U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 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 number 0-25455
MORGAN CREEK ENERGY CORP.
_________________________________________________________________
(Exact name of small business issuer as specified in its charter)
NEVADA 201777817
_______________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
10120 S. Eastern Avenue
Suite 200
Henderson, Nevada 89052
________________________________________
(Address of Principal Executive Offices)
(702) 566-1307
___________________________
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
________________
(Title of class)
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.001
______________________________
(Title of class)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of issuer's knowledge, in definitive proxy of
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]
Applicable Only to issuers Involved in Bankruptcy Proceedings
During the Preceding Five Years.
N/A
Indicate by check mark 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 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes [ ] No [ ]
Applicable Only to Corporate Registrants
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of May 4, 2007
Common Stock, $.001 par value 29,814,905
Transitional Small Business Disclosure Format (Check one:)
Yes [ ] No [X]
2
INDEX PAGE
PART I. FINANCIAL INFORMATION 4
ITEM 1. INTERIM FINANCIAL INFORMATION 4
BALANCE SHEETS 6
STATEMENTS OF OPERATIONS 7
STATEMENTS OF CASH FLOWS 8
NOTES TO FINANCIAL STATEMENTS 9
ITEM 2. MANAGEMENT'S DUSCISSION AND ANALYSIS FO FINANCIAL
CONDITION OR PLAN OF OPERATION 16
ITEM 3. CONTROLS AND PROCEDURES 20
PART II.OTHER INFORMATION 21
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
3
PART I
ITEM 1. FINANCIAL STATEMENTS
MORGAN CREEK ENERGY CORP.
FINANCIAL STATEMENTS
MARCH 31, 2007
(Unaudited)
4
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
BALANCE SHEETS
STATEMENTS OF OPERATIONS
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
5
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
BALANCE SHEETS
March 31, December 31,
2007 2006
__________________________________________________________________________________________________________________
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 5,778 $ 5,824
Prepaid 13,755 13,755
__________________________________________________________________________________________________________________
19,543 19,579
NON CURRENT ASSET
Restricted cash (Note 7) 25,000 -
__________________________________________________________________________________________________________________
OIL AND GAS PROPERTIES, unproven (Note 3) 375,860 310,070
__________________________________________________________________________________________________________________
$ 420,393 $ 329,649
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 65,250 $ 119,735
Due to related parties (Note 6) 686,386 353,493
__________________________________________________________________________________________________________________
751,636 473,228
__________________________________________________________________________________________________________________
GOING CONCERN (Note 1)
STOCKHOLDERS' EQUITY(DEFICIT) (Note 4)
Common stock, 100,000,000 shares authorized with $0.001 par value
Issued and outstanding
29,814,905 common shares (December 31, 2006 - 29,814,905) 29,815 29,815
Additional paid-in-capital 3,972,363 3,972,363
Deficit accumulated during exploration stage (4,333,421) (4,145,757)
__________________________________________________________________________________________________________________
(331,243) (143,579)
__________________________________________________________________________________________________________________
$ 420,393 $ 329,649
==================================================================================================================
The accompanying notes are an integral part of these financial statements.
6
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
(UNAUDITED)
October 19, 2004
Three months ended Three months ended (inception) to
March 31, 2007 March 31, 2006 March 31, 2007
__________________________________________________________________________________________________________________
GENERAL AND ADMINISTRATIVE EXPENSES
Investor relations $ - $ 75,000 $ 152,954
Consulting fees 44,378 77,500 482,845
Management fees 61,739 15,000 373,446
Management fees - stock based compensation - - 1,527,170
Impairment of oil and gas properties
(Note 3(a ),(b),(c) and (d)) - - 1,273,410
Office and general 26,945 13,454 227,050
Professional fees 54,602 11,080 296,546
__________________________________________________________________________________________________________________
NET LOSS $ (187,664) $ (192,034) $(4,333,421)
==================================================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.00) $ (0.00)
=============================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING-BASIC AND DILUTED 29,814,905 40,670,800
=============================================================================================
The accompanying notes are an integral part of these financial statements.
7
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
October 19, 2004
Three months ended Three months ended (inception) to
March 31, 2007 March 31, 2006 March 31, 2007
___________________________________________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $(187,664) $(192,034) $(4,333,421)
Adjustments to reconcile net loss to net cash
used in operating activities:
- Stock based compensation - - 1,527,170
- Impairment of oil and gas properties - - 1,273,410
- Prepaid expenses - - (13,755)
- Due from related parties - 200,000 -
- Due to related parties 32,675 (9,458) 33,886
- Accounts payable and accrued liabilities (81,767) (5,930) 65,250
___________________________________________________________________________________________________________________________
NET CASH USED IN OPERATING ACTIVITIES (236,756) (7,422) (1,447,460)
___________________________________________________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of oil and gas properties, net of recovery (65,790) - (1,299,270)
Restricted cash deposits (25,000) (25,000)
___________________________________________________________________________________________________________________________
NET CASH FLOWS USED IN INVESTING ACTIVITIES (90,790) - (1,324,270)
___________________________________________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on sale of common stock - - 2,125,008
Advances from related parties 327,500 40,000 652,500
___________________________________________________________________________________________________________________________
NET CASH PROVIDED BY FINANCING ACTIVITIES 327,500 40,000 2,777,508
___________________________________________________________________________________________________________________________
INCREASE (DECREASE) IN CASH (46) 32,578 5,778
CASH, BEGINNING OF PERIOD 5,824 7,110 -
___________________________________________________________________________________________________________________________
CASH, END OF PERIOD $ 5,778 $ 39,688 $ 5,778
===========================================================================================================================
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 (Note 3) $ - $ - $ 950,000
The accompanying notes are an integral part of these financial statements.
8
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
________________________________________________________________________________
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 2,281 gross acres and is planning to drill its first well on the
property, the Boggs 1 by the end of May 2007.
GOING CONCERN
The Company commenced operations on October 19, 2004 and has not realized any
revenues since inception. As of March 31, 2007 the Company has a total deficit
of $4,333,421 and a working capital deficiency of $707,103. 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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principals for interim
financial information and with the instructions to Form 10-QSB of Regulation
S-B. They do not include all information and footnotes required by United States
generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material changes in the
information disclosed in the notes to the financial statements for the year
ended December 31, 2006 included in the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission. The interim unaudited
financial statements should be read in conjunction with those financial
statements included in the Form 10-KSB. In the opinion of Management, all
adjustments considered necessary for a fair presentation, consisting solely of
normal recurring adjustments, have been made. Operating results for the three
months ended March 31, 2007 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2007.
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. The Company's financial statements are
presented in US dollars.
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.A.
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.
9
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
________________________________________________________________________________
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 value. If a reduction in 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.
LOSS PER COMMON SHARE
Basic earnings 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 per share reflects the potential
dilution of securities that could share in the earnings of the Company. Because
the Company does not have any potentially dilutive securities, diluted loss per
share is equal to basic loss per share.
10
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
________________________________________________________________________________
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, 2006 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.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS No.
123R), SHARE-BASED PAYMENT, which addresses the accounting for stock-based
payment transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments. In January 2005, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB)
No. 107, which provides supplemental implementation guidance for SFAS No. 123R.
SFAS No. 123R eliminates the ability to account for stock-based compensation
transactions using the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and instead
generally requires that such transactions be accounted for using a
fair-value-based method. The Company uses the Black-Scholes-Merton ("BSM")
option-pricing model to determine the fair-value of stock-based awards under
SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company has elected the
modified prospective transition method as permitted by SFAS No. 123R and
accordingly prior periods have not been restated to reflect the impact of SFAS
No. 123R. The modified prospective transition method requires that stock-based
compensation expense be recorded for all new and unvested stock options,
restricted stock, restricted stock units, and employee stock purchase plan
shares that are ultimately expected to vest as the requisite service is rendered
beginning on January 1, 2006 the first day of the Company's fiscal year 2006.
Stock-based compensation expense for awards granted prior to January 1, 2006 is
based on the grant date fair-value as determined under the pro forma provisions
of SFAS No. 123.
Prior to the adoption of SFAS No. 123R, the Company measured compensation
expense for its employee stock-based compensation plans using the intrinsic
value method prescribed by APB Opinion No. 25. The Company applied the
disclosure provisions of SFAS No. 123 as amended by SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, as if the fair-value-based
method had been applied in measuring compensation expense. Under APB Opinion No.
25, when the exercise price of the Company's employee stock options was equal to
the market price of the underlying stock on the date of the grant, no
compensation expense was recognized.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2006, the FASB issued FSP EITF 00-19-02, Accounting for Registration
Payment Arrangements ("FSP 00-19-2") which addresses accounting for registration
payment arrangements. FSP 00-19-2 specifies that the contingent obligation to
make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with FASB Statement No. 5, Accounting for
Contingencies. FSP 00-19-2 further clarifies that a financial instrument subject
to a registration payment arrangement should be accounted for in accordance with
other applicable generally accepted accounting principles without regard to the
contingent obligation to transfer consideration pursuant to the registration
payment arrangement. For registration payment arrangements and financial
instruments subject to those arrangements that were entered into prior to the
issuance of EITF 00-19-2, this guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2006 and interim periods
within those fiscal years. The Company has determined the adoption of FSP
00-19-2 will not have a significant impact upon its financial position, results
of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". This Statement permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of SFAS No. 159 on its financial position and results of operations.
11
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
________________________________________________________________________________
NOTE 3 - OIL AND GAS PROPERTIES
________________________________________________________________________________
(a) QUACHITA PROSPECT
The Company leased various properties totalling approximately 2,281 gross acres
within the Quachita Trend within the state of Texas for a three year term in
consideration for $312,963. The Company has a 100% Working Interest and a 77%
N.R.I. in the leases.
(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. Each 40
acre lease is expected to be productive after completion of the rework program
and the addition of extra equipment. Subsequent to the period on April 23, 2007
the Company reached an agreement to sell the property for $65,000.
________________________________________________________________________________
NOTE 4 - STOCKHOLDERS' EQUITY
________________________________________________________________________________
(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 2 new shares
for 1 old share basis whereby 10,167,700 common shares were issued pro-rata to
shareholders of the Company as of the record date on May 10, 2006.
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 2 new
shares for 1 old share basis whereby 20,335,400 common shares were issued
pro-rata to shareholders of the Company as of the record date on August 8, 2006.
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 1,550,000 shares of common stock at
$0.10 per share for proceeds of $155,000.
On December 15, 2004 the Company issued 1,887,500 shares of common stock at
$0.10 per share for proceeds of $188,750 and 660,200 shares of common stock at
$0.50 per share for proceeds of $330,100.
On March 9, 2005 the Company issued 70,000 shares of common stock at a price of
$0.50 per share for proceeds of $35,000.
On October 16, 2006 the Company completed a private placement consisting of
944,105 units with each unit comprised of one common share at $1.50 per share
for proceeds of $1,416,158. The units consist 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 the day which is 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 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%.
12
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
________________________________________________________________________________
NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)
________________________________________________________________________________
(c) SHARE PURCHASE WARRANTS
There were 944,105 share purchase warrants issued and outstanding as of December
31, 2006. Share purchase warrants outstanding as of March 31, 2007 are:
______________________________________________________________________
Weighted Number of Weighted average
Exercise average warrants to remaining In
price price purchase shares contractual life (in years)
______________________________________________________________________
$3.00 $3.00 944,105 1.80
______________________________________________________________________
A summary of the Company's stock purchase warrants as of March 31, 2007 and
changes during the period is presented below:
________________________________________________________________________________
Weighted average Weighted average
Number of exercise Price remaining In
Warrants per share contractual life
(in years)
________________________________________________________________________________
Outstanding at December, 2006 944,105 - -
Issued - - -
Expired - - -
Exercised - - -
BALANCE MARCH 31, 2007 944,105 $ 3.00 1.50
________________________________________________________________________________
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. On December 12, 2006 the Board of Directors of the
Company ratified and approved under the Company's existing Stock Option Plan the
issuance of 1,850,000 shares for five years at $1.10 per share.
On December 12, 2006, the Company granted 1,350,000 stock options to officers
and directors and 500,000 options to 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 $1,527,170, or $1,114,421 and $412,749
respectively, and was estimated using the Black-Scholes option pricing model
with an expected life of 3 years, a risk free interest rate of 4.49%, a dividend
yield of 0% and expected volatility of 187% and has been recorded as a stock
based compensation expense in the year.
A summary of the Company's stock options as of March 31, 2007 and changes during
the period ended is presented below: There were 1,850,000 stock options granted
in fiscal 2006.
________________________________________________________________________________
Weighted average Weighted average
Number of exercise Price remaining In
Options per share contractual life
(in years)
________________________________________________________________________________
Outstanding at December 31, 2006 1,850,000 - -
Granted - - -
Exercised - - -
OUTSTANDING AT MARCH 31, 2007 1,850,000 $1.10 4.70
________________________________________________________________________________
13
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
________________________________________________________________________________
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 period ended March 31, 2007 the Company paid IMT consulting
expenses of $30,000 (2005 - $20,000). In addition during the period IMT advanced
the Company $6,000. As of March 31, 2007 the Company owed IMT $26,164 which
amount is unsecured and non-interest bearing, and has no specific repayment
terms.
During the period ended March 31, 2007 a shareholder of the Company advanced
$321,500 to the Company. The balance owing to this shareholder as of March 31,
2007 was $646,500 and bears interest at 8% per annum and has no specific
repayment terms. As of March 31, 2007 total accrued interest was $13,722.
MANAGEMENT FEES
During the period ended March 31, 2007, the Company paid an officer and director
$30,000 for management fees (March 2006 -$15,000).
As part of their compensation agreement the Company's chief Geologist and
Operations Manager (hereafter referred to as "Executives") each receives and is
assigned at 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 period ended March 31, 2007 the Company recorded related
additional compensation to the Executives of the estimated fair value of $1,739
(March 2006 - $nil).
NOTE 7 - RESTRICTED CASH
________________________________________________________________________________
Restricted cash consists of amounts restricted for more than 12 months and
accordingly is included in non-current assets. Restricted cash consists of a
$25,000 operating bond for the Company held by the Railroad Commission of Texas.
NOTE 8 - INCOME TAXES
________________________________________________________________________________
The Company has adopted the FASB No. 109 for reporting purposes. As of December
31, 2006, the Company had net operating loss carry forwards of approximately
$2,618,600 that may be available to reduce future years' taxable income through
2026. 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.
The Company reviews its valuation allowance requirements on an annual basis
based on projected future operations. When circumstances change and this causes
a change in management's judgment about the recoverability of future tax assets,
the impact of the change on the valuation allowance is generally reflected in
current income.
A reconciliation of income tax computed at the federal and state statutory tax
rates and the Company's effective tax rate is as follows:
Year ended Year ended
December 31, 2006 December 31, 2005
________________________________________________________________________________
Federal income tax provision
at statutory rate 35.0% 35.0%
States income tax provision
at statutory rates, net of
federal income tax effect 3.0% 7.0%
________________________________________________________________________________
Total income tax provision 38.0% 42.0%
________________________________________________________________________________
14
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
________________________________________________________________________________
NOTE 8 - INCOME TAXES (CONTINUED)
________________________________________________________________________________
The actual income tax provisions differ from the expected amounts calculated by
applying the combined federal and state corporate income tax rates to the
Company's loss before income taxes. The components of these differences are as
follows:
2006 2005
_________________________________________________________________________________
Loss before income taxes $ (3,918,002) $ (204,026)
Corporate tax rate 38.00% 42.00%
_________________________________________________________________________________
Expected tax expense (recovery) (1,488,841) (85,690)
Decrease resulting from:
Non-deductible stock option expenses 580,325 -
Valuation allowance 908,516 85,690
_________________________________________________________________________________
Future income tax provision (recovery) $ - $ -
=================================================================================
The Company's deferred tax asset is as follows:
2006 2005
_________________________________________________________________________________
Long-term deferred tax asset
Net operating loss carry forwards $ 995,063 $ 95,657
Valuation allowance (995,063) (95,657)
_________________________________________________________________________________
$ - $ -
=================================================================================
As the criteria for recognizing future income tax assets have not been met due
to the uncertainty of realization, a valuation allowance of 100% has been
recorded for the current and prior year.
15
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-QSB 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
GENERAL
Morgan Creek Energy Corp. is a corporation organized under the laws of the State
of Nevada. 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". We are engaged
in the business of exploration of oil and gas bearing properties in the United
States. Our shares are also traded on the Frankfurt Stock Exchange in Germany
under the symbol "M6C".
Please note that throughout this Quarterly Report, and unless otherwise noted,
the words "we," "our," "us," the "Company," or "Morgan Creek," refers to Morgan
Creek Energy Corp.
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 ("Quachita Prospect"). To date, we have acquired approximately
2,281 gross acres. 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 $312,963.
OIL AND GAS PROPERTIES
QUACHITA PROSPECT
As of March 31, 2007, we leased approximately 2,281 acres within the Ouachita
Trend in the State of Texas for a three-year term in consideration of $312,963,
which was paid during 2006 (the "Ouachita Lease"). We had previously identified
seven separate potential areas of exploration interest and have carried out wide
scale leasing on the first of these targets. As of the date of this Quarterly
review
16
Report, 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.
As of the date of this Quarterly Report, we have received a permit for drilling
of the twin well on the Quachita Prospect. The site has been cleared and the
rathhole has been drilled. We anticipate further drilling will resume by June
2007.
SOUTH TEXAS PROSPECT
On approximately January 30, 2007, we acquired a 100% working 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 "South Texas
Lease"). As of the date of this Quarterly Report, we anticipate that the South
Texas Leases will be productive after completion of the rework program and the
addition of extra equipment. On April 23, 2007, we reached an agreement to sell
our working interest in the South Texas Lease for $65,000.
RESULTS OF OPERATION
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.
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.
THREE MONTH PERIOD ENDED MARCH 31, 2007 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 2006
Our net loss for the three-month period ended March 31, 2007 was approximately
($187,664) compared to a net loss of $192,034 during the three-month period
ended March 31, 2006 (a decrease of $4,370). During the three-month periods
ended March 31, 2007 and March 31, 2006, we did not generate any revenue.
During the three-month period ended March 31, 2007, we incurred general and
administrative expenses of approximately $187,664 compared to $192,034 incurred
during the three-month period ended March 31, 2006 (a decrease of $4,370). These
general and administrative expenses incurred during the three-month period ended
March 31, 2007 consisted of: (i) consulting fees of $44,378 (2006: $77,500);
(ii) management fees of $61,739 (2006: $15,000); (iii) office and general of
$26,945 (2006: $13,454); and (iv) professional fees of $54,602 (2006: $11,080).
During the three-month period ended March 31, 2007, we did not incur any
expenses associated with investor relations as compared to $75,000 incurred
during the three-month period ended March 31, 2006.
General and administrative expenses incurred during the three-month period ended
March 31, 2007 compared to the three-month period ended March 31, 2006 decreased
primarily due to the decrease in expenses associated with investor relations and
consulting fee. During 2006, investor relation expenses were incurred relating
to corporate marketing and pertaining to investor awareness. Consulting fees
17
decreased during the three-month period ended March 31, 2007 due to decrease in
use of contract services. However, management fees increased during the
three-month period ended March 31, 2007 compared to three-month period ended
March 31, 2006 primarily due to emphasis on reliance of managerial services
provided by our officers. General and administrative expenses generally include
corporate overhead, financial and administrative contracted services, marketing,
and consulting costs.
Of the $187,664 incurred as general and administrative expenses during the
three-month period ended March 31, 2007, we incurred consulting expenses of
$30,000 payable to International Market Trend, Inc. ("IMT"). In addition, IMT
advanced us $6,000 during the three-month period ended March 31, 2007. As of
March 31, 2007, we owed IMT $26,164, which is unsecured and non-interest bearing
and has no definite repayment terms. An officer and director of IMT is also one
of our shareholders.
Of the $187,664 incurred as general and administrative expenses during the
three-month period ended March 31, 2007, an aggregate of $30,000 was incurred
payable to a certain officer and director in management and consulting 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 the three-month period ended
March 31, 2007, we recorded additional compensation of $1,739.
Our net loss during the three-month period ended March 31, 2007 was ($187,664)
or ($0.00) per share compared to a net loss of ($192,034) or ($0.00) per share
during the three-month period ended March 31, 2006. The weighted average number
of shares outstanding was 29,814,905 for the three-month period ended March 31,
2007 compared to 40,670,800 for the three-month period ended March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
THREE-MONTH PERIOD ENDED MARCH 31, 2007
As at the three-month period ended March 31, 2007, our current assets were
$19,533 and our current liabilities were $751,636, which resulted in a working
capital deficiency of ($732,103). As at the three-month period ended March 31,
2007, current assets were comprised of: (i) $5,778 in cash; (ii) $13,755 in
prepaid. As at the three-month period ended March 31, 2007, current liabilities
were comprised of: (i) $65,250 in accounts payable and accrued liabilities; and
(ii) $686,386 due to related parties.
As at the three-month period ended March 31, 2007, our total assets were
$420,393 comprised of: (i) $44,533 in current assets; and (ii) $375,860 in
unproven oil and gas properties. The increase in total assets during the
three-month period ended March 31, 2007 from fiscal year ended December 31, 2006
was primarily due to the increase in valuation of the recently acquired unproven
oil and gas properties and the increase in restricted cash consisting of a
$25,000 operating bond held by the Railroad Commission of Texas.
As at the three-month period ended March 31, 2007, our total liabilities were
$751,636 comprised entirely of current liabilities. The increase in liabilities
during the three-month period ended March 31, 2007 from fiscal year ended
18
December 31, 2006 was primarily due to the increase in amounts due to related
parties. See " - Material Commitments."
Stockholders' equity decreased from $143,579 for fiscal year ended December 31,
2006 to ($331,243) for the three-month period ended March 31, 2007.
CASH FLOWS FROM OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. For the
three-month period ended March 31, 2007, net cash flows used in operating
activities was ($236,756), consisting primarily of a net loss of ($187,664). Net
cash flows used in operating activities was adjusted by $32,675 to reconcile
costs due to related parties and by ($81,767) to reconcile accounts payable and
accrued liabilities.
For the three-month period ended March 31, 2006, net cash flow used in operating
activities was $(7,422), consisting primarily of a net loss of $(192,034). The
change in net cash flows used in operating activities during the three-month
period ended March 31, 2007 from the three-month period ended March 31, 2006
related primarily to the adjustment by $200,000 to reconcile amounts due from
related parties.
CASH FLOWS FROM INVESTING ACTIVITIES
For the three-month period ended March 31, 2007, net cash flows used in
investing activities was ($90,790) consisting of $65,790 for acquisition of the
oil and gas properties and $25,000 for the restricted cash deposit relating to
the bond held by the Railroad Commission of Texas. There were no cash flows from
investing activities in the three-month period ended March 31, 2006.
CASH FLOWS FROM FINANCING ACTIVITIES
We have financed our operations primarily from either advancements or the
issuance of equity and debt instruments. For the three-month period ended March
31, 2007, net cash flows from financing activities was $327,500 compared to
$40,000 for the three-month period ended March 31, 2006 pertaining primarily to
proceeds received from advances from related parties.
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
19
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, 2006, we engaged in private placement
offerings under Regulation D and Regulation S of the Securities Act pursuant to
which we received gross proceeds of $1,416,157, of which $845,000 consisted of
settlement of debt relating to amounts previously advanced to us by one of our
shareholders.
MATERIAL COMMITMENTS
During the three-month period ended March 31, 2007, one of our shareholders
advanced an aggregate of $321,500 to us. As of March 31, 2007, we owe this
shareholder an aggregate of $646,500, which is subject to interest at the rate
of 8% per annum and has no definite repayment terms. As of March 31, 2007, total
accrued interest was $13,722.
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, 2006 and December
31, 2005 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.
ITEM III. CONTROLS AND PROCEDURES
Our management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) that is designed to ensure that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported, within the time periods
specified in the Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
20
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
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
March 31, 2007. Based on that evaluation, Messrs. Johnson and Horton concluded
that our disclosure controls and procedures were 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 three-month period ended March 31, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
AUDIT COMMITTEE REPORT
The Board of Directors has established an audit committee. The members of the
audit committee are Mr. Marcus Johnson, Mr. Steven Jewett and Mr. D. Bruce
Horton. 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 financial
statements as of and for the three-month period ended March 31, 2007. The audit
committee has also discussed with Dale Matheson Carr-Hilton LaBonte LLP 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 Dale
Matheson Carr-Hilton LaBonte LLP required by Independence Standards Board
Standard No. 1, Independence Discussions with Audit Committees, as amended, and
has discussed with Dale Matheson Carr-Hilton LaBonte LLP their independence.
Based on the reviews and discussions referred to above, the audit committee has
recommended to the Board of Directors that the financial statements referred to
above be included in our Quarterly Report on Form 10-QSB for the three-month
period ended March 31, 2007 filed with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Management is not aware of any legal proceedings contemplated by any
governmental authority or any other party involving us or our properties. As of
the date of this Quarterly 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No report required.
21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No report required.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No report required.
ITEM 5. OTHER INFORMATION
No report required.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Securities
Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).
31.2 Certification of Chief Financial Officer pursuant to Securities
Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).
32.1 Certification of Chief Executive Officer pursuant to Securities
Exchange Act of 1934 Rule 13a- 14(b) or 15d-14(b) and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Financial Officer pursuant to Securities
Exchange Act of 1934 Rule 13a- 14(b) or 15d-14(b) and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
22
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: May 7, 2007 By: /s/ MARCUS M. JOHNSON
________________________________
Marcus M Johnson, President and
Chief Executive Officer
Dated: May 7, 2007 By: /s/ D. BRUCE HORTON
________________________________
D. Bruce Horton, Chief Financial
Officer
23