U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 2008
[ ] 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. 000-52139
MORGAN CREEK ENERGY CORP.
_________________________
(Name of small business issuer in its charter)
NEVADA 201777817
______ _________
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5050 QUORUM DRIVE, SUITE 700, DALLAS, TEXAS 75254
_________________________________________________
(Address of principal executive offices)
(214) 722-6490
______________
(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)
Indicate by checkmark whether the issuer: (1) has 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 (2) has been subject to such filing requirements for the past 90
days.
Yes [X ] No[ ]
Indicate by check mark whether the registrant is a large accelerated filed, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [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 Issuer Involved in Bankruptcy Proceedings During the
Preceding Five Years.
N/A
Indicate by checkmark 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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the most practicable date:
Class Outstanding as of November 11, 2008
Common Stock, $0.001 14,389,197
MORGAN CREEK ENERGY CORP.
Form 10-Q
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Operations 3
Statements of Cash Flows 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 20
Item 4. Controls and Procedures 20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 26
PART I
ITEM 1. FINANCIAL STATEMENTS
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
1
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
BALANCE SHEETS
September 30, December 31,
2008 2007
_________________________________________________________________________________________________________________________________
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash $ 54,294 $ 16,098
Other current assets 23,304 17,891
_________________________________________________________________________________________________________________________________
TOTAL CURRENT ASSETS 77,598 33,989
OIL AND GAS PROPERTIES, unproven (Note 3) 1,806,330 1,724,102
_________________________________________________________________________________________________________________________________
TOTAL ASSETS $ 1,883,928 $ 1,758,091
=================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 146,538 $ 389,612
Due to related parties (Note 6) 255,073 1,570,079
Drilling advances payable - 759,000
_________________________________________________________________________________________________________________________________
TOTAL CURRENT LIABILITIES 401,611 2,718,691
_________________________________________________________________________________________________________________________________
GOING CONCERN (Note 1)
STOCKHOLDERS' EQUITY(DEFICIT) (Note 4)
Common stock, 33,333,333 shares authorized with $0.001 par value
Issued and outstanding
14,389,196 common shares (December 31, 2007 - 9,938,302) 14,389 9,938
Additional paid-in-capital 7,569,074 3,992,240
Private placement subscriptions 609,755 -
Deficit accumulated during exploration stage (6,710,901) (4,962,778)
_________________________________________________________________________________________________________________________________
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 1,482,317 (960,600)
_________________________________________________________________________________________________________________________________
TOTAL LIABILITIES & STOCK HOLDERS' EQUITY (DEFICIT) $ 1,883,928 $ 1,758,091
=================================================================================================================================
The accompanying notes are an integral part of these financial statements.
2
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
(UNAUDITED)
October 19,
2004
Three Months Ended Nine Months Ended (inception) to
September 30 September 30 September 30,
2008 2007 2008 2007 2008
_________________________________________________________________________________________________________________________________
GENERAL AND ADMINISTRATIVE EXPENSES
Investor relations $ - $ - $ 33,644 $ - $ 195,718
Consulting fees 35,219 37,075 213,001 111,823 841,459
Management fees - related party 70,500 106,250 222,000 227,989 846,697
Management fees - stock based compensation - - 436,955 - 1,964,125
Impairment of oil and gas properties - - - - 1,273,410
Office and general 80,428 41,478 230,385 127,277 587,129
Professional fees 67,229 31,174 187,478 120,236 577,703
_________________________________________________________________________________________________________________________________
NET LOSS BEFORE THE FOLLOWING: (253,376) (215,977) (1,323,463) (587,325) (6,286,241)
_________________________________________________________________________________________________________________________________
OTHER (EXPENSE)
Financing Costs - - (424,660) - (424,660)
_________________________________________________________________________________________________________________________________
TOTAL OTHER (EXPENSE) - - (424,660) - (424,660)
_________________________________________________________________________________________________________________________________
NET LOSS FOR THE PERIOD $ (253,376) $ (215,977) $(1,748,123) $ (587,325) $ (6,710,901)
=================================================================================================================================
BASIC AND DILUTED
LOSS PER COMMON SHARE $ (0.02) $ (0.03) $ (0.13) $ (0.06)
==============================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
-BASIC AND DILUTED 14,376,250 9,938,302 13,400,059 9,938,302
==============================================================================================================
The accompanying notes are an integral part of these financial statements.
3
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
October 19,
2004
Nine Months Ended (inception) to
September 30 September 30,
2008 2007 2008
_________________________________________________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (1,748,123) $ (587,325) $ (6,710,901)
Adjustments to reconcile net loss to net cash used in operating activities:
- Stock based compensation 436,955 - 1,964,125
- Impairment of oil and gas properties - - 1,273,410
- Financing costs 424,660 - 424,660
- Interest expense related to due to related party 52,359 - 52,359
CHANGES IN OPERATING ASSETS AND LIABILITIES
- Prepaid expenses and other (5,413) - (48,304)
- Due to related parties accrued 10,972 111,990 240,141
- Accounts payable and accrued liabilities (243,074) 283,395 106,861
_________________________________________________________________________________________________________________________________
NET CASH USED IN OPERATING ACTIVITIES (1,071,664) (191,940) (2,697,649)
_________________________________________________________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas property expenditures (82,228) (1,315,645) (2,764,653)
Restricted cash deposits - (25,000) -
_________________________________________________________________________________________________________________________________
NET CASH FLOWS USED IN INVESTING ACTIVITIES (82,228) (1,340,645) (2,764,653)
_________________________________________________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on sale and subscriptions of common stock 897,088 - 3,022,096
Drilling Advances - 759,000 759,000
Advances from related parties-net 295,000 798,500 1,735,500
_________________________________________________________________________________________________________________________________
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,192,088 1,557,500 5,516,596
_________________________________________________________________________________________________________________________________
INCREASE (DECREASE) IN CASH 38,196 24,915 54,294
CASH, BEGINNING OF PERIOD 16,098 5,824 -
_________________________________________________________________________________________________________________________________
CASH, END OF PERIOD $ 54,294 $ 30,739 $ 54,294
=================================================================================================================================
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 $ - $ - $ 950,000
Transfer of bond against settlement of debt $ - $ - $ 25,000
Non-cash sale of oil and gas property $ - $ - $ 65,000
Common stock issued for settlement of debts (Note 4) $ 2,856,997 $ - $ 2,856,997
The accompanying notes are an integral part of these financial statements.
4
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(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 1,971 net 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 indicates
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 7,576 net acres. Subsequent to the period
ending September 30, 2008, the Company has an option to acquire approximately an
additional 7,763 net acres in New Mexico.
GOING CONCERN
The Company commenced operations on October 19, 2004 and has not realized any
revenues since inception. As of September 30, 2008, the Company has an
accumulated deficit of $6,710,901 and a working capital deficit of $324,013. 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 financial statements have been prepared in accordance
with generally accepted accounting principles for financial information and with
the instructions to Form 10-Q 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, 2007 included in the Company's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission. The 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 nine months ended September 30, 2008 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008.
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.
5
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
________________________________________________________________________________
OIL AND GAS PROPERTIES (CONTINUED)
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.
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.
6
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(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 September 30, 2008 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 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 were not restated.
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 May 2008, the FASB issued SFAS No. 163, ACCOUNTING FOR FINANCIAL GUARANTEE
INSURANCE CONTRACTS ("SFAS 163"). SFAS 163 clarifies how SFAS 60, ACCOUNTING AND
REPORTING BY INSURANCE ENTERPRISES applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts. SFAS 163 is effective
for the Company's interim period commencing January 1, 2009, except for
disclosures about an insurance enterprise's risk-management activities, which
are effective for the Company's interim period commencing July 1, 2008.
Management does not expect the adoption of SFAS 163 to have a material impact on
the Company's financial position, cash flows and results of operations.
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.
7
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
________________________________________________________________________________
RECENT ACCOUNTING PRONOUNCEMENT (CONTINUED)
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. Effective January 1,
2008, the Company adopted this statement. To date, the Company has not applied
this standard to the measurement of any reported amounts. Accordingly, the
adoption of this standard did not have any impact on the Company's results of
operations or financial position.
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.
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 adoption of this standard did not have any 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 7,576 net acres
within the Quachita Trend within the state of Texas for a three year term in
consideration for $338,343. 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 2007 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. To date,
$1,357,208 has been incurred on drilling and completion expenditures on the
Boggs #1. The Boggs #1 was initially 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. To December 31, 2007, the
Company had incurred $1,335,781 of costs on Boggs #1 and
8
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
________________________________________________________________________________
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
________________________________________________________________________________
BOGGS #1 (CONTINUED)
had received $759,000 in funding from the private investors. On March 24, 2008,
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 $759,000 and forgiveness of any additional amounts owing. Effective March
24, 2008, the Company completed this acquisition and settlement through the
issuance of 1,265,000 shares of common stock at $0.63 per share (refer to Note
4).
(B) NEW MEXICO PROSPECT
The Company to date has leased various properties totalling approximately 7,576
net acres within the state of New Mexico for a five year term in consideration
for $112,883. The Company has a 100% Working Interest and an 87.5% N.R.I. in the
leases.
Subsequent to the period on October 31, 2008, the Company entered into an
agreement to acquire from Westrock Land Corp. approximately 7,763 net acres of
property within the State of New Mexico for a five year term in consideration
for $388,150. The Company optioned to acquire a 100% working interest in
approximately 7,763 net acres; consisting of a 78.5% N.R.I. in the leases in
approximately 2,017 net acres and a 81.5% N.R.I. in the leases in approximately
5,745 net acres. Under the terms of the agreement the Company has until November
21, 2008 to complete the transactions.
NOTE 4 - STOCKHOLDERS' EQUITY (DEFICIT)
________________________________________________________________________________
(A) SHARE CAPITAL
The Company's capitalization is 33,333,333 common shares with a par value of
$0.001 per share.
On April 22, 2008, the directors of the Company approved a special resolution to
undertake a reverse split of the common stock of the Company on a basis of 1 new
share for 3 old shares. 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. 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.
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, the 2:1 forward split on August 8, 2006
and the 3:1 reverse stock split on April 22, 2008 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 4,000,000
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 2,066,666 shares of common stock at
$0.075 per share for proceeds of $155,000.
On December 15, 2004, the Company issued 2,516,667 shares of common stock at
$0.075 per share for proceeds of $188,750 and 880,267 shares of common stock at
$0.375 per share for proceeds of $330,100.
On March 9, 2005, the Company issued 93,333 shares of common stock at a price of
$0.375 per share for proceeds of $35,000.
On October 16, 2006, the Company completed a private placement consisting of
314,702 units at $4.50 per unit for proceeds of $1,416,158. Each unit consists
of one common share and one non-transferable share purchase warrant exercisable
at $9.00 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, 187,778 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
9
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
________________________________________________________________________________
NOTE 4 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
________________________________________________________________________________
(B) PRIVATE PLACEMENTS (CONTINUED)
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%.
During the period ending September 30, 2008, the Company received subscriptions
towards a private placement consisting of 1,224,000 units at $0.75 per unit for
total proceeds of $918,000. Each unit consists of one common share and one
non-transferable share purchase warrant exercisable at $1.50 per share for a
period of 12 months from the date of share issuance. As of September 30, 2008,
397,000 of the units had been issued for total proceeds of $297,750 and $620,250
was recorded as subscriptions received. A finders fee of 3.5% ($20,912) was paid
on $597,500 of the private placement proceeds received.
(C) OTHER ISSUANCES
On February 13, 2008, the Company issued 2,525,356 shares of common stock at a
price of $0.75 per share on settlement of related party advance and accrued
interest totaling $1,515,214. The difference between the estimated fair value of
the common shares issued at issuance and the amount of debt settled totaling
$378,803 was recorded as a finance cost during the period (refer to Note 6).
On March 24, 2008, the Company issued 1,528,538 shares of common stock at a
price of $0.63 per share on settlement of related party advances and the
acquisition of the interest in the Boggs well totalling $917,123. The difference
between the estimated fair value of the common shares at issuance and the amount
of debt settled totaling $45,857 was recorded as a finance cost during the
period (refer to Notes 3 and 6).
(D) SHARE PURCHASE WARRANTS
Details of the Company's share purchase warrants issued and outstanding as of
September 30, 2008 are as follows:
Exercise price Weighted average price Number of warrants to purchase shares Expiry Date
_______________________________________________________________________________________________________________________________
$9.00 $9.00 314,702 October 16, 2008
1.50 1.50 397,000 June 27, 2009
The Company's share purchase warrants activity for the period ended September
30, 2008 is summarized as follows:
Weighted average exercise Weighted average remaining
Number of Warrants Price per share In contractual life (in years)
_______________________________________________________________________________________________________________________________
Balance, December 31, 2007 314,702 $ 9.00 0.80
Issued 397,000 1.50 -
Expired - - -
Exercised - - -
_______________________________________________________________________________________________________________________________
Balance, September 30, 2008 711,702 $ 4.82 0.43
===============================================================================================================================
All warrants are exercisable as at September 30, 2008.
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 1,666,667 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 may be 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
10
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
________________________________________________________________________________
NOTE 5 - STOCK OPTION PLAN (CONTINUED)
________________________________________________________________________________
within one year of his death or such longer period as the Board of Directors may
determine. On April 28, 2008, the Board of Directors deemed it necessary to
approve an amendment to the Stock Option Plan to an aggregate of 5,000,000.
As approved by the Board of directors, on December 12, 2006, the Company granted
616,667 stock options to certain officers, directors and management of the
Company at $3.30 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%.
As approved by the Board of Directors on April 30, 2008, the Company granted
1,250,000 stock options to certain officers, directors and management of the
Company at $1.00 per share. The term of these options are ten years. The total
fair value of these options at the date of grant was estimated to be $436,955
and was recorded as a stock based compensation expense during the period. The
fair value of these options was estimated using the Black-Scholes option pricing
model with the following assumptions: expected life of 10 years; risk free
interest rate of 3.77%; dividend yield of 0% and expected volatility of 210%.
The Company's stock option warrants activity for the period ended September 30,
2008 is summarized as follows:
Weighted average exercise Weighted average remaining
Number of Options Price per share In contractual life (in years)
________________________________________________________________________________________________________________________________
Balance, December 31, 2007 616,667 $ 3.30 3.95
Granted 1,250,000 1.00
Expired - - -
Exercised - - -
________________________________________________________________________________________________________________________________
Balance, September 30, 2008 1,866,667 $ 1.76 7.47
================================================================================================================================
All options are exercisable as at September 30, 2008.
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 September 30, 2008, the Company incurred
consulting fees of $30,000 to IMT (September 30, 2007 - $90,000). On March 24,
2008, the Company converted $86,873 in consulting fees and advances through the
issuance of 144,788 commons shares of the Company at $0.63 per share. (Refer
Note 4).
On June 13, 2008, the Company repaid a shareholder of the Company that had
advanced $10,000 to the Company. The amount was unsecured, non-interest bearing
and without specific repayment terms.
As of December 31, 2007, $1,365,500 was owed to a separate shareholder for
advances made to the Company. During the period, this shareholder made further
advances to the Company of $805,000. On February 13, 2008, the Company issued
2,525,356 shares of common stock at a price of $0.75 per share on settlement of
related party advance and related accrued interest totaling $1,894,017 (refer to
Note 4). During the period ended September 30, 2008, $500,000 was repaid to the
shareholder. As a result, as of September 30, 2008, $230,000 was owed which
bears interest at 8% per annum and has no specific repayment terms. As of
September 30, 2008, total accrued interest was $14,102 (December 31, 2007 -
$66,456).
11
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
________________________________________________________________________________
NOTE 6 - RELATED PARTY TRANSACTIONS (CONTINUED)
________________________________________________________________________________
MANAGEMENT FEES
During the period ended September 30, 2008, the Company paid officers and
directors $222,000 for management fees (September 30, 2007 -$227,989). As of
September 30, 2008 total amount owing in management fees was $10,971.
During the period the Company converted $71,250 of management fees owing to the
President of the Company through the issuance of 118,750 common shares of the
Company at $0.63 per share (Refer to Note 4 ).
NOTE 7 - INCOME TAXES
________________________________________________________________________________
The Company has adopted the FASB No. 109 for reporting purposes. As of September
30, 2008, the Company had net operating loss carry forwards of approximately
$3,048,000 that may be available to reduce future years' taxable income through
2028. 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.
NOTE 8 - SUBSEQUENT EVENTS
________________________________________________________________________________
Subsequent to the period on October 23, 2008, the Company completed the issuance
of 827,000 units of the 1,224,000 original private placement subscriptions dated
September 30, 2008, were issued for total proceeds of $620,250.
Subsequent to the period on October 31, 2008, the Company entered into an
agreement to acquired from Westrock Land Corp. approximately 7,763 net acres of
property within the State of New Mexico for a five year term in consideration
for $388,150. The Company has a 100% working interest in approximately 7,763 net
acres; consisting of a 78.5% N.R.I. in the leases in approximately 2,017 net
acres and a 81.5% N.R.I. in the leases in approximately 5,746 net acres. Under
the terms of the agreement the Company has until November 21, 2008 to complete
the transactions.
12
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-Q 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 AND RESULTS
OF OPERATIONS
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" (currently under
the symbol"MCKE: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.
RECENT DEVELOPMENTS
APRIL 22, 2008 REVERSE STOCK SPLIT
On April 1, 2008, our Board of Directors pursuant to a Board of Directors
meeting authorized and approved a reverse stock split of one for three of our
total issued and outstanding shares of common stock (the "Reverse Stock Split").
The Reverse Stock Split was effectuated based on market conditions and upon a
determination by our Board of Directors that the Reverse Stock Split was in our
best interests and of the shareholders. Certain factors were discussed among the
members of the Board of Directors concerning the need for the Reverse Stock
Split, including the increased potential for financing. The intent of the
Reverse Stock Split is to increase the marketability of our common stock.
13
The Reverse Stock Split was effectuated on April 22, 2008 upon filing the
appropriate documentation with NASDAQ. The Reverse Stock Split decreased our
total issued and outstanding shares of common stock from 41,976,591 to
approximately 13,992,197 shares of common stock. The common stock will continue
to be $0.001 par value.
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 1,971 net 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 7,576 net acres within the State of New Mexico
for a five-year term in consideration for $112,883 (the "New Mexico Prospect").
We have a 100% working interest and an 87.5% net revenue interest in the leases.
OIL AND GAS PROPERTIES
QUACHITA PROSPECT
As of the date of this Quarterly Report, we lease approximately 1,971 net 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. 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.
The Boggs #1 had 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 previously retained a
25% working interest and a 23% net revenue interest in the Boggs #1 well. As of
September 30, 2008 and December 31, 2007, we incurred $1,357,208 and $1,335,780
respectively, in drilling and completion costs. As of December 31, 2007 we had
received a total of $759,000 in funding from the private investors. On March 24,
2008, we negotiated with the funding investors to acquire their interest in the
Boggs #1 for $759,000 (which amount is equal to the total amount of the funding
investors' initial investment) and forgiveness of any additional amounts owing.
Effective on March 24, 2008, we completed the acquisition and settlement through
the issuance of 3,795,000 shares (Post-Reverse Stock Split) of our restricted
common stock at $0.21 per share. The difference between the estimated fair value
of the common shares at issuance and the amount of the debt settled totaling
$37,950 was recorded as a finance cost. See "Part II. Item 2.
Changes in Securities and Use of Proceeds."
14
NEW MEXICO PROSPECT
As of the date of this Quarterly Report, we have leased various properties in
the New Mexico Prospect totaling approximately 7,576 net acres within the State
of New Mexico for a five year term in consideration for $112,883. We have a 100%
working interest and a 87.5% net revenue interest in the leases comprising the
New Mexico Prospect.
WESTROCK LAND CORP. OPTION AGREEMENT
Effective on October 31, 2008, our Board of Directors authorized the execution
of an option agreement (the "Option Agreement") with Westrock Land Corp, a
private Texas corporation ("Westrock"). In accordance with the terms and
provisions of the Option Agreement: (i) Westrock owns all right, title and
interest in and to approximately 7,763 net acres with a net revenue interest of
81.5% pertaining to 5,745 of the net acres and a 78.5% net revenue interest
pertaining to 2,017 net acres (the "Leases"); (b) Westrock has an option until
June 23, 2009 to exercise a five year lease at $100 per net acres for
acquisition on the 2,017 net acres; (iii) we desire to acquire a 100% working
interest in the Leases at $50.00 per net acres for a total purchase price of
approximately $388,150; and (iv) we have until November 21, 2008 to complete our
due diligence (the "Option Period").
It is anticipated that in the event the due diligence is completed satisfactory
to us, the effective date of conveyance of the working interest in the Leases to
us will occur on approximately November 21, 2008.
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.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2007
Our net loss for the nine month period ended September 30, 2008 was ($1,748,123)
compared to a net loss of ($587,325) during the nine month period ended
September 30, 2007 (an increase of $1,160,798). During the nine month periods
ended September 30, 2008 and 2007, we did not generate any revenue.
During the nine month period ended September 30, 2008, we incurred general and
administrative expenses of approximately $1,323,463 compared to $587,325
incurred during the nine month period ended September 30, 2007 (an increase of
$736,138). These general and administrative expenses incurred during the nine
month period ended September 30, 2008 consisted of: (i) investor relations of
$33,644 (2007: $-0-); (ii) consulting fees of $213,001 (2007: $111,823); (iii)
15
office and general of $230,385 (2007: $127,277); (iv) professional fees of
$187,478 (2007: $120,236); (v) management fees - related party of $222,000
(2007: $227,989); and (vi) management fees - stock based compensation of
$436,955 (2007: $-0-).
During the nine month periods ended September 30, 2008 and 2007, we did not
record any impairment of oil and gas properties. Thus, general and
administrative expenses incurred during the nine month period ended September
30, 2008 compared to the nine month period ended September 30, 2007 increased
primarily due to the incurrence of management fees - stock based compensation
relating to the valuation of stock options granted to our officers and
directors. General and administrative expenses increased further due to the
increase in investor relations, consulting fees, office and general expenses and
professional fees relating to the increased scope of business operations.
General and administrative expenses generally include corporate overhead,
financial and administrative contracted services, marketing, and consulting
costs.
Of the $1,323,463 incurred as general and administrative expenses during the
nine month period ended September 30, 2008, we incurred consulting expenses of
$30,000 payable to International Market Trend, Inc. ("IMT"). In addition, on
March 24, 2008, we settled an aggregate amount of $86,873 in consulting fees and
advances due and owing to IMT through the issuance of 434,366 shares
(Post-Reverse Stock Split) of our restricted common stock. An officer and
director of IMT is also one of our shareholders. See "Part II. Item 2.
Changes in Securities and Use of Proceeds."
Of the $1,323,463 incurred as general and administrative expenses during the
nine month period ended September 30, 2008, we incurred management fees of
$222,000 payable to our officers and directors. In addition, during the nine
month period ended September 30, 2008, we settled an aggregate $71,250 for
management fees due and owing to our former President, Marcus Johnson, through
the issuance of 356,250 shares (Post-Reverse Stock Split) of our restricted
common stock. See Part II. Item 2. Changes in Securities and Use of Proceeds."
Financing costs incurred during the nine month period ended September 30, 2008
of $424,660 (2007: $-0-) were recorded as other expense resulting in a net loss
of ($1,748,123). Our net loss during the nine month period ended September 30,
2008 was ($1,748,123) or ($0.13) per share compared to a net loss of ($587,325)
or ($0.06) per share during the nine month period ended September 30, 2007. The
weighted average number of shares outstanding was 13,400,059 for the nine month
period ended September 30, 2008 compared to 9,938,302 for the nine month period
ended September 30, 2007.
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2008 COMPARED TO THREE MONTH PERIOD ENDED
SEPTEMBER 30, 2007
Our net loss for the three month period ended September 30, 2008 was ($253,376)
compared to a net loss of ($215,977) during the three month period ended
September 30, 2007 (an increase of $37,399). During the three month periods
ended September 30, 2008 and 2007, we did not generate any revenue.
During the three month period ended September 30, 2008, we incurred general and
administrative expenses of approximately $253,376 compared to $215,977 incurred
during the three month period ended September 30, 2007 (an increase of $37,399).
16
These general and administrative expenses incurred during the three month period
ended September 30, 2008 consisted of: (i) consulting fees of $35,219 (2007:
$37,075); (ii) office and general of $80,428 (2007: $41,478); (iii) professional
fees of $67,229 (2007: $31,174); and (iv) management fees - related party of
$70,500 (2007: $106,250).
During the three month period ended September 30, 2008 and 2007, we did not
record any impairment of oil and gas properties. Thus, general and
administrative expenses incurred during the three month period ended September
30, 2008 compared to the three month period ended September 30, 2007 increased
primarily due to the increase in office and general expenses and professional
fees relating to the increased scope of business operations.
Our net loss during the three month period ended September 30, 2008 was
($253,376) or ($0.02) per share compared to a net loss of ($215,977) or ($0.03)
per share during the three month period ended September 30, 2007. The weighted
average number of shares outstanding was 14,376,250 for the three month period
ended September 30, 2008 compared to 9,938,302 for the three month period ended
September 30, 2007.
LIQUIDITY AND CAPITAL RESOURCES
AS AT SEPTEMBER 30, 2008
As at September 30, 2008, our current assets were $77,598 and our current
liabilities were $401,611, which resulted in a working capital deficiency of
($324,013). As at September 30, 2008, current assets were comprised of: (i)
$54,294 in cash; and (ii) $23,304 in other current assets. As at September 30,
2008, current liabilities were comprised of: (i) $146,538 in accounts payable
and accrued liabilities; and (ii) $255,073 due to related parties.
As at September 30, 2008, our total assets were $1,883,928 comprised of: (i)
$77,598 in current assets; and (ii) $1,806,330 in unproven oil and gas
properties. The increase in total assets during the nine month period ended
September 30, 2008 from fiscal year ended December 31, 2007 was primarily due to
the increase in valuation of the unproved oil and gas properties.
As at September 30, 2008, our total liabilities were $401,611 comprised entirely
of current liabilities. The decrease in liabilities during the nine month period
ended September 30, 2008 from fiscal year ended December 31, 2007 was primarily
due to the settlement of an aggregate $917,123 in current indebtedness (the
"Debt Settlement") by the issuance of an aggregate 4,585,616 shares
(Post-Reverse Stock Split) of our restricted common stock at $0.21 per share
effective as of March 24, 2008. The difference between the estimated fair value
of the common shares at issuance and the amount of the debt settled totaling
$45,856 was included on the recorded finance costs. See "Part II. Item 2.
Changes in Securities and Use of Proceeds."
Stockholders' deficit increased from ($960,600) for fiscal year ended December
31, 2007 to $1,482,317 for the nine month period ended September 30, 2008.
17
CASH FLOWS FROM OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. For the
nine month period ended September 30, 2008, net cash flows used in operating
activities was ($1,071,664), consisting primarily of a net loss of ($1,748,123).
Net cash flows used in operating activities was adjusted by $436,955 in stock
based compensation and $424,660 in financing costs and $52,359 in interest
expense due to related party. Net cash flows used in operating activities was
further changed by $10,972 relating to an accrual due to related parties,
($243,074) in accounts payable and accrued liabilities, and a decrease of
($5,413) related to increase in prepaid expenses and other. For the nine month
period ended September 30, 2007, net cash flows used in operating activities was
($191,940), consisting primarily of a net loss of ($587,325), and adjusted by
$283,395 in accounts payable and accrued liabilities and $111,990 due to related
parties.
CASH FLOWS FROM INVESTING ACTIVITIES
For the nine month period ended September 30, 2008, net cash flows used in
investing activities was ($82,228) consisting of $82,228 for acquisition of oil
and gas properties. For the nine month period ended September 30, 2007, net cash
flows used in investing activities was ($1,340,645) consisting of $1,315,645 for
the acquisition of oil and gas properties and $25,000 in restricted stock
deposits.
CASH FLOWS FROM FINANCING ACTIVITIES
We have financed our operations primarily from either advancements or the
issuance of equity and debt instruments. For the nine month period ended
September 30, 2008, net cash flows provided from financing activities was
$1,192,088 compared to $1,557,500 for the nine month period ended September 30,
2007. Cash flows from financing activities for the nine month period ended
September 30, 2008 consisted of $897,088 in proceeds on sale and subscriptions
of common stock and a net total of $295,000 in advances from related parties.
Cash flows from financing activities for the nine month period ended September
30, 2007 consisted of $759,000 in drilling advances and $798,500 in 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
18
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 the period ended September 30, 2008, we completed a private placement
consisting of 1,224,000 units at the price of $0.75 per unit for total proceeds
of $918,000. During the nine month period ended September 30, 2008, we closed a
private placement offering under Regulation S of the Securities Act pursuant to
which we issued an aggregate of 7,576,068 shares (Post-Reverse Stock Split) and
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. Effective March 24, 2008, we also settled an
aggregate $917,123 in debt by the issuance of 4,585,616 shares (Post-Reverse
Stock Split) of our restricted common stock at $0.21 per share. The difference
between the estimated fair value of the common shares at issuance and the amount
of debt settled totaling $45,857 was recorded as a finance cost.
See "Part II. Item 2. Changes in Securities and Use of Proceeds."
MATERIAL COMMITMENTS
During fiscal year ended December 31, 2007, an aggregate of $1,365,500 was due
and owing to one of our shareholders relating to advances. Subsequently, during
January 2008, an additional advance was made by this same shareholder to us for
an aggregate amount of $1,515,214 due and owing. This amount was assigned by the
shareholder to various assignees and settled pursuant to the issuance of
7,576,068 shares (Post-Reverse Stock Split) of our restricted common stock at
$0.25 per share. The difference between the estimated fair value of the common
shares at issuance and the amount of debt settled totaling $378,803 was recorded
as a finance cost. During the nine month period ended September 30, 2008,
$500,000 was repaid to the shareholder. As a result, as at September 30, 2008,
an aggregate $230,000 was due and owing to this shareholder, which bears
interest at 8% per annum and has no specific repayment terms. As at September
30, 2008, total accrued interest was $14,102. See "Part II. Item 2. Changes in
Securities and Use of Proceeds."
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next twelve
months.
19
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Quarterly 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.
ITEM III. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the risk of loss that may impact our financial position,
results of operations or cash flows due to adverse change in foreign currency
and interest rates.
EXCHANGE RATE
Our reporting currency is United States Dollars ("USD"). In the event we acquire
any properties outside of the United States, the fluctuation of exchange rates
may have positive or negative impacts on our results of operations. However,
since all of our properties are currently located within the United States, any
potential revenue and expenses will be denominated in U.S. Dollar, and the net
income effect of appreciation and devaluation of the currency against the U.S.
Dollar would be limited to our costs of acquisition of property.
INTEREST RATE
Interest rates in the United States are generally controlled. Any potential
future loans will relate mainly to acquisition of properties and will be mainly
short-term. However our debt may be likely to rise in connection with expansion
and if interest rates were to rise at the same time, this could become a
significant impact on our operating and financing activities. We have not
entered into derivative contracts either to hedge existing risks of for
speculative purposes.
ITEM IV. 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
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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
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 David Urquhart as our CEO until his resignation
effective August 8, 2008, Peter Wilson, as our CEO effective as of September 29,
2008, 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 September 30, 2008. Based on that evaluation, Messrs. Wilson
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 nine month period ended September
30, 2008 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. Steve Jewett and Mr. D. Bruce
Horton. Two of the three members of the audit committee are "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 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 financial statements referred to
above be included in our Quarterly Report on Form 10-Q for the nine month period
ended September 30, 2008 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.
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ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
PRIVATE PLACEMENT OFFERINGS
SEPTEMBER 2008 PRIVATE PLACEMENT
During the nine month period ended September 30, 2008, we completed a private
placement offering (the "September 2008 Private Placement Offering"), whereby we
issued an aggregate of 1,224,000 units at $0.75 per unit for proceeds of
$918,000, of which $297,750 have been issued as of September 30, 2008. Each unit
consists of one share of our restricted common stock and one non-transferable
share purchase warrant exercisable at $1.50 per share for a period of twelve
months from the date of share issuance. The September 2008 Private Placement
Offering was completed in reliance on Regulation S of the Securities Act. Sales
were made to only non-U.S. residents. The September 2008 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 September 2008 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.
FEBRUARY 2008 PRIVATE PLACEMENT
On February 13, 2008, we closed a private placement offering (the "February 2008
Private Placement Offering"), whereby we issued an aggregate of 7,576,068 shares
(Post-Reverse Stock Split) of common stock at a deemed settlement and issuance
price of $0.25 per share in settlement of an aggregate $1,515,214 in debt due
and owing by us to certain non-U.S. residents.(The difference between the
estimated fair value of the common shares at issuance and the amount of debt
settled totaling $378,803 was recorded as a finance cost). The February 2008
Private Placement Offering was completed in reliance on Regulation S of the
Securities Act. Sales were made to only non-U.S. residents. The February 2008
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 February 2008 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 (Post-Reverse Stock Split) of our restricted common stock at
$0.21 per share effective as of March 24, 2008. (The difference between the
estimated fair value of the common shares at issuance and the amount of debt
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settled totaling $45,857 was recorded as a finance cost). 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 shares issued to the funding investors relating to the acquisition of their
interest in the Boggs#1 is included in this issuance.
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.
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.
REVERSE STOCK SPLIT
On April 1, 2008, our Board of Directors pursuant to a Board of Directors
meeting authorized and approved the Reverse Stock Split. The Reverse Stock Split
was effectuated based on market conditions and upon a determination by our Board
of Directors that the Reverse Stock Split was in our best interests and of the
shareholders. Certain factors were discussed among the members of the Board of
Directors concerning the need for the Reverse Stock Split, including the
increased potential for financing. The intent of the Reverse Stock Split is to
increase the marketability of our common stock. The Reverse Stock Split was
effectuated on April 22, 2008 upon filing the appropriate documentation with
NASDAQ. The Reverse Stock Split decreased our total issued and outstanding
shares of common stock from 41,976,589 to approximately 13,992,196 shares of
common stock. The common stock will continue to be $0.001 par value.
STOCK OPTION PLAN
On April 3, 2006, our Board of Directors and our shareholders adopted a stock
option plan (the "Stock Option Plan"). A provision in the Stock Option Plan
provides that in the event of a change in our corporate or capital structure,
the Plan Administrator shall make proportional adjustments in the maximum number
and kind of securities that may be subject to options. On April 22, 2008, we
effected the Reverse Stock Split, which decreased the number of shares issuable
under the Stock Option Plan from 5,000,000 shares to 1,666,666 shares. On April
28, 2008, our Board of Directors approved an amendment to the Stock Option Plan
to increase the number of shares issuable under the Stock Option Plan to an
aggregate of 5,000,000.
On April 30, 2008, we authorized the grant of an aggregate 1,250,000 stock
options to certain of our officers, directors and management. The options are
exercisable at $1.00 per share for a period of ten years.
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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
DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS/ELECTION OF DIRECTORS/ APPOINTMENT OF
CERTAIN OFFICERS/COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS
RESIGNATION OF DIRECTOR
Effective on July 8, 2008, our Board of Directors accepted the resignation of
Thomas Markham as a member of the Board of the Company. There were no
disagreements or disputes between us or Mr. Markham.
RESIGNATION OF CEO/APPOINTMENT OF CEO
Effective on April 30, 2008, our Board of Directors accepted the resignation of
Marcus M. Johnson as our President/Chief Executive Officer. Mr. Marcus Johnson
remains as a member of our Board of Directors. On the same date, the Board of
Directors accepted the consent of David Urquhart to act as our President/Chief
Executive Officer and as a member of the Board of Directors.
EXECUTIVE SERVICE AGREEMENT
On April 30, 2008, we entered into an executive service agreement with
Westhampton Ltd., an Alberta corporation ("Westhampton") and David Urquhart (the
"Executive Agreement"). In accordance with the terms and provisions of the
Executive Agreement, Mr. Urquhart through Westhampton provided to us such
services as required relating to his executive position as our President and
Chief Executive Officer. In accordance with the further terms and provisions of
the Executive Agreement, we shall pay Westhampton a monthly fee of $10,000 and
grant to Mr. Urquhart 500,000 stock options exercisable at $1.00 per share for a
ten year period. The Executive Agreement may be terminated by either party upon
thirty days notice.
RESIGNATION OF CEO/APPOINTMENT OF CEO
Effective on August 8, 2008, our Board of Directors accepted the resignation of
David Urquhart as the President/Chief Executive Officer and our director. We
received notice of Mr. Urquhart's resignation approximately September 19, 2008.
The resignation of Mr. Urquhart is not a result of any disagreement between us
or Mr. Urquhart pertaining to matters relating to our operations, policies or
practices. The Executive Agreement was terminated effective as of August 8,
2008.
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Effective on September 29, 2008, our Board of Directors accepted the consent of
Peter Wilson as the President/Chief Executive Officer and our director. In
accordance with a written consent of resolutions of our Board of Directors
signed by the members of the Board of Directors of the Company, Mr. Wilson was
duly appointed as our President/Chief Executive Officer and a member of our
Board of Directors.
BIOGRAPHY
PETER WILSON. During the past fifteen years, Mr. Wilson has been involved in the
senior level management of public companies. His experience spans a wide range
of project development and contract negotiations within the mining, energy and
real estate industries. Mr. Wilson has focused on the creation and
implementation of market strategies, contract negotiations and financing options
for maximum return on investments. His business experience includes diverse
international assignments in the United Kingdom, Canada, the United States,
Switzerland and Norway. Mr. Wilson has worked extensively with overseas investor
groups and within the E&P market in Louisiana and Texas.
From approximately 2007 through current date, Mr. Wilson is the President of
Hana Mining Ltd., a publicly listed exploration company seeking to develop a
copper-silver project in Botswana, Africa. During approximately 2005 to 2006,
Mr. Wilson served as the President and Chief Executive Officer of Sun Oil and
Gas Corp. During approximately 1997 to 2005, Mr. Wilson was a Director and the
Vice President of International Operations for Petroreal Oil Corp., a small oil
producer engaged in energy asset purchases aggregating more than $130,000,000.
During approximately 1993 to 1999, Mr. Wilson was the Vice President of Samoth
Equity Corporation (now Sterling Center Corp.), where he began his involvement
with capital markets and finance. Samoth Equity Corporation gained prominence
through the 1990s and grew to a $150,000,000 TSX-listed real estate merchant
banking organization involved in lending throughout the southwestern United
States and Canada.
Mr. Wilson continues to serve as an advisor to several public and private
Houston-based E&P companies, and serves as a Director of Offset Energy
Corporation operating in the GOM and Houston, Texas.
APPOINTMENT OF DIRECTOR
Effective on September 29, 2008, our Board of Directors accepted the consent of
Angelo Viard as one of our Directors. In accordance with a written consent of
resolutions of our Board of Directors signed by the members of our Board of
Directors, Mr. Viard was duly appointed as a member of our Board of Directors.
Therefore, as of the date of this Quarterly Report, our Board of Directors is
comprised of the following individuals: Marcus Johnson, D. Bruce Horton, Stephen
Jewett, Erik Essiger, Peter Wilson and Angelo Viard.
BIOGRAPHY ANGELO VIARD.
During the past ten years, Mr. Viard has been involved in providing companies
with advisory services including, but not limited to, managerial, investment
strategy, finance, information technology, compliance, accounting, business
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development, mergers and acquisitions, and capital fund raising in a wide range
of industry sectors across the United States, South America and Europe. From
approximately June 2007 through current date, Mr. Viard has been the
President/Chief Executive Officer of Viard Consulting Services. Mr. Viard's
functions include full budgeting responsibilities, management of budgets and
planning, creation of policies and administrative procedures to restructure
business processes, authoring multi-company employee manuals, design work order
tracking and billing interface systems for accounting, and updating business
plans, accounting structures and organizational changes to maximize business
growth. From approximately August 2006 through June 2007, Mr. Viard was the IT
operations manager for Bare Escentuals where he was responsible for developing,
coordinating multiple related projects in alignment with strategic and tactical
company goals, served as a primary customer advocate, planned and coordinated
long term systems strategy, and managed the day to day operations of the IT
department, including LAN/WAN architecture, telecommunications and
hardware/software support. From approximately August 2005 through August 2006,
Mr. Viard was a senior IT audit consultant for PricewaterhouseCoopers LLP where
he was responsible for determining the audit documentation, strategy and plan.
From approximately December 2004 through August 2005, Mr. Viard was the Chief
Executive Officer and founder of Technology Mondial Inc., which was a start-up
company specializing in broadband wireless technology in Costa Rica and
management and development of wireless connection planning for Latin America.
Mr. Viard was also previously employed with OpenTV Inc., where he was manager of
information system and technology, Thomas Weisel Partners LLC where he was an
information technology brokerage services manager BancBoston Robertson Stephens
& Co. where he was a senior system engineer and Environmental Chemical
Corporation where he was a technical analyst.
Mr. Viard holds a master in computer science, a BS in business management and
administration, and an A/A in computer business administration and network.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.1 Option Agreement between Morgan Creek Energy Corp. and Westrock
Land Corp. dated October 31, 2008. (1)
10.2 Executive Service Agreement dated April 30, 2008 between Morgan
Creek Energy Corp., Westhampton Ltd., and David Urquhart. (2)
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 Certifications 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.
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(1) Incorporated by reference from Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 5, 2008.
(2) Incorporated by reference from Current Report on Form 8-K filed
with the Securities and Exchange Commission on April 5, 2008.
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: November 12, 2008 By: /s/ PETER WILSON
_________________________________
Peter Wilson President and
Chief Executive Officer
Dated: November 12, 2008 By: /s/ D. BRUCE HORTON
_________________________________
D. Bruce Horton, Chief Financial
Officer
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