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 June 30, 2009
[ ] 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 (I.R.S. Employer
incorporation 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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
229.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files.
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 August 4, 2009
Common Stock, $0.001 34,032,392*
*Increased from 17,016,196 shares of common stock to 34,032,392 shares of common
stock as a result of the August 3, 2009 Forward Stock Split.
2
MORGAN CREEK ENERGY CORP.
Form 10-Q
Part 1. FINANCIAL INFORMATION 4
Item 1. FINANCIAL STATEMENTS
Balance Sheets 5
Statements of Operations 6
Statements of Cash Flows 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 27
Part II. OTHER INFORMATION 28
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 29
Item 6. Exhibits 30
3
PART I
ITEM 1. FINANCIAL STATEMENTS
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
FINANCIAL STATEMENTS
JUNE 30, 2009
(UNAUDITED)
4
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
BALANCE SHEETS
June 30, December 31,
2009 2008
_____________________________________________________________________________________________________
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash $ 20,843 $ 14,883
Prepaid expenses and other 12,049 25,804
_____________________________________________________________________________________________________
TOTAL CURRENT ASSETS 32,892 40,687
OIL AND GAS PROPERTIES, unproven (Note 3) 1,811,943 1,802,943
_____________________________________________________________________________________________________
TOTAL ASSETS $ 1,844,835 $ 1,843,630
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 351,434 $ 303,959
Due to related parties (Note 6) 485,013 331,162
_____________________________________________________________________________________________________
TOTAL CURRENT LIABILITIES 836,447 635,121
TOTAL LIABILITIES 836,447 635,121
_____________________________________________________________________________________________________
GOING CONCERN (Note 1)
STOCKHOLDERS' EQUITY (Note 4)
Common stock, 66,666,666 shares authorized with $0.001 par value
Issued and outstanding
30,432,392 common shares (December 31, 2008 - 30,432,392) 30,432 30,432
Additional paid-in-capital 8,162,785 8,162,785
Private placement subscriptions 65,000 -
Deficit accumulated during exploration stage (7,249,829) (6,984,708)
_____________________________________________________________________________________________________
TOTAL STOCKHOLDERS' EQUITY 1,008,388 1,208,509
_____________________________________________________________________________________________________
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 1,844,835 $ 1,843,630
=====================================================================================================
The accompanying notes are an integral part of these financial statements.
5
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
(UNAUDITED)
October 19,
2004
Three Months Ended Six Months Ended (inception)
June 30 June 30 to June 30,
2009 2008 2009 2008 2009
_____________________________________________________________________________________________________________________________
GENERAL AND ADMINISTRATIVE EXPENSES
Investor relations $ - $ 33,644 $ - $ 33,644 $ 322,018
Consulting fees - 64,937 15,000 177,782 871,960
Management fees - related party 65,000 91,500 110,600 151,500 998,683
Management fees - stock based compensation - 436,955 - 436,955 1,964,125
Impairment of oil and gas properties - - - - 1,273,410
Office and general 46,445 96,389 66,332 127,509 588,307
Professional fees 30,680 68,687 58,584 120,249 694,336
_____________________________________________________________________________________________________________________________
NET OPERATING LOSS: (142,125) (792,112) (250,516) (1,047,639) (6,712,839)
_____________________________________________________________________________________________________________________________
OTHER EXPENSE
Financing costs - - - (424,660) (424,660)
Interest expense (8,011) (13,105) (14,603) (22,448) (112,330)
_____________________________________________________________________________________________________________________________
TOTAL OTHER EXPENSE (8,011) (9,425) (14,603) (447,108) (536,990)
_____________________________________________________________________________________________________________________________
NET LOSS $ (150,136) $ (805,217) $ (265,120) $(1,494,747) $(7,249,829)
=============================================================================================================================
BASIC LOSS PER COMMON SHARE $ (0.00) $ (0.03) $ (0.01) $ (0.06)
=============================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
-BASIC 30,432,392 27,984,392 30,432,392 25,352,382
=============================================================================================================
The accompanying notes are an integral part of these financial statements.
6
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
October 19,
Six Months Ended 2004
June 30 (inception) to
2009 2008 June 30, 2009
________________________________________________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (265,120) $(1,494,747) $(7,249,827)
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
- Interest accrued 14,603 22,448 112,329
- Financing costs - 424,660 424,660
CHANGES IN OPERATING ASSETS AND LIABILITIES
- Prepaid expenses and other 13,755 (5,413) (37,049)
- Due to related parties 39,247 26,321 230,111
- Accounts payable and accrued liabilities 47,475 (145,593) 311,755
________________________________________________________________________________________________________________________________
NET CASH USED IN OPERATING ACTIVITIES (150,040) (735,369) (2,970,486)
________________________________________________________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas property expenditures (9,000) (102,238) (2,770,266)
________________________________________________________________________________________________________________________________
NET CASH FLOWS USED IN INVESTING ACTIVITIES (9,000) (102,238) (2,770,266)
________________________________________________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on subscriptions of common stock 65,000 400,000 3,087,095
Drilling Advances - - 759,000
Advances from related parties 100,000 480,000 1,915,500
________________________________________________________________________________________________________________________________
NET CASH PROVIDED BY FINANCING ACTIVITIES 165,000 880,000 5,761,595
________________________________________________________________________________________________________________________________
INCREASE IN CASH 5,960 42,393 20,843
CASH, BEGINNING OF PERIOD 14,883 16,098 -
________________________________________________________________________________________________________________________________
CASH, END OF PERIOD $ 20,843 $ 58,491 $ 20,843
================================================================================================================================
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.
7
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009
(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 New Mexico ("New Mexico Prospect"). The leases are unproven. To date
we have leased approximately 7,576 net acres within the State of New Mexico. The
company has also entered into an option to acquire an additional 7,763 net acres
in New Mexico. (Refer to Note 3) In addition, we acquired leases in Texas (the
"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.
GOING CONCERN
The Company commenced operations on October 19, 2004 and has not realized any
revenues since inception. As of June 30, 2009, the Company has an accumulated
deficit of $7,249,829 and a working capital deficit of $803,555. 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. The financials statements
do not include any adjustments relating to the recoverability and classification
of recorded assets, or the amounts of and classification of liabilities that
might be necessary in the event the company cannot continue in existence. 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-X. 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, 2008 included in the Company's Annual Report on Form 10-K 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-K.
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 six months ended June 30, 2009 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009.
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.
8
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009
(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.
CASH AND CASH EQUIVALENTS
For the statements of cash flows, all highly liquid investments with maturity of
three months or less are considered to be cash equivalents. There were no cash
equivalents as of June 30, 2009 and December 31, 2008 that exceeded federally
insured limits.
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.
9
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009
(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 June 30, 2009, 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 2009, the FASB issued SFAS No. 165, SUBSEQUENT EVENTS ("SFAS 165"). SFAS
165 provides authoritative accounting literature related to evaluating
subsequent events that was previously addressed only in the auditing literature,
and is largely similar to the current guidance in the auditing literature with
some exceptions that are not intended to result in significant changes in
practice. SFAS 165 defines subsequent events and also requires the disclosure of
the date through which an entity has evaluated subsequent events and the basis
for that date. SFAS 165 is effective on a prospective basis for interim or
annual financial periods ending after June 15, 2009. The adoption of this
standard during the period did not have any impact on the Company's financial
position, cash flows or results of operations.
In June 2009, the FASB issued Statement of Financial Accounting Standards No.
166, "Accounting for Transfers of Financial Assets, an amendment to SFAS No.
140," ("SFAS 166"). SFAS 166 eliminates the concept of a "qualifying
special-purpose entity," changes the requirements for derecognizing financial
assets, and requires additional disclosures in order to enhance information
reported to users of financial statements by providing greater transparency
about transfers of financial assets, including securitization transactions, and
an entity's continuing involvement in and exposure to the risks related to
transferred financial assets. SFAS 166 is effective for fiscal years beginning
after November 15, 2009. The Company will adopt SFAS 166 in fiscal 2010. The
Company does not expect that the adoption of SFAS 166 will have a material
impact on the financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards No.
167, "Amendments to FASB Interpretation No. 46(R)," ("SFAS 167"). The amendments
include: (1) the elimination of the exemption for qualifying special purpose
entities, (2) a new approach for determining who should consolidate a
variable-interest entity, and (3) changes to when it is necessary to reassess
who should consolidate a variable-interest entity. SFAS 167 is effective for the
first annual reporting period beginning after November 15, 2009 and for interim
10
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009
(UNAUDITED)
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
________________________________________________________________________________
RECENT ACCOUNTING PRONOUNCEMENT (CONTINUED)
periods within that first annual reporting period. The Company will adopt SFAS
167 in fiscal 2010. The Company does not expect that the adoption of SFAS 167
will have a material impact on the financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards No.
168, "The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles," ("SFAS 168"). SFAS 168 replaces FASB Statement
No. 162, "The Hierarchy of Generally Accepted Accounting Principles", and
establishes the FASB Accounting Standards Codification ("Codification") as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with generally accepted accounting principles ("GAAP"). SFAS 168
is effective for interim and annual periods ending after September 15, 2009. The
Company will begin to use the new Codification when referring to GAAP in its
annual report on Form 10-K for the fiscal year ending December 31, 2009. This
will not have an impact on the results of the Company.
NOTE 3 - OIL AND GAS PROPERTIES
________________________________________________________________________________
(a) QUACHITA PROSPECT
The Company has leased various properties totalling approximately 1,971 net
acres within the Quachita Trend within the state of Texas for a three year term,
all expiring during the year ended 2009, in consideration for $338,353. The
Company has a 100% Working Interest and a 77% N.R.I. in the leases.
BOGGS #1
On June 7, 2007, the Company began drilling its first well on the Quachita
Prospect (Boggs #1). During 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 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 84.5% N.R.I. in the
leases. On October 31, 2008, the Company entered into an agreement to acquire
from Westrock Land Corp. approximately 5,763 additional 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 5,763 net acres; and an 81.5% N.R.I. in the leases in
approximately 5,763 net acres. Under the terms of the agreement the Company had
until April 16, 2009 to complete the transactions. The Option Agreement was
subsequently extended on March 31, 2009 and June 1, 2009 whereby the option
period has been extended to September 15, 2009.
Subsequent to the period on July 9, 2009, the Company entered into a Letter
Agreement with FormCap Corp. ("FormCap"), for joint drilling on the Company's
New Mexico prospect. FormCap is required to drill and complete two mutually
defined targets on the Company's leases in return for an earned 50% Working
Interest in the entire New Mexico Prospect. (Refer to note 7).
11
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009
(UNAUDITED)
________________________________________________________________________________
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
________________________________________________________________________________
(c) OKLAHOMA PROSPECT
On May 28, 2009, the Company entered into a Letter Agreement with Bonanza
Resources Corporation ("Bonanza") for an option to earn a 60% interest of
Bonanza's 85% interest in the North Fork 3-D prospect in Beaver County,
Oklahoma. The parties intend to enter into a definitive agreement regarding the
option and purchase of the 60% interest within 60 days. A non-refundable payment
of $150,000 will be paid to Bonanza, whereby Bonanza will grant Morgan Creek an
exercise period of one year. As per a verbal agreement, the 60 day period has
been extended to August 17, 2009.
In order to exercise the option, the Company will be required to incur
$2,400,000 in exploration and drilling expenditures during the Option Period
which will be one year. In the event that Morgan Creek does not do so the option
will terminate, Morgan Creek will cease to have any interest in the prospect and
Bonanza will retain the benefit of any drilling or exploration expenditures made
by Morgan Creek during the Option Period.
NOTE 4 - STOCKHOLDERS' EQUITY (DEFICIT)
________________________________________________________________________________
(a) SHARE CAPITAL
The Company's capitalization is 66,666,666 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. On July 14, 2009, 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 and the 2:1 forward split on
August 3, 2009, 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 8,000,000
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 4,133,332 shares of common stock at
$0.0375 per share for proceeds of $155,000.
On December 15, 2004, the Company issued 5,033,334 shares of common stock at
$0.0375 per share for proceeds of $188,750 and 1,760,534 shares of common stock
at $0.1875 per share for proceeds of $330,100.
On March 9, 2005, the Company issued 186,666 shares of common stock at a price
of $0.1875 per share for proceeds of $35,000.
On October 16, 2006, the Company completed a private placement consisting of
629,404 units at $2.25 per unit for proceeds of $1,416,158. Each unit consists
of one common share and one non-transferable share purchase warrant exercisable
at $4.50 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, 375,556 of the units issued
were in exchange for $845,000 previously advanced to the Company by a
shareholder. The estimated fair value of the warrants at the date of grant of
$592,210, which has been included in additional paid in capital, was determined
using the Black-Scholes option pricing model with an expected life of 2 years,
risk free interest rate of 4.49%, a dividend yield of 0% and an expected
volatility of 153%.
12
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009
(UNAUDITED)
________________________________________________________________________________
NOTE 4 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
________________________________________________________________________________
(b) PRIVATE PLACEMENTS (CONTINUED)
During 2008, the Company completed a private placement consisting of 2,448,000
units at $0.375 per unit for total gross proceeds of $918,000. Each unit
consists of one common share and one non-transferable share purchase warrant
exercisable at $0.75 per share for a period of 12 months from the date of share
issuance. A finders fee of 3.5% ($20,913) was paid on $597,500 of the private
placement proceeds received.
Subsequent to June 30, 2009, the Company completed a private placement
consisting of 1,960,000 units at $0.125 per unit for total proceeds of $245,000
of which $65,000 had been received as of June 30, 2009. Each unit consists of
one common share and one non-transferable share purchase warrant exercisable at
$0.25 per share for a period of 12 months from the date of issuance. A finders
fee of 7% ($3,500) was paid on $50,000 of the private placement proceeds
received
(c) OTHER ISSUANCES
On February 13, 2008, the Company issued 5,050,712 shares of common stock at a
price of $0.375 per share on settlement of related party advances 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 3,057,076 shares of common stock at a
price of $0.315 per share on settlement of related party advances and the
acquisition of the interest in the Boggs #1 well totalling $962,980. 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).
Subsequent to June 30, 2009, the Company issued 1,640,000 units at $0.125 per
unit on settlement of related party advances of $200,000 and accounts payable of
$5,000. Each unit consists of one common share and one non-transferable share
purchase warrant exercisable at $0.25 per share for a period of 12 months from
the date of issuance (refer Note 6 & 7)
(d) SHARE PURCHASE WARRANTS
Details of the Company's share purchase warrants issued and outstanding as of
June 30, 2009 are as follows:
Exercise price Number of warrants to purchase shares Expiry Date
_____________________________________________________________________________
$0.75 1,654,000 October 23, 2009
The Company's share purchase warrants activity for the period ended June 30,
2009 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 629,404 $ 4.50 0.80
Issued 2,448,000 0.75 -
Expired (629,404) 4.50 -
Exercised - - -
______________________________________________________________________________________________________________________________
Balance, December 31, 2008 2,448,000 0.75 0.71
Issued - - -
Expired (794,000) 0.75 -
Exercised - - -
______________________________________________________________________________________________________________________________
Balance, June 30, 2009 1,654,000 $ 0.75 0.31
==============================================================================================================================
13
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009
(UNAUDITED)
________________________________________________________________________________
NOTE 4 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
________________________________________________________________________________
(d) SHARE PURCHASE WARRANTS (CONTINUED)
All warrants are exercisable as at June 30, 2009.
Subsequent to June 30, 2009, the Company issued 3,600,000 warrants exercisable
at $0.25 per share for a period of 12 months from the date of issuance.
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 3,333,334 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 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 shares.
As approved by the Board of Directors, on December 12, 2006, the Company granted
1,233,336 stock options to certain officers, directors and management of the
Company at $1.65 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
2,500,000 stock options to certain officers, directors and management of the
Company at $0.50 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%.
Subsequent to June 30, 2009 on July 14, 2009, the Company cancelled 3,566,670
stock options to certain officers, directors and management of the Company and
authorized the issuance of 3,000,000 new stock options to certain officers,
directors and management of the Company at $0.25 per share. The term of the new
options is ten years.
The Company's stock option activity for the period ended June 30, 2009 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 1,233,336 $ 1.65 3.95
Granted 2,500,000 0.50 -
Expired - - -
Exercised - - -
____________________________________________________________________________________________________________________________
Balance, December 31, 2008 3,733,336 0.88 7.22
Granted - - -
Expired - - -
Exercised - - -
____________________________________________________________________________________________________________________________
Balance, June 30, 2009 3,733,336 $ 0.88 6.72
==============================================================================================================================
All options are exercisable as at June 30, 2009.
14
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009
(UNAUDITED)
________________________________________________________________________________
NOTE 6 - RELATED PARTY TRANSACTIONS
________________________________________________________________________________
As of December 31, 2007, $1,365,500 was owed to a shareholder for advances made
to the Company. During 2008, this shareholder made further advances to the
Company of $885,000 and $500,000 was repaid to the shareholder. On February 13,
2008, the Company issued 5,050,712 shares of common stock at a price of $0.375
per share on settlement of related party advance and related accrued interest
totaling $1,894,017 (Refer to Note 4). During the period, this shareholder made
further advances of $100,000. As a result, as of June 30, 2009, $410,000
(December 31, 2008 - $310,000) was owed which bears interest at 8% per annum and
has no specific repayment terms. As of June 30, 2009, total accrued interest was
$33,767 (December 31, 2008 - $19,164).
Subsequent to June 30, 2009, the Company issued 1,600,000 units at $0.125 per
unit on settlement of shareholder advances of $200,000. Each unit consists of
one common share and one non-transferable share purchase warrant exercisable at
$0. 25 per share for a period of 12 months from the date of issuance.
MANAGEMENT FEES
During the six month period ended June 30, 2009, the Company incurred $110,600
(2008 -$151,500) for management fees to officers and directors. As of June 30,
2009, total amount owing in accrued and unpaid management fees was $43,845 (2008
- $nil).
NOTE 7 - SUBSEQUENT EVENTS
________________________________________________________________________________
On July 9, 2009, the Company entered into a Letter Agreement with FormCap, for
joint drilling on the Company's New Mexico prospect. FormCap is required to
drill and complete two mutually defined targets on the Company's leases in
return for an earned 50% Working Interest in the entire New Mexico Prospect.
On July 14, 2009, the Company cancelled 3,566,670 stock options to certain
officers, directors and management of the Company and authorized the issuance of
3,000,000 new stock options to certain officers, directors and management of the
Company at $0.25 per share. The term of the new options is ten years.
Subsequent to June 30, 2009, the Company completed a private placement
consisting of 1,960,000 units at $0.125 per unit for total proceeds of $245,000
of which $65,000 had been received as of June 30, 2009. Each unit consists of
one common share and one non-transferable share purchase warrant exercisable at
$0.25 per share for a period of 12 months from the date of issuance. A finders
fee of 7% ($3,500) was paid on $50,000 of the private placement proceeds
received (refer Note 4).
Subsequent to June 30, 2009, the Company issued 1,640,000 units at $0.125 per
unit on settlement of related party advances of $200,000 and accounts payable of
$5,000. Each unit consists of one common share and one non-transferable share
purchase warrant exercisable at $0.25 per share for a period of 12 months from
the date of issuance.
On July 14, 2009, 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. The forward stock split became effective August 3, 2009.
The Letter Agreement with Bonanza Resources Corporation ("Bonanza") dated May
28, 2009 for an option to earn a 60% interest of Bonanza's 85% interest in the
North Fork 3-D prospect in Beaver County, Oklahoma. As per a verbal agreement,
the 60 day period due diligence period has been extended to August 17, 2009.
15
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
AUGUST 3, 2009 FORWARD STOCK SPLIT
On July 14, 2009, our Board of Directors pursuant to a Board of Directors
meeting authorized and approved a forward stock split of two for one of our
total issued and outstanding shares of common stock (the "Forward Stock Split").
The Forward Stock Split was effectuated based on market conditions and upon a
determination by our Board of Directors that the Forward 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 Forward Stock
Split, including the increased potential for financing. The intent of the
Forward Stock Split is to increase the marketability of our common stock.
16
The Forward Stock Split was effectuated on August 3, 2009 upon filing the
appropriate documentation with NASDAQ. The Forward Stock Split increased our
total issued and outstanding shares of common stock from 17,016,196 to
approximately 34,032,392 shares of common stock. The common stock will continue
to be $0.001 par value.
Amendment to Articles of Incorporation
Commensurate with the Forward Stock Split, the authorized share capital was
increased from 33,333,333 shares of common stock to 66,666,666 shares of common
stock with a par value of $0.001 per share. An amendment to our Articles of
Incorporation was filed with the Nevada Secretary of State on July 31, 2009
affecting the increase in our authorized capital.
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 New Mexico (the "New Mexico Prospect"). The leases are unproven and
were acquired for approximately $338,000. 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. We have a 100% working interest
and an 84.5% net revenue interest in the leases. In addition, we have acquired
leases in Texas (the "Quachita Prospect"). To date, we have acquired
approximately 1,971 net acres within the Quachita Prospect in the State of Texas
for a three-year term all expiring during the year ended 2009. We acquired a
100% working interest and a 77% net revenue interest in natural gas targeted
Quachita Prospect leases.
OIL AND GAS PROPERTIES
The acreage and location of our oil and gas properties is summarized as follows:
NET ACRES(*)
Texas 1,971
New Mexico 7,576
_____
Total: 9,547
(*) Certain of our interests in our oil and gas properties may be less than
100%. Accordingly, we have presented the acreage of our oil and gas
properties on a net acre basis.
QUACHITA PROSPECT
As of the date of this 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.
17
BOGGS #1 WELL. 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 initially retained a
25% working interest and a 23% net revenue interest in the Boggs #1 well. As of
June 30, 2009, we incurred $1,357,208 in drilling and completion costs. As of
June 30, 2009, we had received a total of $759,000 in funding from 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 2,530,000 shares of our
restricted common stock at $0.315 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.
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 an 84.5% 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 of property within the State of New Mexico with a net revenue interest of
81.5% pertaining to 5,746 of the net acres (the "New Mexico Leases"); (b)
Westrock ; (iii) we desire to acquire a 100% working interest in the New Mexico
Leases for a total purchase price of approximately $388,150; and (iv) we have
until April 16, 2009 to complete our due diligence (the "Option Period").
The Option Agreement was subsequently extended on March 31, 2009 and June 1,
2009 whereby the option period has been extended to September 15, 2009. 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 New Mexico
Leases to us will occur on approximately September 15, 2009.
18
BONANZA RESOURCES CORPORATION OPTION AGREEMENT.
Effective on June 2, 2009, our Board of Directors, pursuant to unanimous vote at
a special meeting of the Board, authorized the execution of a letter agreement
dated May 28, 2009 (the "Option Agreement") with Bonanza Resources (Texas) Inc.,
the wholly owned subsidiary of Bonanza Resources Corporation ("Bonanza
Resources"), to purchase a certain percentage of Bonanza Resources' eighty-five
percent (85%) leasehold interest in and to certain leases located in Beaver
County, State of Oklahoma (the "Bonanza Resources Interest"). In accordance with
the terms and provisions of the Option Agreement: (i) we have agreed to make a
non-refundable payment to Bonanza Resources of $150,000 within sixty (60) days
from the date of this Option Agreement; and (ii) Bonanza Resources has agreed to
grant to us an option having an exercise period of one year (the "Option
Period") to purchase a sixty percent (60%) partial interest (the "Partial
Interest") in the Bonanza Resources Interest. In the event we do not pay the
$150,000 to Bonanza Resources within sixty days from the date of the Option
Agreement, the Option Agreement will terminate.
The Bonanza Resources Interest is held by Bonanza Resources pursuant to that
certain letter agreement between Bonanza Resources, Ryan Petroleum LLC and
Radian Energy L.C. dated February 25, 2009 (the "Original Agreement").
Therefore, in the event we pay the $150,000 to Bonanza Resources within the
sixty day period from the date of the Option Agreement, and in accordance with
the further terms and provisions of the Option Agreement: (i) we shall assume
that amount of Bonanza Resources' right, title and interest and obligations
under the Original Agreement as is proportionate to the Partial Interest; and
(ii) we must incur $2,400,000 in exploration and drilling expenditures (the
"Exploration Expenditures") during the Option Period. In the event that we do
not exercise the Option Agreement, Bonanza shall retain the $150,000 as
liquidated damages for our failure to incur the Exploration Expenditures.
In the event we incur the Exploration Expenditures and exercise the Option
Agreement, a definitive agreement shall be executed by both parties with respect
to the Parial Interest.
FORMCAP CORPORATION OPTION AGREEMENT
Effective on July 14, 2009, our Board of Directors, pursuant to unanimous vote
at a special meeting of the Board, authorized the execution of a letter
agreement dated July 9, 2009 (the "Option Agreement") with Formcap Corporation
("Formcap"), to purchase a 50% working interest (40.75% net revenue interest) of
our 81.5% leasehold interest in and to certain leases located in Curry County,
State of New Mexico (the "Frio Draw Prospect Interest").
In accordance with the terms and provisions of the Option Agreement: (i) Formcap
has agreed to pay us a $100,000 initial payment (the "Initial Payment") within
five business days from the completion of its due diligence; (ii) the balance of
funds for the initial well will be advanced by FormCap to us within five
business days from receipt of a mutually agreed upon approval for expenditure,
which balance of such funds for the initial well are to be received by us no
later than September 8, 2009; and (iii) the Initial Payment will be applied
towards the total consideration to be paid by FormCap to us, which will include
the cost of drilling and completing two wells at a total estimated cost of
approximately $1,300,000.
19
In accordance with the further terms and provisions of the Option Agreement: (i)
FormCap will provide to us the dry hole and completion costs estimated at
$650,000 in advance of drilling the first well; (ii) upon drilling and
completion of the first well, we will assign to FormCap a 25% working interest
(20.375% net revenue interest) in the Frio Draw Prospect Interest; and (iii)
upon receipt by us of the funds from Formcap in advance of drilling the second
well, we will assign to FormCap the additional 25% working interest (20.375% net
revenue interest). Costs associated with the drilling of all subsequent wells
will be shares on an equal basis between us and FormCap.
We have granted to FormCap the time period between the date of execution of the
Option Agreement and August 15, 2009 to complete its due diligence (the "Option
Period").
20
RESULTS OF OPERATION
FOR THE PERIOD FROM
OCTOBER 19, 2004
SIX MONTH PERIOD ENDED (INCEPTION) TO
JUNE 30, 2009 AND 2008 JUNE 30, 2009
_________________________ __________________
STATEMENT OF OPERATIONS DATA
GENERAL AND ADMINISTRATIVE
EXPENSES
Investor relations $ -0- $ 33,644 $ 322,018
expenses
Consulting expenses 15,000 177,782 871,960
Management fees - 110,600 151,500 998,683
related party
Management fees - -0- 436,955 1,964,125
stock based
compensation
Impairment of oil and -0- -0- 1,273,410
gas properties
Office and general 66,332 127,509 588,307
Professional Fees 58,584 120,249 694,336
NET OPERATING LOSS $(250,516) $(1,047,639) $(6,712,839)
OTHER EXPENSE
Financing Costs -0- (424,660) (424,660)
Interest expense (14,603) (22,448) (112,330)
NET LOSS $(265,120) $(1,494,747) $(7,249,829)
21
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.
SIX MONTH PERIOD ENDED JUNE 30, 2009 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30,
2008
Our net loss for the six-month period ended June 30, 2009 was approximately
($265,120) compared to a net loss of ($1,494,747) during the six-month period
ended June 30, 2008 (a decrease of $1,229,627). During the six-month periods
ended June 30, 2009 and 2008, we did not generate any revenue.
During the six-month period ended June 30, 2009, we incurred general and
administrative expenses of approximately $250,516 compared to $1,047,639
incurred during the six-month period ended June 30, 2008 (a decrease of
$797,123). These general and administrative expenses incurred during the
six-month period ended June 30, 2009 consisted of: (i) investor relations of
$-0- (2008: $33,644); (ii) consulting fees of $15,000 (2008: $177,782); (iii)
office and general of $66,332 (2008: $127,509); (iv) professional fees of
$58,584 (2008: $120,249); (v) management fees - related party of $110,600 (2008:
$151,500); and (vi) management fees - stock based compensation of $-0- (2008:
$436,955).
During the six-month periods ended June 30, 2009 and 2008, we did not record any
impairment of oil and gas properties. Thus, general and administrative expenses
incurred during the six-month period ended June 30, 2009 compared to the
six-month period ended June 30, 2008 decreased primarily due to the reduction of
management fees - stock based compensation relating to the valuation of stock
options granted to our officers and directors. General and administrative
expenses were reduced expenses further due to the decrease in investor
relations, consulting fees, office and general expenses and professional fees
relating to the decrease scope of business operations during the period. General
and administrative expenses generally include corporate overhead, financial and
administrative contracted services, marketing, and consulting costs.
Of the $250,516 incurred as general and administrative expenses during the
six-month period ended June 30, 2009, we incurred consulting fees of $15,000 and
management fees of $110,600 payable to our officers, managers and directors.
Financing costs incurred during the six-month period ended June 30, 2009 were
$-0- (2008: $424,660). Our net loss during the six-month period ended June 30,
2009 was ($265,120) or ($0.01) per share compared to a net loss of ($1,494,747)
or ($0.06) per share during the six-month period ended June 30, 2008. The
weighted average number of shares outstanding was 30,432,392 for the six-month
period ended June 30, 2009 compared to 25,352,382 for the six-month period ended
June 30, 2008.
22
THREE MONTH PERIOD ENDED JUNE 30, 2009 COMPARED TO THREE MONTH PERIOD ENDED JUNE
30, 2008.
Our net loss for the three month period ended June 30, 2009 was ($150,136)
compared to a net loss of ($805,217) during the three month period ended June
30, 2008 (a decrease of $655,081). During the three month periods ended June 30,
2009 and 2008, we did not generate any revenue.
During the three month period ended June 30, 2009, we incurred general and
administrative expenses of approximately $142,125 compared to $792,112 incurred
during the three month period ended June 30, 2008 (a decrease of $649,987).
These general and administrative expenses incurred during the three month period
ended June 30, 2009 consisted of: (i) consulting fees of $-0- (2008: $64,937);
(ii) office and general of $46,445 (2008: $96,389); (iii) professional fees of
$30,680 (2008: $68,687); (iv) management fees - related party of $65,000 (2008:
$91,500); and (v) investor relations of $-0- (2008: $33,644) and (vi) management
fee-stock based compensation of $-0- (2008-$436,955)
During the three month periods ended June 30, 2009 and June 30, 2008, we did not
record any impairment of oil and gas properties. Thus, general and
administrative expenses incurred during the three month period ended June 30,
2009 compared to the three month period ended June 30, 2008 decreased primarily
due to the decrease in expenses associated with investor relations, consulting
fees, office and general and professional fees. General and administrative
expenses generally include corporate overhead, financial and administrative
contracted services, marketing, and consulting costs.
Of the $142,125 incurred as general and administrative expenses during the three
month period ended June 30, 2009, we incurred consulting expenses of $-0- (2008-
$64,937). We further incurred management fees of $65,000 payable to our
officers, managers and directors. As of June 30, 2009, the total amount owing in
management fees was $43,845.
Interest expense during the three month periods ended June 30, 2009 and June 30,
2008 of $8,011 and $13,105, respectively, was recorded as other expense. This
resulted in a net loss of ($150,136) or ($0.00) per share for the three month
period ended June 30, 2009 compared to a net loss of ($805,217) or ($0.03) per
share for the three month period ended June 30, 2008. The weighted average
number of shares outstanding was 30,432,392 for the three month period ended
June 30, 2009 compared to 27,984,392 for the three month period ended June 30,
2008.
LIQUIDITY AND CAPITAL RESOURCES
AS AT JUNE 30, 2009
As at June 30, 2009, our current assets were $32,892 and our current liabilities
were $836,447, which resulted in a working capital deficiency of ($803,555). As
at June 30, 2009, current assets were comprised of: (i) $20,843 in cash; and
(ii) $12,049 in other current assets. As at the six month period ended June 30,
2009, current liabilities were comprised of: (i) $351,434 in accounts payable
and accrued liabilities; and (ii) $485,013 in amounts due to related parties.
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As at ended June 30, 2009, our total assets were $1,844,835 comprised of: (i)
$32,892 in current assets; and (ii) $1,811,943 in unproven oil and gas
properties. The slight increase total assets at ended June 30, 2009 from
December 31, 2008 was primarily due to the increase in cash.
As at ended June 30, 2009, our total liabilities were $836,447 comprised
entirely of current liabilities. The increase in liabilities at June 30, 2009
from December 31, 2008 was primarily due to an increase in accounts payable and
accrued liabilities and amounts due to related parties. See " - Material
Commitments".
Stockholders' equity decreased from $1,208,509 as of December 31, 2008 to
stockholders' equity of $1,008,388 as of June 30, 2009.
CASH FLOWS FROM OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. For the six
month period ended June 30, 2009, net cash flows used in operating activities
was ($150,040), consisting primarily of a net loss of ($265,120). Net cash flows
used in operating activities was changed by $39,247 relating to an accrual due
to related parties, interest accrued for $14,603, prepaid expenses for $13,755
and $47,475 in accounts payable and accrued liabilities.
CASH FLOWS FROM INVESTING ACTIVITIES
For the six month period ended June 30, 2009, net cash flows used in investing
activities was ($9,000) for the acquisition of oil and gas properties.
CASH FLOWS FROM FINANCING ACTIVITIES
We have financed our operations primarily from either advancements or the
issuance of equity and debt instruments. For the six month period ended June 30,
2009, net cash flows provided from financing activities was $165,000 compared to
$880,000 for the six month period ended June 30, 2008. Cash flows from financing
activities for the six month period ended June 30, 2009 consisted of $65,000 in
proceeds from subscriptions of common stock and $100,000 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
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
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(iii) future property acquisitions. We intend to finance these expenses with
further issuances of securities, and debt issuances. Thereafter, we expect we
will need to raise additional capital and generate revenues to meet long-term
operating requirements. Additional issuances of equity or convertible debt
securities will result in dilution to our current shareholders. Further, such
securities might have rights, preferences or privileges senior to our common
stock. Additional financing may not be available upon acceptable terms, or at
all. If adequate funds are not available or are not available on acceptable
terms, we may not be able to take advantage of prospective new business
endeavors or opportunities, which could significantly and materially restrict
our business operations.
During fiscal year ended December 31, 2008, we completed a private placement
consisting of 2,448,000 units at the price of $0.375 per unit for total gross
proceeds of $918,000 excluding finders fees of ($20,913). During fiscal year
ended December 31, 2008, we closed a private placement offering under Regulation
S of the Securities Act pursuant to which we issued an aggregate of 5,050,712
shares 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
closed a further private placement offering under Regulation S of the Securities
Act pursuant to which we issued an aggregate of 3,057,076 shares and received
gross proceeds of $962,980, of which all consisted of settlement of debt and
acquisition of the interest in the Boggs #1 well. Effective July 14, 2009, the
Company closed a further private placement under Regulation S of the Securities
Act pursuant to which we issued an aggregate of 3,600,000 units, each unit
consists of one common share and one non-transferable share purchase warrant
exercisable at $0.25 per share for a period of 12 months from the date of
issuance, and received gross proceeds of $450,000 of which $245,000 was in cash
and $205,000 consisted of settlement of related party advances and accounts
payable.
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
fiscal year ended December 31, 2008, additional advances were made by this same
shareholder to us of $885,000 for an aggregate amount of $2,250,500 due and
owing. During fiscal year ended December 31, 2008, we repaid $500,000 to this
shareholder. Further, the shareholder assigned the amount of $1,515,214 to
various assignees and settled the $1,515,214 pursuant to the issuance of
5,050,712 shares of our restricted common stock at $0.375 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. As
a result, as at June 30, 2009, an aggregate $410,000 was due and owing to this
shareholder, which bears interest at 8% per annum and has no specific repayment
terms. As at June 30, 2009, total accrued interest was $33,767. Effective July
14, 2009, the Company issued 1,600,000 units at $0.125 per unit on settlement of
shareholders advances of $200,000. Each unit consists of one common share and
one non-transferable share purchase warrant exercisable at $0.25 per share for a
period of 12 months from the date of issuance.
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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 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, 2008 and December
31, 2007 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. Dollars, 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 for speculative
purposes.
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ITEM IV. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have performed an evaluation under the supervision and with the participation
of our management, including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of our disclosure controls and
procedures, (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act). Based on that evaluation, our management, including our CEO and CFO,
concluded that our disclosure controls and procedures were effective as of June
30, 2009 to provide reasonable assurance that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Under the supervision and with the participation of our
management, including our CEO and CFO, we evaluated the effectiveness of our
internal control over financial reporting as of June 30, 2009. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework.
This Quarterly Report does not include an attestation report of our registered
public accounting firm De Joya Griffith & Company, LLC regarding internal
control over financial reporting. Management's report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules
of the SEC that permit us to provide only management's report in this Quarterly
Report on Form 10-Q.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
We believe that a controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, and our CEO and our CFO have
concluded that these controls and procedures are effective at the "reasonable
assurance" level.
CHANGES IN INTERNAL CONTROLS
Our management had remediated the material weaknesses that were reported from
our 10-K/A for the fiscal year end December 31, 2007 which were filed on October
2, 2008. (A) Management implemented an audit committee that oversees and
monitors our financials (See Paragraph on Audit committee report below). (B)
Adequate segregation of duties were put in place to reduce the likelihood that
errors (intentional or unintentional) will remain undetected by providing for
separate processing by different individuals at various stages of a transaction
and for independent reviews of the work performed. No further significant
changes were implemented in our internal controls over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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AUDIT COMMITTEE REPORT
The Board of Directors has established an audit committee. The members of the
audit committee are Mr. Marcus Johnson, Mr. Angelo Viard and Mr. D. Bruce
Horton. All of the members of the audit committee are "independent" within the
meaning of Rule 10A-3 under the Exchange Act. The current audit committee was
organized on December 18, 2008 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.
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 six month period
ended June 30, 2009 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 1A. RISK FACTORS
No report required.
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
No report required.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No report required.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No report required.
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ITEM 5. OTHER INFORMATION
JULY 2009 PRIVATE PLACEMENT OFFERING
Effective July 2009, we completed a private placement offering (the "2009
Private Placement") with certain non-United States residents (collectively, the
"Investors"). In accordance with the terms and provisions of the 2009 Private
Placement, we issued to the Investors an aggregate of 1,960,000 units at a per
unit price of $0.125 (the "Unit") in our capital for aggregate proceeds of
$245,000, of which as at the date of this Quarterly Report an aggregate of
$65,000 has been received. Each Unit was comprised of one share of restricted
common stock and one non-transferable warrant (the "Warrant"). Each Warrant is
exercisable at $0.25 per share for a period of one year from the date of
issuance (the "Exercise Period").
The Units under the 2009 Private Placement were sold to non-United States
Investors in reliance on Regulation S promulgated under the United States
Securities Act of 1933, as amended (the "Securities Act"). The 2009 Private
Placement has 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. The per share price of the Units was arbitrarily
determined by our Board of Directors based upon analysis of certain factors
including, but not limited to, stage of development and exploration of
properties, industry status, investment climate, perceived investment risks, our
assets and net estimated worth. The Investors executed subscription agreements
and acknowledged that the securities to be issued have not been registered under
the Securities Act, that they understood the economic risk of an investment in
the securities, and that they had the opportunity to ask questions of and
receive answers from our management concerning any and all matters related to
acquisition of the securities.
DEBT SETTLEMENT
Effective during July 2009, we issued 1,640,000 Units at a per share price of
$0.125 in accordance with the terms and provisions of a settlement agreement. We
settled an aggregate of $200,000 in related party advances and $5,000 in
accounts payable. Each Unit was comprised of one share of restricted common
stock and one non-transferable Warrant. Each Warrant is exercisable at $0.25 per
share for a period of one year from the date of issuance (the "Exercise
Period"). The shares of common stock were issued in reliance on Regulation S
promulgated under the Securities Act. The per share price of the Units was
arbitrarily determined by our Board of Directors based upon analysis of certain
factors including, but not limited to, stage of development and exploration of
properties, industry status, investment climate, perceived investment risks, our
assets and net estimated worth.
We had adopted a stock option plan (the "2006 Stock Option Plan"), pursuant to
which there was an aggregate of 5,000,000 shares available for issuance under
the 2008 Stock Option Plan, reduced to 3,333,334 shares in accordance with a
reverse stock split effective April 22, 2008, and subsequently increased to
5,000,000 shares by Board of Director approval and resolution on April 28, 2008.
Our Board of Directors had authorized the grant of an aggregate 3,733,336 stock
options under the 2006 Stock Option Plan, of which 1,066,670 stock options were
granted exercisable at $1.65 per share expiring on December 12, 2016, taking
into effect the reverse stock split (collectively, the "2006 Stock Options") and
2,500,000 stock options were granted exercisable at $0.50 per share expiring on
April 30, 2018 (collectively, the "2008 Stock Options").
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On July 14, 2009, our Board of Directors approved the cancellation of certain of
the 2006 Stock Options and the 2008 Stock Options, which aggregated 3,566,670
options. Our Board of Directors further approved the re-issuance of 3,000,000
stock options (the "2009 Stock Options") to certain of our officers, directors
and consultants at an exercise price of $0.25 for a period of ten years.
Effective July 31, 2009, our Board of Directors authorized the specific number
of 2009 Stock Options to be granted to each of our officers, directors and
consultants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.1 Letter Agreement dated May 28, 2009 between Morgan Creek Energy Corp.
and Bonanza Resources (Texas) Inc. (1)
10.2 Letter Agreement dated July 9, 2009 between Morgan Creek Energy Corp.
and FormCap Corporation. (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.
(1) Incorporated by reference from Form 8-K filed with the Commission on June
9, 2009.
(2) Incorporated by reference from Form 8-K filed with the Commission on July
16, 2009.
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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: August 7, 2009
By: /s/ PETER WILSON
__________________________________________
Peter Wilson
President and Chief Executive Officer
Dated: August 7, 2009
By: /s/ WILLIAM D. THOMAS
__________________________________________
William D. Thomas
Chief Financial Officer
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