we did not engage in any private
placement offerings. However, during February 2008, we engaged in a private
placement offering under Regulation S of the Securities Act pursuant to which we
received gross proceeds of $1,515,214, of which all consisted of settlement of
debt relating to amounts previously advanced to us by one of our shareholders
and related accrued interest. And effective March 24, 2008, we also settled an
aggregate $917,123 in debt by the issuance of 4,585,616 shares of our restricted
common stock at $0.20 per share.
MATERIAL COMMITMENTS
31
During fiscal year ended December 31, 2007, one of our shareholders advanced an
aggregate of $1,130,500 to us. As at December 31, 2006, an aggregate of $325,500
was already owing to this shareholder, which is subject to interest at the rate
of 8% per annum and has no definite repayment terms. During fiscal year ended
December 31, 2007, an aggregate of $65,000 resulting from proceeds received on
disposal of the Peters Ranch Lease was utilized to offset the aggregate amount
due and owing to the shareholder. Also add the $25,000 settlement by
transferring Railroad bonds owed by the company to the shareholder. Thus, as of
December 31, 2007, an aggregate of $1,365,500 was due and owing and accrued
interest totaled $66,456.
Subsequently, during January 2008, an additional advance was made by this same
shareholder to us for an aggregate amount of $1,512,214 due and owing. This
amount was assigned by the shareholder to various assignees and settled pursuant
to the issuance of 7,576,068 shares of our restricted common stock at $0.20 per
share. See "Item 5. Market for Common Equity and Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities - Recent Sales of
Unregistered Securities."
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next twelve
months.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Annual Report, we do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
GOING CONCERN
The independent auditors' report accompanying our December 31, 2007 and December
31, 2006 financial statements contains an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern. The
financial statements have been prepared "assuming that we will continue as a
going concern," which contemplates that we will realize our assets and satisfy
our liabilities and commitments in the ordinary course of business.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 161"). SFAS 161 is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. SFAS 161 achieves these improvements by requiring disclosure of the fair
values of derivative instruments and their gains and losses in a tabular format.
It also provides more information about an entity's liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. SFAS 161 will be
32
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, will be adopted by the Company beginning in
the first quarter of 2009. The Company does not expect there to be any
significant impact of adopting SFAS 161 on its financial position, cash flows
and results of operations.
In February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, THE FAIR VALUE OPTION FOR FINANCIAL
ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT NO.
115 ("SFAS No. 159"). This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. This statement is effective
as of the beginning of our first fiscal year that begins after November 15,
2007, although earlier adoption is permitted. As of December 31, 2007, we have
not adopted this statement and management has not determined the effect that
adopting this statement would have on our financial position or results of
operations.
In December 2007, the FASB issued SFAS No. 160, NONCONTROLLING INTEREST IN
CONSOLIDATED FINANCIAL STATEMENTS, AN AMENDMENT OF ARB NO. 51 ("SFAS No. 160"),
which will change the accounting and reporting for minority interests, which
will be recharacterized as noncontrolling interests and classified as a
component of equity within the consolidated balance sheets. SFAS No. 160 is
effective as of the beginning of an entity's first fiscal year beginning on or
after December 15, 2008. Earlier adoption is prohibited. Management has not
determined the effect that adopting this statement would have on our financial
position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), BUSINESS
COMBINATIONS ("SFAS No. 141R"). SFAS No. 141R will change the accounting for
business combinations. Under SFAS No. 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain specific items in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
entity's first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations completed by us prior to January 1, 2009
will be recorded and disclosed following existing GAAP. Management has not
determined the effect that adopting this statement would have on our financial
position or results of operations.
In September 2006, FASB issued SFAS No. 157, FAIR VALUE MEASURE ("SFAS No.
157"). This Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), expands
disclosures about fair value measurements, and applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157 does
not require any new fair value measurements. However, the FASB anticipates that
for some entities, the application of SFAS No. 157 will change current practice.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, which for us is the fiscal year beginning
33
January 1, 2008. We are currently evaluating the impact of adopting SFAS No. 157
but do not expect that it will have a significant effect on its financial
position or results of operations.
In September 2006, the FASB issued SFAS No. 158, EMPLOYERS' ACCOUNTING FOR
DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS "SFAS No. 158". This
Statement requires an employer to recognize the over funded or under funded
status of a defined benefit post retirement plan (other than a multiemployer
plan) as an asset or liability in its statement of financial position, and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income. SFAS No. 158 is effective for fiscal years ending
after December 15, 2006. The Company has determined that the adoption of this
standard did not have any impact on the Company's results of operations or
financial position.
In June 2006, FASB issued Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN
INCOME TAXES-AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"). This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB No.
109, "ACCOUNTING FOR INCOME TAXES." This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006. We have determined that the adoption of FIN 48 did not have
any material impact on our results of operations or financial position.
ITEM 7. FINANCIAL STATEMENTS
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
FINANCIAL STATEMENTS
DECEMBER 31, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BALANCE SHEETS
STATEMENTS OF OPERATIONS
STATEMENT OF STOCKHOLDER'S EQUITY
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
34
DALE MATHESON
CARR-HILTON LABONTE LLP
__________________________
DMCL CHARTERED ACCOUNTANTS
LETTERHEAD
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Morgan Creek Energy Corp.:
We have audited the balance sheets of Morgan Creek Energy Corp. (an exploration
stage company) as at December 31, 2006 and 2005 and the statements of
operations, stockholders' equity and cash flows for the years then ended and for
the period from inception on October 19, 2004 to December 31, 2006. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2006 and 2005
and the results of its operations and cash flows for the years then ended and
for the period from inception on October 19, 2004 to December 31, 2006 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, to date the Company has not generated revenues since
inception, has incurred losses in developing its business, and further losses
are anticipated. The Company requires additional funds to meet its obligations
and finance its operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in this
regard are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
"DMCL"
DALE MATHESON CARR-HILTON LABONTE LLP
CHARTERED ACCOUNTANTS
March 30, 2007
Vancouver, Canada
35
DE JOYA GRIFFITH & COMPANY, LLC
_______________________________
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Morgan Creek Energy Corp.
Henderson, Nevada
We have audited the accompanying balance sheet of Morgan Creek Energy Corp. (An
Exploration Stage Company) as of December 31, 2007 and the related statements of
operations, stockholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audit. We did not audit the financial statements of Morgan Creek Energy Corp.
for the year ended December 31, 2006. Those statements were audited by other
auditors whose report has been furnished to us and our opinion, in so far as it
relates to the amounts included in the year ended December 31, 2006, is based
solely on the report of other auditors.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Morgan Creek Energy Corp. as of
December 31, 2007, and the results of their operations and cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations, which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
De Joya Griffith & Company, LLC
/s/ De Joya Griffith & Company, LLC
Henderson, NV
March 25, 2008
________________________________________________________________________________
2580 Anthem Village Drive, Henderson, NV 89052
Telephone (702) 588-5960 Facsimile (702) 588-5979
36
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
BALANCE SHEETS
December 31, December 31,
2007 2006
_________________________________________________________________________________________________________________________________
(Audited) (Audited)
ASSETS
CURRENT ASSETS
Cash $ 16,098 $ 5,824
Prepaid expenses and other 17,891 13,755
_________________________________________________________________________________________________________________________________
TOTAL CURRENT ASSETS 33,989 19,579
OIL AND GAS PROPERTIES, unproven (Note 3) 1,724,102 310,070
_________________________________________________________________________________________________________________________________
TOTAL ASSETS $ 1,758,091 $ 329,649
=================================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 389,612 $ 119,735
Due to related parties (Note 6) 1,570,079 353,493
Drilling advances payable (Note 3) 759,000 -
_________________________________________________________________________________________________________________________________
TOTAL CURRENT LIABILITIES 2,718,691 473,228
_________________________________________________________________________________________________________________________________
GOING CONCERN (Note 1)
STOCKHOLDERS' DEFICIT (Note 4)
Common stock, 100,000,000 shares authorized with $0.001 par value
Issued and outstanding - 29,814,905 common shares 29,815 29,815
(December 31, 2006 - 29,814,905)
Additional paid-in-capital 3,972,363 3,972,363
Deficit accumulated during exploration stage (4,962,778) (4,145,757)
_________________________________________________________________________________________________________________________________
TOTAL STOCKHOLDERS' DEFICIT (960,600) (143,579)
_________________________________________________________________________________________________________________________________
TOTAL LIABILITIES & STOCK HOLDERS' DEFICIT $ 1,758,091 $ 329,649
=================================================================================================================================
The accompanying notes are an integral part of these financial statements.
37
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
Year ended Year ended October 19, 2004
December 31, December 31, (inception) to
2007 2006 December 31, 2007
_________________________________________________________________________________________________________________________________
(Audited) (Audited) (Audited)
GENERAL AND ADMINISTRATIVE EXPENSES
Investor relations $ 9,120 $ 112,744 $ 162,074
Consulting fees 189,991 346,992 628,458
Management fees - related party 312,990 311,707 624,697
Management fees - stock based compensation - 1,527,170 1,527,170
Impairment of oil and gas properties (Note 3) - 1,273,410 1,273,410
Office and general 156,639 176,884 356,744
Professional fees 148,281 169,095 390,225
_________________________________________________________________________________________________________________________________
NET LOSS $ (817,021) $ (3,918,002) $ (4,962,778)
=================================================================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.03) $ (0.14)
=================================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING-BASIC AND DILUTED 29,814,905 28,811,306
=================================================================================================================================
The accompanying notes are an integral part of these financial statements.
38
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM OCTOBER 19, 2004 (INCEPTION) TO DECEMBER 31, 2007
(AUDITED)
Common Stock Additional Deficit
accumulated
during
Number of Paid in exploration Stockholders'
Shares Amount Capital stage Equity
___________________________________________________________________________________________________________________________________
Balance, October 19, 2004 - $ - $ - $ - $ -
Common stock issued for oil and gas property
at $0.025 per share - November 19, 2004 24,000,000 24,000 576,000 - 600,000
Capital distribution to founding share holder
on acquisition of oil and gas property (Note
3) - - (600,000) - (600,000)
Common stock issued for cash at $0.025 per share
- November 26, 2004 and December 15, 2004 13,750,000 13,750 330,000 - 343,750
Common stock issued for cash at $0.125 per share
- December 15, 2004 2,640,800 2,641 327,459 - 330,100
Net loss for the period - - - (23,729) (23,729)
___________________________________________________________________________________________________________________________________
Balance, December 31, 2004 40,390,800 40,391 633,459 (23,729) 650,121
Common stock issued for cash at $0.125 per share
- March 9, 2005 280,000 280 34,720 - 35,000
Net loss for the year - - - (204,026) (204,026)
___________________________________________________________________________________________________________________________________
Balance, December 31, 2005 40,670,800 40,671 668,179 (227,755) 481,095
Common stock issued for cash at $1.50 per share
- October 16, 2006 944,105 944 1,415,214 - 1,416,158
Common stock issued for oil and gas property
at $1.75 per share - October 17, 2006 (Note 3) 200,000 200 349,800 - 350,000
Stock-based compensation - - 1,527,170 - 1,527,170
Restricted common shares cancelled
- December 19, 2006 (12,000,000) (12,000) 12,000 - -
Net loss for the year - - - (3,918,002) (3,918,002)
___________________________________________________________________________________________________________________________________
Balance, December 31, 2006 29,814,905 29,815 3,972,363 (4,145,757) (143,579)
Net loss for the year - - - (817,021) (817,021)
___________________________________________________________________________________________________________________________________
Balance, December 31, 2007 29,814,905 $ 29,815 $3,972,363 $ (4,962,778) $(960,600)
===================================================================================================================================
The accompanying notes are an integral part of these financial statements.
39
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
(AUDITED)
October 19, 2004
Year ended (inception) to
December 31, December 31,
2007 2006 2007
_________________________________________________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (817,021) $ (3,918,002) $ (4,962,778)
Adjustments to reconcile net loss to net cash used in operating
activities:
- Stock based compensation - 1,527,170 1,527,170
- Impairment of oil and gas properties - 1,273,410 1,273,410
CHANGES IN OPERATING ASSETS AND LIABILITIES
- Decrease (increase) in prepaid expenses and other (29,136) (13,755) (42,891)
- Due from related party - 200,000 -
- Due to / from related parties 191,086 28,083 229,169
- Increase (decrease) in accounts payable and accrued liabilities 269,877 64,043 349,935
_________________________________________________________________________________________________________________________________
NET CASH USED IN OPERATING ACTIVITIES (385,194) (839,051) (1,625,985)
_________________________________________________________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas property expenditures (1,479,032) (903,393) (2,682,425)
_________________________________________________________________________________________________________________________________
NET CASH FLOWS USED IN INVESTING ACTIVITIES (1,479,032) (903,393) (2,682,425)
_________________________________________________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on sale of common stock - 1,416,158 2,125,008
Drilling Advances 759,000 - 759,000
Advances from related parties 1,115,500 325,000 1,440,500
_________________________________________________________________________________________________________________________________
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,874,500 1,741,158 4,324,508
_________________________________________________________________________________________________________________________________
INCREASE (DECREASE) IN CASH 10,274 (1,286) 16,098
CASH, BEGINNING OF PERIOD 5,824 7,110 -
_________________________________________________________________________________________________________________________________
CASH, END OF PERIOD $ 16,098 $ 5,824 $ 16,098
=================================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION AND
NONCASH INVESTING AND FINANCING ACTIVITIES:
Cash paid for interest $ - $ - $
Cash paid for income taxes $ - $ - $
Common stock issued for acquisition of oil and gas property $ - $ 350,000 $ 950,000
Transfer of bond against settlement of debt $ 25,000 $ - $ 25,000
Non-cash sale of oil and gas property in property (Note 3) $ 65,000 $ - $ 65,000
The accompanying notes are an integral part of these financial statements.
40
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
________________________________________________________________________________
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
________________________________________________________________________________
Morgan Creek Energy Corp. (the "Company") is an exploration stage company that
was organized to enter into the oil and gas industry. The Company intends to
locate, explore, acquire and develop oil and gas properties in the United States
and within North America. The primary activity and focus of the Company is its
leases in Texas ("Quachita Prospect"). To date the Company has acquired
approximately 2,365 gross acres. During the production testing and evaluation
period on the first well on the property, the Boggs #1, four of the five tested
zones produced significant volumes of natural gas. Analysis of the gas indicate
a "sweet" condensate rich gas with BTU values of 1,000. This quality will yield
a premium price over the current U.S. average natural gas price. As formation
water was also produced with the natural gas in the tested zones, the Boggs #1
is currently under evaluation.
During the period the Company has begun leasing acreage in New Mexico. To date
the Company has acquired approximately 4800 gross acres.
GOING CONCERN
The Company commenced operations on October 19, 2004 and has not realized any
revenues since inception. As of December 31, 2007 the Company has an accumulated
deficit of $4,962,778 and a working capital deficiency of $2,684,702. The
ability of the Company to continue as a going concern is dependent on raising
capital to fund ongoing operations and carry out its business plan and
ultimately to attain profitable operations. Accordingly, these factors raise
substantial doubt as to the Company's ability to continue as a going concern. To
date the Company has funded its initial operations by way of private placements
of common stock and advances from related parties. Subsequent to the period on
February 13, 2008 the company converted $1,515,214 of related party debt and
accrued interest into 7,576,068 shares of common stock (refer to Note 6).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
________________________________________________________________________________
ORGANIZATION
The Company was incorporated on October 19, 2004 in the State of Nevada. The
Company's fiscal year end is December 31.
BASIS OF PRESENTATION
These financial statements are presented in United States dollars and have been
prepared in accordance with United States generally accepted accounting
principles.
OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for its oil and gas
operations whereby all costs related to the acquisition of methane, petroleum,
and natural gas interests are capitalized. Under this method, all productive and
non-productive costs incurred in connection with the exploration for and
development of oil and gas reserves are capitalized. Such costs include land and
lease acquisition costs, annual carrying charges of non-producing properties,
geological and geophysical costs, costs of drilling and equipping productive and
non-productive wells, and direct exploration salaries and related benefits.
Proceeds from the disposal of oil and gas properties are recorded as a reduction
of the related capitalized costs without recognition of a gain or loss unless
the disposal would result in a change of 20 percent or more in the depletion
rate. The Company currently operates solely in the U.S.
Depreciation and depletion of proved oil and gas properties is computed on the
units-of-production method based upon estimates of proved reserves, as
determined by independent consultants, with oil and gas being converted to a
common unit of measure based on their relative energy content.
41
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
________________________________________________________________________________
OIL AND GAS PROPERTIES (CONTINUED)
The costs of acquisition and exploration of unproved oil and gas properties,
including any related capitalized interest expense, are not subject to
depletion, but are assessed for impairment either individually or on an
aggregated basis. The costs of certain unevaluated leasehold acreage are also
not subject to depletion. Costs not subject to depletion are periodically
assessed for possible impairment or reductions in recoverable value. If a
reduction in recoverable value has occurred, costs subject to depletion are
increased or a charge is made against earnings for those operations where a
reserve base is not yet established.
Estimated future removal and site restoration costs are provided over the life
of proven reserves on a units-of-production basis. Costs, which include
production equipment removal and environmental remediation, are estimated each
period by management based on current regulations, actual expenses incurred, and
technology and industry standards. The charge is included in the provision for
depletion and depreciation and the actual restoration expenditures are charged
to the accumulated provision amounts as incurred.
The Company applies a ceiling test to capitalized costs which limits such costs
to the aggregate of the estimated present value, using a ten percent discount
rate of the estimated future net revenues from production of proven reserves at
year end at market prices less future production, administrative, financing,
site restoration, and income tax costs plus the lower of cost or estimated
market value of unproved properties. If capitalized costs are determined to
exceed estimated future net revenues, a write-down of carrying value is charged
to depletion in the period.
ASSET RETIREMENT OBLIGATIONS
The Company has adopted the provisions of SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
related oil and gas properties
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates. Significant areas requiring management's
estimates and assumptions are the determination of the fair value of
transactions involving common stock and financial instruments. Other areas
requiring estimates include deferred tax balances and asset impairment tests.
FINANCIAL INSTRUMENTS
The fair value of the Company's financial assets and financial liabilities
approximate their carrying values due to the immediate or short-term maturity of
these financial instruments.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Dilutive earnings (loss) per share reflects
the potential dilution of securities that could share in the earnings of the
Company. Dilutive earnings (loss) per share is equal to that of basic earnings
(loss) per share as the effects of stock options and warrants have been excluded
as they are anti-dilutive.
INCOME TAXES
The Company follows the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
balances. Deferred tax assets and liabilities are measured using enacted or
substantially enacted tax rates expected to apply to the taxable income in the
years in which those differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the date of enactment or
substantive enactment. As at December 31, 2007 the Company had net operating
loss carryforwards, however, due to the uncertainty of realization, the Company
has provided a full valuation allowance for the deferred tax assets resulting
from these loss carryforwards.
42
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
________________________________________________________________________________
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement No. 123(R), SHARE-BASED
PAYMENT, ("SFAS 123R"). The Company adopted SFAS 123R using the
modified-prospective-transition method. Under this method, compensation cost
recognized for the year ended December 31, 2006 includes: a) compensation cost
for all share-based payments granted prior to, but not yet vested as of December
31, 2005, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS 123, and b) compensation cost for all share-based
payments granted subsequent to December 31, 2005, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123R. In addition,
deferred stock compensation related to non-vested options is required to be
eliminated against additional paid-in capital upon adoption of SFAS 123R. The
results for the prior periods have not been restated. The Company's results of
operations for the year ended December 31, 2006 were no different than if the
Company had not adopted SFAS 123R because (i) there were no previously granted
stock options, and (ii) all stock options granted during the year ended December
31, 2006 were granted to consultants with the related fair value accounting
consistent under SFAS 123 and SFAS 123R. As a result, no pro forma disclosure of
the impact of adopting SFAS 123R has been provided for the year ended December
31, 2006.
The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees in accordance with SFAS No. 123
and the conclusions reached by the Emerging Issues Task Force ("EITF") in Issue
No. 96-18. Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably measurable. The value of equity instruments
issued for consideration other than employee services is determined on the
earliest of a performance commitment or completion of performance by the
provider of goods or services as defined by EITF 96-18.
RECENT ACCOUNTING PRONOUNCEMENT
In March 2008, the FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 161"). SFAS 161 is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. SFAS 161 achieves these improvements by requiring disclosure of the fair
values of derivative instruments and their gains and losses in a tabular format.
It also provides more information about an entity's liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. SFAS 161 will be
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, will be adopted by the Company beginning in
the first quarter of 2009. The Company does not expect there to be any
significant impact of adopting SFAS 161 on its financial position, cash flows
and results of operations.
In February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, THE FAIR VALUE OPTION FOR FINANCIAL
ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT NO.
115 ("SFAS No. 159"). This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings cause by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. This statement is effective
as of the beginning of the Company's first fiscal year that begins after
November 15, 2007, although earlier adoption is permitted. As of December 31,
2007, the Company has not adopted this statement and management has not
determined the effect that adopting this statement would have on the Company's
financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, NONCONTROLLING INTEREST IN
CONSOLIDATED FINANCIAL STATEMENTS, AN AMENDMENT OF ARB NO. 51 ("SFAS No. 160"),
which will change the accounting and reporting for minority interests, which
will be recharacterized as noncontrolling interests and classified as a
component of equity within the consolidated balance sheets. SFAS No. 160 is
effective as of the beginning of an entity's first fiscal year beginning on or
after December 15, 2008. Earlier adoption is prohibited. Management has not
determined the effect that adopting this statement would have on the Company's
financial position or results of operations.
43
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
________________________________________________________________________________
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), BUSINESS
COMBINATIONS ("SFAS No. 141R"). SFAS No. 141R will change the accounting for
business combinations. Under SFAS No. 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain specific items in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
entity's first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations completed by the Company prior to January
1, 2009 will be recorded and disclosed following existing GAAP. Management has
not determined the effect that adopting this statement would have on the
Company's financial position or results of operations.
In September 2006, FASB issued SFAS No. 157, FAIR VALUE MEASURE ("SFAS No.
157"). This Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), expands
disclosures about fair value measurements, and applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157 does
not require any new fair value measurements. However, the FASB anticipates that
for some entities, the application of SFAS No. 157 will change current practice.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, which for the Company is the fiscal year
beginning January 1, 2008. The Company is currently evaluating the impact of
adopting SFAS No. 157 but does not expect that it will have a significant effect
on its financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, EMPLOYERS' ACCOUNTING FOR
DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS "SFAS No. 158". This
Statement requires an employer to recognize the over funded or under funded
status of a defined benefit post retirement plan (other than a multiemployer
plan) as an asset or liability in its statement of financial position, and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income. SFAS No. 158 is effective for fiscal years ending
after December 15, 2006. The Company has determined that the adoption of this
standard did not have any impact on the Company's results of operations or
financial position.
In June 2006, FASB issued Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN
INCOME TAXES-AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"). This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB No.
109, "ACCOUNTING FOR INCOME TAXES." This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006. The Company has determined that the adoption of FIN 48 did
not have any material impact on the Company's results of operations or financial
position.
NOTE 3 - OIL AND GAS PROPERTIES
________________________________________________________________________________
(A) QUACHITA PROSPECT
The Company leased various properties totalling approximately 2,365 gross acres
within the Quachita Trend within the state of Texas for a three year term in
consideration for $338,353. The Company has a 100% Working Interest and a 77%
N.R.I. in the leases.
BOGGS #1
On June 7, 2007 the Company began drilling its first well on the Quachita
Prospect (Boggs #1). During the year the Company began production testing and
evaluation of the well. Of the five tested zones, four produced significant
volumes of natural gas. As formation water was also produced with the natural
gas in the tested zones, the Boggs # 1 is currently under evaluation. During the
year $1,335,781 was incurred on drilling and completion expenditures on the
Boggs #1. The Boggs #1 was privately funded with the funding investors receiving
a 75% Working Interest and a 54% Net Revenue Interest in exchange for providing
100% of all drilling and completion costs. For the year ended December 31, 2007
the Company had incurred $1,335,781 of costs on Boggs #1 and had received
$759,000 in funding from the private investors.. As at December 31, 2007, the
Company has retained a 25% Working Interest and a 19.25% Net Revenue Interest in
the Boggs #1. Subsequent to year end, the Company negotiated with the funding
investors to acquire their interest in the well for an amount equal to the total
amount of their initial investment being
44
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
________________________________________________________________________________
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
________________________________________________________________________________
$759,000 and forgiveness of any additional amounts owing. Effective March 24,
2008, the Company completed this acquisition and settlement through the issuance
of 3,795,000 shares of common stock at $0.20 per share.
(B) PETERS RANCH LEASE
On January 30, 2007 the Company acquired a 100% working interest, 77% net
revenue interest, in two fully equipped South Texas oil leases; the Mata lease
in Webb County and the Peters Ranch located in Duval County for $55,000. On
April 23, 2007 the Company reached an agreement to sell the property for
$65,000. By agreement between the purchaser and a shareholder of the Company,
the amounts owing under this agreement were offset against amounts owing by the
Company to this shareholder (refer to Note 6).
(C) NEW MEXICO PROSPECT
The Company to date has leased various properties totalling approximately 4800
gross acres within the state of New Mexico for a five year term in consideration
for $52,083. The Company has a 100% Working Interest and an 87.5% N.R.I. in the
leases.
NOTE 4 - STOCKHOLDERS' DEFICIT
________________________________________________________________________________
(A) SHARE CAPITAL
The Company's capitalization is 100,000,000 common shares with a par value of
$0.001 per share.
On May 10, 2006, the directors of the Company approved a special resolution to
undertake a forward split of the common stock of the Company on a basis of 2 new
shares for 1 old share. On July 26, 2006, the directors of the Company approved
a special resolution to undertake a further forward split of the common stock of
the Company on a basis of 2 new shares for 1 old share.
All references in these financial statements to number of common shares, price
per share and weighted average number of common shares outstanding prior to the
2:1 forward stock split on May 10, 2006 and the 2:1 forward split on August 8,
2006 have been adjusted to reflect these stock splits on a retroactive basis,
unless otherwise noted.
On December 19, 2006 a founding shareholder of the Company returned 12,000,000
restricted shares of common stock to treasury and the shares were subsequently
cancelled by the Company. The shares were returned to treasury for no
consideration to the shareholder.
(B) PRIVATE PLACEMENTS
On November 26, 2004 the Company issued 6,200,000 shares of common stock at
$0.025 per share for proceeds of $155,000.
On December 15, 2004 the Company issued 7,550,000 shares of common stock at
$0.025 per share for proceeds of $188,750 and 2,640,800 shares of common stock
at $0.125 per share for proceeds of $330,100.
On March 9, 2005 the Company issued 280,000 shares of common stock at a price of
$0.125 per share for proceeds of $35,000.
On October 16, 2006 the Company completed a private placement consisting of
944,105 units at $1.50 per unit for proceeds of $1,416,158. Each unit consists
of one common share and one non-transferable share purchase warrant exercisable
at $3.00 per share for the period commencing on October 16, 2006 and ending on
October 16, 2008, being the day which is the earlier of 24 months from the date
of issuance of the units or 18 months from the effective date of a planned
registration statement. Of this private placement, 563,333 of the units issued
were in exchange for $845,000 previously advanced to the Company by a
shareholder. The estimated fair value of the warrants at the date of grant of
$592,210, which has been included in additional paid in capital, was determined
using the Black-Scholes option pricing model with an expected life of 2 years,
risk free interest rate of 4.49%, a dividend yield of 0% and an expected
volatility of 153%.
(C) OTHER ISSUANCES
On February 13, 2008, the Company issued 7,576,068 shares of common stock at a
price of $0.20 per share on settlement of related party advance and related
accrued interest totalling $1,515,214. (refer to Note 6)
On March 24, 2008, the Company issued 4,585,616 shares of common stock at a
price of $0.20 per share on settlement of related party advances and acquisition
of interest in the Boggs well
45
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
________________________________________________________________________________
NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)
________________________________________________________________________________
(D) SHARE PURCHASE WARRANTS
Details of the Company's share purchase warrants issued and outstanding as of
December 31, 2007 are as follows:
Exercise price Weighted average price Number of warrants to purchase shares Expiry Date
________________________________________________________________________________________________________________________________
$3.00 $3.00 944,105 October 16, 2008
The Company's share purchase warrants activity for the years ended December 31,
2007 and 2006 is summarized as follows:
Weighted average exercise Weighted average remaining
Number of Warrants Price per share In contractual life (in years)
________________________________________________________________________________________________________________________________
Balance, December 31, 2005 - $ - -
Issued 944,105 3.00 -
Expired - - -
Exercised - - -
________________________________________________________________________________________________________________________________
Balance, December 31, 2006 944,105 3.00 1.80
Issued - - -
Expired - - -
Exercised - - -
________________________________________________________________________________________________________________________________
Balance, December 31, 2007 944,105 $ 3.00 1.80
================================================================================================================================
All Warrants are exercisable as of December 31, 2007
NOTE 5 - STOCK OPTION PLAN
________________________________________________________________________________
On April 3, 2006 the Board of Directors of the Company ratified, approved and
adopted a Stock Option Plan for the Company in the amount of 5,000,000 shares
with an exercisable period up to 10 years. In the event an optionee ceases to be
employed by or to provide services to the Company for reasons other than cause,
any Stock Option that is vested and held by such optionee maybe exercisable
within up to ninety calendar days after the effective date that his position
ceases. No Stock Option granted under the Stock Option Plan is transferable. Any
Stock Option held by an optionee at the time of his death may be exercised by
his estate within one year of his death or such longer period as the Board of
Directors may determine.
As approved by the Board of directors, on December 12, 2006, the Company granted
1,850,000 stock options to certain officers, directors and management of the
Company at $1.10 per share. The term of these options are five years. The total
fair value of these options at the date of grant was estimated to be $1,527,170
and was recorded as a stock based compensation expense during 2006. The fair
value of these options was estimated using the Black-Scholes option pricing
model with the following assumptions: expected life of 3 years; risk free
interest rate of 4.49%; dividend yield of 0% and expected volatility of 187%.
46
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
________________________________________________________________________________
NOTE 5 - STOCK OPTION PLAN (CONTINUED)
________________________________________________________________________________
The Company's stock option warrants activity for the years ended December 31,
2007 and 2006 is summarized as follows:
Weighted average exercise Weighted average remaining
Number of Options Price per share In contractual life (in years)
________________________________________________________________________________________________________________________________
Balance, December 31, 2005 - $ - -
Granted 1,850,000 1.10 -
Expired - - -
Exercised - - -
________________________________________________________________________________________________________________________________
Balance, December 31, 2006 1,850,000 1.10 4.95
Granted - - -
Expired - - -
Exercised - - -
________________________________________________________________________________________________________________________________
Balance, December 31, 2007 1,850,000 $ 1.10 4.95
================================================================================================================================
All options are exercisable as of December 31, 2007.
NOTE 6 - RELATED PARTY TRANSACTIONS
________________________________________________________________________________
INTERNATIONAL MARKET TREND, INC. ("IMT")
An officer and director of IMT, a private company, is a shareholder of the
Company. During the year ended December 31, 2007 the Company incurred consulting
fees of $120,000 to IMT (December 31, 2006 - $167,500). In addition, during the
year IMT advanced the Company $6,000. As of December 31, 2007 the Company owed
IMT $56,873 which is unsecured non-interest bearing, and has no specific
repayment terms. Subsequent to the period the Company converted $86,873 in
consulting fees and advances through the issuance of 434,366 common shares of
the Company at $0.20 per share (Refer Note 4).
During the year ended December 31, 2007 a shareholder of the Company advanced
$10,000 to the Company. In addition, as at December 31, 2007, $71,250 is owing
to the President of the Company for expenses incurred by the President on behalf
of the Company. These amounts are unsecured non-interest bearing and without
specific repayment terms.
As at December 31, 2006, $325,000 was owing to a separate shareholder for
advances made to the Company. During the year, December 31, 2007, this
shareholder made further advances to the Company of $1,130,500. In addition, the
$65,000 proceeds on disposal of the Peters Ranch Lease (as described in Note 3)
were offset against these amounts owing by agreement between this shareholder
and the purchaser, as well as the assignment of the $25,000 Railroad Commission
bond. As a result, as of December 31, 2007 $1,365,500 was owing which bears
interest at 8% per annum and has no specific repayment terms. As of December 31,
2007 total accrued interest was $66,456 (December 31, 2006 - $1,211).
Subsequent to December 31, 2007, the above advances, accrued interest, and
further advances from this shareholder that were received in January 2008, for a
total of $1,515,214 were assigned to other parties. These amounts were
subsequently settled by the Company through the issuance of 7,576,068 shares of
the Company's common stock at $0.20 per share (Refer Note 8- "Subsequent
Events").
MANAGEMENT FEES
During the year ended December 31, 2007, the Company paid officers and directors
$311,250 for management fees (2006 -$311,707).
As part of their compensation agreements the Company's chief Geologist and
Operations Manager (hereafter referred to as "Executives") each receives and is
assigned at the time of acquisition up to a 1.5% overriding royalty interest in
any oil and gas properties which are directly introduced by the Executives to
the Company. During the year ended December 31, 2007 the Company recorded
related additional compensation to the Executives of $1,739 (2006 - $nil), being
the estimated cost of royalty interests earned during the year.
47
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
________________________________________________________________________________
NOTE 6 - RELATED PARTY TRANSACTIONS (CONTINUED)
________________________________________________________________________________
MANAGEMENT FEES (CONTINUED)
Subsequent to the period the Company converted $71,250 of management fees of the
President of the Company through the issuance of 356,250 common shares of the
Company at $0.20 per share (Refer to Note 4 and Note 8).
NOTE 7 - INCOME TAXES
________________________________________________________________________________
The Company has adopted the FASB No. 109 for reporting purposes. As of December
31, 2007, and 2006 the Company had net operating loss carry forwards of
approximately $2,162,000 and $1,345,177, respectively that may be available to
reduce future years' taxable income through 2027. Future tax benefits which may
arise as a result of these losses have not been recognized in these financial
statements, as their realization is determined not likely to occur and
accordingly, the Company has recorded a valuation allowance for the deferred tax
asset relating to these tax loss carryforwards.
At December 31, 2007 and 2006, the Company had a federal operating loss carry
forward of $2,162,198 and $1,345,177, respectively.
The provision for income taxes consisted of the following components for the
years ended December 31:
2007 2006
___________________ _____________________
Current:
Federal -- --
--
State --
Deferred: -- --
___________________ _____________________
-- --
_________
Components of net deferred tax assets, including a valuation allowance, are as
follows at December 31:
2007 2006
___________________ _____________________
Deferred tax assets:
Net operating loss carryforward $ 2,162,198 $ 1,345,177
-- --
___________________ _____________________
Total deferred tax assets 756,769 470,812
Less: Valuation Allowance (756,769) (470,812)
___________________ _____________________
Net Deferred Tax Assets $ -- $ --
The valuation allowance for deferred tax assets as of December 31, 2007 and 2006
was $756,769 and $470,812, respectively. In assessing the recovery of the
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income in the periods in which those temporary differences become
deductible. Management considers the scheduled reversals of future deferred tax
assets, projected future taxable income, and tax planning strategies in making
this assessment. As a result, management determined it was more likely than not
the deferred tax assets would be realized as of December 31, 2007 and 2006.
________________________________________________________________________________
48
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
________________________________________________________________________________
Reconciliation between the statutory rate and the effective tax rate is as
follows at December 31:
2007 2006
__________________ _________________
Federal statutory tax rate (35.0)% (34.0)%
__________________ _________________
Change in valuation allowance 35.0% 35.0%
__________________ _________________
Effective tax rate 0% 0%
NOTE 8 - SUBSEQUENT EVENTS
________________________________________________________________________________
OTHER ISSUANCES
On February 13, 2008, the Company issued 7,576,068 shares of common stock at a
price of $0.20 per share on settlement of related party advance and related
accrued interest totalling $1,515,214. (refer to Note 6)
On March 24, 2008, the Company issued 4,585,616 shares of common stock at a
price of $0.20 per share on settlement of related party advances and acquisition
of interest in the Boggs well
49
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective July 31, 2007, our Board of Directors accepted the resignation of Dale
Matheson Carr-Hilton LaBonte LLP, Chartered Accountants ("DMCL"), as our
principal independent registered public accounting firm. On the same date, our
Board of Directors appointed De Joya Griffith & Company, LLC as our principal
independent registered public accounting firm.
The reports of DMCL on our consolidated financial statements for each of the
fiscal years ended December 31, 2005 and 2006 did not contain an adverse opinion
or disclaimer of opinion, nor were they modified as to uncertainty, audit scope
or accounting principles, other than to state that there is substantial doubt as
to our ability to continue as a going concern. During our fiscal years ended
December 31, 2005 and 2006, and during the subsequent period through to the date
of DMCL's resignation, there were no disagreements between us and DMCL, whether
or not resolved, on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
the satisfaction of DMCL, would have caused DMCL to make reference thereto in
their reports on our audited consolidated financial statements.
We provided DMCL with a copy of a Current Report on Form 8-K and requested that
DMCL furnish us with a letter addressed to the Securities and Exchange
Commission stating whether or not DMCL agrees with the statements made in the
Current Report on Form 8-K with respect to DMCL and, if not, stating the aspects
with which they do not agree. We received the requested letter from DMCL wherein
they have confirmed their agreement to our disclosures in the Current Report
with respect to DMCL. A copy of DMCL's letter was filed as an exhibit to the
Current Report.
In connection with our appointment of De Joya Griffith & Company, LLC as our
principal registered accounting firm at this time, we have not consulted De Joya
Griffith & Company, LLC on any matter relating to the application of accounting
principles to a specific transaction, either completed or contemplated, or the
type of audit opinion that might be rendered on our financial statements.
ITEM 8A. CONTROLS AND PROCEDURES
FINANCIAL DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was conducted under the supervision and with the participation of
our management, including Marcus Johnson, our Chief Executive Officer ("CEO")
and D. Bruce Horton, our Chief Financial Officer ("CFO"), of the effectiveness
of the design and operation of our disclosure controls and procedures as of
December 31, 2007. Based on that evaluation, Messrs. Johnson and Horton
concluded that our disclosure controls and procedures were not effective as of
such date to ensure that information required to be disclosed in the reports
that we file or submit under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms. Such officers also confirm that there was no change in our internal
control over financial reporting during the year ended December 31, 2007 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
AUDIT COMMITTEE REPORT
50
The Board of Directors has established an audit committee. The members of the
audit committee are Mr. Marcus Johnson, Mr. Stephen Jewett and Mr. D. Bruce
Horton and. One of the three members of the audit committee is "independent"
within the meaning of Rule 10A-3 under the Exchange Act. The audit committee was
organized in November 20, 2004 and operates under a written charter adopted by
our Board of Directors.
The audit committee has reviewed and discussed with management our audited
financial statements as of and for fiscal year ended December 31, 2007. The
audit committee has also discussed with De Joya Griffith & Company, LLC the
matters required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended, by the Auditing Standards Board
of the American Institute of Certified Public Accountants. The audit committee
has received and reviewed the written disclosures and the letter from De Joya
Griffith & Company, LLC required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, as amended, and has discussed
with De Joya Griffith & Company, LLC their independence.
Based on the reviews and discussions referred to above, the audit committee has
recommended to the Board of Directors that the audited financial statements
referred to above be included in our Annual Report on Form 10-KSB for fiscal
year ended December 31, 2007 filed with the Securities and Exchange Commission.
We maintain "disclosure controls and procedures," as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"),
that are designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. We
conducted an evaluation (the "Evaluation"), under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of our disclosure controls and
procedures ("Disclosure Controls") as of the end of the period covered by this
report pursuant to Rule 13a-15 of the Exchange Act. The evaluation of our
disclosure controls and procedures included a review of the disclosure controls'
and procedures' objectives, design, implementation and the effect of the
controls and procedures on the information generated for use in this report. In
the course of our evaluation, we sought to identify data errors, control
problems or acts of fraud and to confirm the appropriate corrective actions, if
any, including process improvements, were being undertaken. Our Chief Executive
Officer and our Chief Financial Officer concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures were
effective and were operating at the reasonable assurance level.
ITEM 8A(T)
Not applicable.
ITEM 8B. OTHER INFORMATION
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
All of our directors hold office until the next annual general meeting of the
shareholders or until their successors are elected and qualified. Our officers
are appointed by our board of directors and hold office until their earlier
death, retirement, resignation or removal.
Our directors and executive officers, their ages, positions held are as follows:
51
NAME AGE POSITION WITH THE COMPANY
Marcus M. Johnson 59 President, Chief Executive Officer/Principal
Executive Officer and a Director and Chairman
of the Board
D. Bruce Horton 63 Secretary/Treasurer, Chief Financial Officer,
Principal Accounting Officer, Stock Option Plan
Administrator and a Director
Thomas A. Markham II 57 Chief Geologist and a Director
Stephen Jewett 69 Director
Erik Essiger 42 Director
BUSINESS EXPERIENCE
The following is a brief account of the education and business experience of
each director, executive officer and key employee during at least the past five
years, indicating each person's principal occupation during the period, and the
name and principal business of the organization by which he or she was employed,
and including other directorships held in reporting companies.
MARCUS JOHNSON: Mr. Johnson has been our President and Chief Executive
Officer/Principal Executive Officer and a director and Chairman of our Board of
Directors since October 25, 2006. Mr. Johnson, AIA, has previously been active
in management in both the private and public sectors as a consultant to
management with an emphasis on investor relations and awareness. Mr. Johnson has
performed consulting services for Intergold Corporation, now known as Lexington
Resources, Inc., and Vega-Atlantic Corporation, now known as Transax
International Limited. Mr. Johnson is a professional architect and a member of
the American Institute of Architects. Mr. Johnson has been the professional
architectural consultant of record on various commercial projects and is a
consultant to Exterior Research & Design, LLC, where he is currently retained as
an expert for determining architectural management standards. Mr. Johnson is
also the chief executive officer and director to Geneva Resources, Inc. since
October 2006.
D. BRUCE HORTON has been one of our directors and our Secretary/Treasurer and
Chief Financial Officer and Principal Accounting Officer since August 21, 2006.
During the past five years, Mr. Horton has been active in the financial arena in
both the private and public sectors as an accountant and financial management
consultant with an emphasis on corporate financial reporting, financing and tax
planning. Mr. Horton has specialized in corporate management, re-organization,
merger and acquisition, international tax structuring, and public and private
financing for over thirty years. From 1972 through 1986, Mr. Horton was a
partner in a public accounting firm. In 1986, Mr. Horton co-founded the Clearly
Canadian Beverage Corporation, of which he was a director and chief financial
officer from June 1986 to May 1997. He is a principal consultant in Calneva
Financial Services Ltd. that provides accounting and financial management
consulting services as well as investment banking services focusing on venture
52
capital opportunities in Asia. Mr. Horton is also an officer and director of
Geneva Resources, Inc. since May 2006 and an officer and director of Uranium
International Corp. since July 2007, which both are publicly traded companies.
THOMAS ALDEN MARKHAM II: Mr. Markham has been our Chief Geologist and one of our
directors since August 21, 2006. Mr. Markham is a professional geologist
specializing evaluations and management of oil and gas plays in the
mid-continental U.S. Since receiving his Masters of Geology, Mr. Markham has
focused on oil and gas plays. He began his career working with BEPCO, ARCO and
then TENNECO, acting as geologist on a wide range of projects spanning over 12
years of development on leading plays including the Pinon, Allen Hill, Brunson
Ranch, J.D. Shale, Brown Bassett Extension and NYY projects. During this period,
he directed 15 Ph D-level geologists and managed exploration budgets up to $21
million. Mr. Markham has recently acted as Chief Geologist in charge of the
supervision and generation of a 21,000 acre Pennsylvanian gas play in the
Permian Basin. Mr. Markham was instrumental in the play's development and
finalized negotiations with the Osage Tribe of Oklahoma for drilling rights on
57-quarter sections (9,120 acres). He has been an independent oil and gas
geologist managing project generation and evaluation for various industry and
non-industry groups primarily in the Mid Continent. Mr. Markham has successfully
drilled and completed proprietary prospects (while providing the supervision of
seismic, leasing, drilling, completion, and production activities) of 88 oil and
gas wells (to 10,500') in Texas, New Mexico, and Oklahoma. He was the generating
geologist of a 5 TCFG overthrust play in Central Texas, he finalized a New
Mexico San Andres stratigraphic play (50 to 100 MMBO at 4,000') and a Permian
Basin Devonian structural play and managed the screening and evaluation of
Springer - Atoka sub-basin prospects of the Anadarko Basin (3-D). Mr. Markham's
work has been published in the American Gas Journal and he has been invited on a
technical tour of the former Soviet Union to review oil and gas assets. He was
also guest speaker at the American Association of Petroleum Landman's (AAPL)
"Buying Oil and Gas Properties" seminar. He continues to carry out Reserve
Evaluation for non-industry groups including the FDIC (Federal Deposit Insurance
Corp. - Wichita and Dallas Branches) and the IRS (Internal Revenue Service). Mr.
Markham is not a director or officer of any other U.S. reporting company.
STEVE JEWETT has been one of our directors and a member of our Audit Committee
since October 2004. From 1978 to the current date, Mr. Jewett has been the owner
and independent operator of Stephen Jewett - Chartered Accountant. During his
career, Mr. Jewett was auditor of several public companies, and currently
focuses on tax related engagements. Mr. Jewett received his degree as a
Chartered Accountant from the Institute of Chartered Accountants of British
Columbia and is our Audit Committee's financial expert. Mr. Jewett is also a
director and audit committee member to Geneva Resources, Inc., since May 2006.
ERIK ESSIGER has been one of our directors since August 21, 2006. Mr. Essiger
has more than fifteen years of experience in corporate finance and lead advisory
services relating to strategic and commercial development projects across a wide
variety of sectors and including, in particular, within the industrial,
automotive, business services, retail and consumer goods sectors. In this
respect Mr. Essiger has performed various commercial and strategy services as
both an external consultant and as a board member and managing director of a
number of companies, including a venture capital company. During the past five
years Mr. Essiger has been: (i) the Managing Director and the founder of
53
Precisetech GmbH, a corporate finance advisory company focused on international
M&A transactions (from October 2004 to present); (ii) a member of the
Supervisory Board of Corix Capital AG (from December 2003 to present); (iii) the
Senior Manager, Transaction Services Strategy Group, with PricewaterhouseCoopers
AG, heading up the commercial and due diligence practice of that group in
Germany which provided services mainly to private equity clients of the firm
(from April 2003 to September 2004); and (iv) a member of the Executive Board
(Vorstand) of MultiMedia Technologies AG, a producer of set-top-boxes and a
company operating in the fields of interactive digital television and the
streaming media market (from July 2000 to July 2002) Mr. Essiger also has
extensive international experience in corporate restructuring; especially in
Germany, Russia, Hong Kong and Switzerland; and he was a member of the
German-Russian co-operation council. Mr. Essiger is also a director of Uranium
Energy Corp., a publicly traded company.
FAMILY RELATIONSHIPS
There are no family relationships among our directors or officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, none of our directors, executive officers or persons
that may be deemed promoters is or have been involved in any legal proceeding
concerning: (i) any bankruptcy petition filed by or against any business of
which such person was a general partner or executive officer either at the time
of the bankruptcy or within two years prior to that time; (ii) any conviction in
a criminal proceeding or being subject to a pending criminal proceeding
(excluding traffic violations and other minor offenses); (iii) being subject to
any order, judgment or decree, not subsequently reversed, suspended or vacated,
of any court of competent jurisdiction permanently or temporarily enjoining,
barring, suspending or otherwise limiting involvement in any type of business,
securities or banking activity; or (iv) being found by a court, the Securities
and Exchange Commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law (and the judgment has
not been reversed, suspended or vacated).
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
As of the date of this Annual Report, Messrs. Johnson, Markham and Jewett have
been appointed as members to our audit committee. Two of the three members are
"independent" within the meaning of Rule 10A-3 under the Exchange Act and are in
addition financial experts. The audit committee operates under a written charter
adopted by the Board of Directors on November 20, 2004.
The audit committee's primary function is to provide advice with respect to our
financial matters and to assist the Board of Directors in fulfilling its
oversight responsibilities regarding finance, accounting, and legal compliance.
The audit committee's primary duties and responsibilities will be to: (i) serve
as an independent and objective party to monitor our financial reporting process
and internal control system; (ii) review and appraise the audit efforts of our
independent accountants; (iii) evaluate our quarterly financial performance as
54
well as our compliance with laws and regulations; (iv) oversee management's
establishment and enforcement of financial policies and business practices; and
(v) provide an open avenue of communication among the independent accountants,
management and the Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our directors and officers, and the
persons who beneficially own more than ten percent of our common stock, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Copies of all filed reports are required to be furnished to us
pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the
reports received by us and on the representations of the reporting persons, we
believe that these persons have complied with all applicable filing requirements
during the fiscal year ended December 31, 2007.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our Chief Executive
Officer and those executive officers that earned in excess of $100,000 during
fiscal years ended December 31, 2007 and 2006 (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
_______________________________________________________________________________________________________________________________
NON-EQUITY NON-QUALIFIED ALL OTHER
INCENTIVE PLAN DEFERRED COMPENSATION
COMPENSATION COMPENSATION
NAME AND STOCK EARNINGS
PRINCIPAL SALARY BONUS AWARDS OPTION TOTAL
POSITION YEAR ($) (1) ($) ($) AWARDS ($) ($) ($) ($) ($) (2)
_______________________________________________________________________________________________________________________________
Marcus 2006 -0- -0- -0- 412,748 $412,748
Johnson,
President and
CEO 2007 $71,250 -0- -0- -0- --- --- --- 71,250
_______________________________________________________________________________________________________________________________
Thomas
Markham, Chief
Geologist 2007 $120,869 -0- -0- -0- --- --- --- $120,869
_______________________________________________________________________________________________________________________________
(1) This amount represents fees paid by us to the Named Executive Officers
during the past year pursuant to consulting services provided in connection
with their respective position as Chief Executive Officer and Chief
Geologist. During fiscal year ended December 31, 2007, we paid: (i) $71,250
to Marcus Johnson, our Chief Executive Officer; and (ii) $120,000 and an
additional $869 in accordance with the 1.5% royalty interest to Thomas
Markham, our Chief Geologist. During fiscal year ended December 31, 2006,
55
we also paid certain executive officers the following amounts, which did
not exceed $100,000 and, therefore, not required to be disclosed in the
Summary Compensation Table: (i) $60,000 and an additional $4,795 in
accordance with the 1.5% royalty interest to Thomas Markham, our Chief
Geologist; and (ii) $35,000 to Grant Atkins, our previous Chief Financial
Officer. Effective March 24, 2008, we also settled an aggregate amount of
$71,250 in debt due and owing to Mr. Johnson by the issuance of 356,250
shares of our restricted common stock at $0.20 per share.
(2) This amount represents the fair value of these options at the date of grant
which was estimated using the Black-Scholes option pricing model.
STOCK OPTIONS/SAW GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2007
The following table sets forth information as at December 31, 2007 relating to
options that have been granted to the Named Executive Officers:
___________________________________________________________________________________________________________________________________
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
___________________________________________________________________________________________________________________________________
OPTION AWARDS STOCK AWARDS
Equity
Incentive
Equity Plan
Incentive Awards:
Plan Market or
Awards: Payout
Equity Market Number of Value of
Incentive Plan Value of Unearned Unearned
Number of Number of Awards: Number Number of Shares Shares, Shares,
Securities Securities of Securities Shares or or Units Units or Units or
Underlying Underlying Underlying Units of of Stock Other Other
Unexercised Unexercised Unexercised Option Stock That That Rights That Rights That
Options Options Unearned Exercise Option Have Not Have Not Have Not Have Not
Exercisable Unexercisable Options Price Expiration Vested Vested Vested Vested
Name (#) (#) (#) ($) Date (#) ($) (#) (#)
___________________________________________________________________________________________________________________________________
Marcus Johnson December 15,
President/CEO 500,000 -0- -0- 1.10 2011 -0- -0- -0- -0-
___________________________________________________________________________________________________________________________________
56
The following table sets forth information relating to compensation paid to our
directors during fiscal year ended December 31, 2007 and 2006:
DIRECTOR COMPENSATION TABLE
_____________________________________________________________________________________________________________________________
Change in
Pension
Value and
Fees Non-Equity Nonqualified
Earned or Incentive Deferred All
Paid in Stock Option Plan Compensation Other
Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
_____________________________________________________________________________________________________________________________
Marcus Johnson,
Chairman (3)
2006 -0- -0- $412,748 -0- -0- -0- $412,748
2007 -0- -0- -0- -0- -0- -0- -0-
_____________________________________________________________________________________________________________________________
Thomas Markham (1) -0- (3) -0- -0- -0- $477,543
2006 $64,794 -0- $412,748 -0- -0- -0- -0-
2007 -0- -0-
_____________________________________________________________________________________________________________________________
Erik Essinger (2) -0- (3) -0- -0- -0- $303,492
2006 97,118 -0- $206,374 -0- -0- -0- -0-
2007 -0- -0-
_____________________________________________________________________________________________________________________________
Steve Jewett -0- -0- (3) -0- -0- -0- $ 41,275
2006 -0- -0- $41,275 -0- -0- -0- -0-
2007 -0-
_____________________________________________________________________________________________________________________________
D. Bruce Horton -0- -0- (3) -0- -0- -0- $ 41,275
2006 -0- -0- $41,275 -0- -0- -0- -0-
2007 -0-
_____________________________________________________________________________________________________________________________
(1)Thomas Markham received these fess as executive compensation in
connection with his role as our Chief Geologist.
(2)Erik Essiger received this compensation for services rendered to us in
connection with business related consulting and promotional services
performed in Europe on our behalf.
(3)This amount represents the fair value of these options at the date of
grant which was estimated using the Black-Scholes option pricing model.
57
EMPLOYMENT AND CONSULTING AGREEMENTS
MARKHAM CONSULTING SERVICES AGREEMENT
On approximately August 1, 2006, we entered into a month-to-month consulting
services agreement with Thomas Markham, our Chief Geologist (the "Markham
Consulting Services Agreement"). In accordance with the verbal terms and
provisions of the Markham Consulting Services Agreement: (i) Mr. Markham shall
provide to us all necessary services and perform all duties associated with his
executive position as Chief Geologist; (ii) we shall pay to Mr. Markham a
monthly fee of $10,000; and (iii) Mr. Markham shall receive a 1.5% royalty
interest in all properties Mr. Markham introduces to us which are subsequently
acquired by us.
During fiscal year ended December 31, 2007, we paid an aggregate of $120,000 to
Mr. Markham in accordance with the monthly fee and an additional $870 in
accordance with the amounts earned under the royalty interest
During fiscal year ended December 31, 2006, we paid an aggregate of $60,000 to
Mr. Markham in accordance with the monthly fee and an additional $4,795 in
accordance with the amounts earned under the royalty interest
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
As of the date of this Annual Report, the following table sets forth certain
information with respect to the beneficial ownership of our common stock by each
stockholder known by us to be the beneficial owner of more than 5% of our common
stock and by each of our current directors and executive officers. Each person
has sole voting and investment power with respect to the shares of common stock,
except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock, except as otherwise indicated. As of the
date of this Annual Report, there are 41,976,589 shares of common stock issued
and outstanding.
AMOUNT AND NATURE OF PERCENTAGE OF BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(1) OWNERSHIP
DIRECTORS AND OFFICERS:
Marcus Johnson 3,870,650 (2) 8.83%
2020 Prospect Way
Bellingham, Washington 98229
58
D. Bruce Horton 387,500 (3) 0.88%
2443 Alder Street
Vancouver, British Columbia
Canada, V6H 4A4
Thomas Markham 1,125,000(4) 2.57%
8801 Christian Court
Plano, Texas 75025
Erik Essiger 500,000(5) 1.14%
P.O. Box 37491
Dubai
United Arab Emeriates
Steve Jewett 50,000(6) 0.11 %
1201-1633 West 8th Avenue
Vancouver, British Columbia
Canada V6J 5H7
All executive officers and directors as a group (5 5,933,150(7) 13.53%
persons)
* Less than one percent.
(1) Under Rule 13d-3, a beneficial owner of a security includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship, or otherwise has or shares: (i) voting
power, which includes the power to vote, or to direct the voting of
shares; and (ii) investment power, which includes the power to dispose
or direct the disposition of shares. Certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons
share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise
of an option) within 60 days of the date as of which the information is
provided. In computing the percentage ownership of any person, the
amount of shares outstanding is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of
these acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in this table does not necessarily
reflect the person's actual ownership or voting power with respect to
the number of shares of common stock actually outstanding as of the
date of this Annual Report. As of the date of this Annual Report, there
are 41,976,589 shares issued and outstanding. Beneficial ownership
amounts reflect the forward stock splits effective May 2006 and August
2006.
59
(2) This figure includes: (i) 3,370,650 shares of common stock; and (ii)
500,000 stock options to purchase 500,000 shares of our common stock at
an exercise price of $1.10 per share expiring on December 15, 2011.
(3) This figure includes: (i) 337,500 shares of common stock; and (ii)
50,000 stock options to purchase 50,000 shares of our common stock at
an exercise price of $1.10 per share expiring on December 15, 2011.
(4) This figure includes: (i) 625,000 shares of common stock; and (ii)
500,000 stock options to purchase 500,000 shares of our common stock at
an exercise price of $1.10 per share expiring on December 15, 2011.
(5) This figure includes: (i) 250,000 shares of common stock; and (ii)
250,000 stock options to purchase 250,000 shares of our common stock at
an exercise price of $1.10 per share expiring on December 15, 2011.
(6) This figure includes 50,000 stock options to purchase 50,000 shares of
our common stock at an exercise price of $1.10 per share expiring on
December 15, 2011.
(7) This figure includes: (i) 4,586,850 shares of common stock; and (ii)
1,350,000 stock options to purchase 1,350,000 shares of our common
stock at $1.10 per share expiring on December 15, 2011.
CHANGES IN CONTROL
We are unaware of any contract, or other arrangement or provision, the operation
of which may at a subsequent date result in a change of control of our company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Except for the transactions described below, none of our directors, officers or
principal stockholders, nor any associate or affiliate of the foregoing, have
any interest, direct or indirect, in any transaction or in any proposed
transactions, which has materially affected or will materially affect us during
fiscal year ended December 31, 2007.
EMPLOYMENT AND CONSULTING AGREEMENTS
MARKHAM CONSULTING SERVICES AGREEMENT
On approximately August 1, 2006, we entered into a month-to-month consulting
services agreement with Thomas Markham, our Chief Geologist (the "Markham
Consulting Services Agreement"). In accordance with the verbal terms and
provisions of the Markham Consulting Services Agreement: (i) Mr. Markham shall
provide to us all necessary services and perform all duties associated with his
executive position as Chief Geologist; (ii) we shall pay to Mr. Markham a
monthly fee of $10,000; and (iii) Mr. Markham shall receive a 1.5% royalty
interest in all properties Mr. Markham introduces to us which are subsequently
acquired by us.
INTERNATIONAL MARKET TREND
On approximately June 1, 2005, we entered into a month-to-month consulting
agreement with IMT (the "Consulting Agreement"), whereby IMT performs a wide
range of management, administrative, financial and business development services
for us. During fiscal year ended December 31, 2007, we incurred consulting fees
in the amount of $189,991 to IMT. In additional, IMT advanced us $6,000 during
fiscal year ended December 31, 2007. As of December 31, 2007, we owed IMT
$56,873, which is unsecured and non-interest bearing and has no definite
repayment terms. Effective March 24, 2008, we settled an aggregate of $86,873
with IMT by the issuance of 434,366 shares of our restricted common stock at
$0.20 per share.
One of our shareholders is an officer and director of IMT.
LOANS
During fiscal year ended December 31, 2007, one of our shareholder advanced to
us $10,000. In addition, as at December 31, 2007 $71,250 is due and owing our
President/Chef Executive Officer for expenses incurred by our President/Chief
Executive Officer on our behalf. These amounts are unsecured, non-interest
bearing and without specific repayment terms.
As at December 31, 2006, $325,000 was due and owing to a separate shareholder
for advances to us by such shareholder. During fiscal year ended December 31,
2007, this shareholder made further advances to us of $1,130,500. On
approximately April 23, 2007, we entered into the Peters Ranch Agreement,
whereby we agreed to sell the property for $65,000. The $65,000 was offset
against amounts we owed to this shareholder, as well as the assignment of the
$25,000 Rail Road Commission bond. Therefore, as a result, at December 31, 2007,
an aggregate of $1,365,500 was due and owing to the shareholder, which bears
interest at 8% per annum and has no specific repayment terms. As of December 31,
2007, total accrued interest was $66,456.
On March 24, 2008, the above advances, accrued interest and further advances
from this shareholder received in January 2008 for a total of $1,515,214 were
assigned to other parties. This amount was subsequently settled by us through
the issuance of 7,576,068 shares of our restricted common stock at $0.20 per
share. See "Item 5. Market for Common Equity and Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities - Recent Sales of
Unregistered Securities."
60
ITEM 13. EXHIBITS
The following exhibits are filed as part of this Annual Report.
EXHIBIT NO. DOCUMENT
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Chapman Oil and Gas Lease (2)
4.2 Hurley Oil and Gas Lease (2)
4.3 Lease Assignment between Geneva Energy Corp.
And Morgan Energy Corp. dated December 17,
2004 (2)
4.4 Fletcher Lewis Letter (3)
4.5 Fletcher Lewis Consent dated December 31,
2004 (3)
4.6 American News Publishing Letter dated
January 13, 2006 (3)
10.1 Asset Purchase Agreement between Morgan
Creek Energy Corp. and Geneva Energy Corp.
Dated December 15, 2004 (1)
10.1 Charter of Audit Committee (1)
14 Code of Business Conduct (1)
16 Letter of Dale Matheson Carr-Hilton LaBonte LLP
Chartered Accountants (4)
31.1 Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act.
31.2 Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act.
32.1 Certification of Chief Executive Officer and
Chief Financial Officer Under Section 1350
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act.
61
(1) Incorporated by reference from Form SB-2 filed with the Commission on April
11, 2005.
(2) Incorporated by reference from Form SB-2/A filed with the Commission on June
14, 2005.
(3) Incorporated by reference from Form SB-2/A filed with the Commission on
January 13, 2006.
(4) Incorporated by reference from Form Current Report on 8-K filed with the
Commission on August 3, 2008.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
During fiscal year ended December 31, 2007, we incurred approximately $42,142 in
fees to our principal independent accountants ($33,142 to Dale Matheson
Carr-Hilton Labonte LLP and $9,000 to De Joya Griffth) for professional services
rendered in connection with the audit of our financial statements for fiscal
year ended December 31, 2007 and for the review of our financial statements for
the quarters ended March 31, 2007, June 30, 2007 and September 30, 2007.
During fiscal year ended December 31, 2006, we incurred approximately $48,400 in
fees to our principal independent accountant for professional services rendered
in connection with the audit of our financial statements for fiscal year ended
December 31, 2006 and for the review of our financial statements for the
quarters ended March 31, 2006, June 30, 2006 and September 30, 2006.
During fiscal year ended December 31, 2007, we did not incur any other fees for
professional services rendered by our principal independent accountant for all
other non-audit services which may include, but is not limited to, tax-related
services, actuarial services or valuation services.
62
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MORGAN CREEK ENERGY CORP.
Dated: April 9, 2008 By: /s/ MARCUS M. JOHNSON
_______________________________
Marcus Johnson, President/Chief
Executive Officer
Dated: April 9, 2008 By: /s/ D. BRUCE HORTON
________________________________
D. Bruce Horton, Treasurer/Chief
Financial Officer
63